<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 12, 2000
REGISTRATION NO. 333- --
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
VELOCOM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 84-1461991
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
6400 South Fiddlers Green Circle
Suite 710
Englewood, Colorado 80111
(303) 874-1120
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
Billi R. McCullough
General Counsel
VeloCom Inc.
6400 South Fiddlers Green Circle
Suite 710
Englewood, Colorado 80111
(303) 874-1371
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C>
LESLIE N. SILVERMAN, Esq. ANTONIA E. STOLPER, Esq.
Cleary, Gottlieb, Steen & Hamilton Shearman & Sterling
One Liberty Plaza 599 Lexington Avenue
New York, New York 10006 New York, New York 10022
(212) 225-2000 (212) 848-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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 of
1933, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.0001 par
value......................... Shares $ $300,000,000 $79,200
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Total........................... Shares $ $300,000,000 $79,200
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</TABLE>
(1) Includes shares issuable upon exercise of over-allotment option granted to
the underwriters.
(2) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(o) of the Securities Act of 1933, as amended.
------------------------
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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS (Subject to Completion)
Issued May 12, 2000
Shares
[LOGO]
VeloCom Inc.
COMMON STOCK
------------------------
VELOCOM INC. IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC
OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE
THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER
SHARE.
------------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "VELO."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS VELOCOM
-------- ------------- -----------
<S> <C> <C> <C>
Per Share....................... $ $ $
Total........................... $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to an additional
shares of common stock to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock
to purchasers on , 2000.
------------------------
Morgan Stanley Dean Witter
Credit Suisse First Boston
Merrill Lynch & Co.
, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements.................................. iii
Market Data and Forecasts................................... iii
Prospectus Summary.......................................... 2
Risk Factors................................................ 7
Use of Proceeds............................................. 19
Dividend Policy............................................. 19
Capitalization.............................................. 20
Dilution.................................................... 21
Unaudited Pro Forma Financial Information................... 22
Selected Consolidated Financial Data........................ 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 32
Management.................................................. 56
Principal Stockholders...................................... 63
Certain Relationships and Related Transactions.............. 66
Description of Capital Stock................................ 69
Certain U.S. Tax Consequences to Non-U.S. Holders........... 73
Underwriters................................................ 75
Legal Matters............................................... 76
Experts..................................................... 77
Where You Can Find More Information......................... 77
Index to Financial Statements............................... F-1
</TABLE>
i
<PAGE> 4
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the common stock. In this
prospectus, unless otherwise indicated, the "company," "VeloCom," "we," "us" and
"our" refer to VeloCom Inc. and the subsidiaries through which we operate.
We have not taken any action to permit a public offering of our shares of common
stock outside the United States. Persons outside the United States who come into
possession of this prospectus must inform themselves about and observe any
restrictions relating to the offering of the shares of common stock and the
distribution of this prospectus outside the United States.
Until , 2000 (25 days after commencement of this offering), all
dealers that buy, sell or trade in common stock, whether or not participating in
this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
------------------------
Our principal executive offices are located at 6400 S. Fiddlers Green Circle,
Suite 710, Englewood, CO 80111 and our telephone number is (303) 874-1120. Our
World Wide Web site address is www.velocom.com. The information on our web site
is not incorporated by reference into this prospectus.
Our logo and certain titles and logos of our services are our trademarks. Each
trademark, trade name or service mark of any other company appearing in this
prospectus belongs to its holder. The term VeloCom(R) is our service mark or
trademark, which is registered or otherwise protected under the laws of various
jurisdictions.
ii
<PAGE> 5
FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus are forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Forward-looking statements include
but are not limited to:
-- our expectations and estimates as to completion dates, network
deployment costs and subsequent maintenance and growth of the
integrated communications networks we are building;
-- our ability to implement successfully our operating and marketing
strategy as we build-out our integrated communications networks; and
-- future financial performance, including growth in sales and income.
The following factors, among others, could cause our actual results to differ
materially from those expressed in any forward-looking statements we make:
-- the rate of expansion of our networks and/or customer base;
-- inaccuracies in our forecasts of customer or market demand;
-- highly competitive market conditions;
-- changes in or developments under laws, regulations and licensing
requirements;
-- changes in communications technology;
-- growth in demand for network and Internet access services;
-- currency fluctuations; and
-- changes in economic conditions in the Latin American countries where
we operate.
These factors should not be construed as exhaustive. We will not update or
revise any forward-looking statements.
------------------------
The information in this prospectus has been adjusted to reflect the conversion
of 78,308,332 outstanding shares of our preferred stock into 78,308,332 shares
of our common stock, assuming all equity commitments are funded. This conversion
will occur upon the closing of this offering. Except where indicated, the
information in this prospectus does not take into account the exercise of any of
our outstanding options or warrants or the possible issuance of additional
shares of our common stock relating to the underwriters' over-allotment option.
Unless otherwise indicated, all references in this prospectus to "$" or
"dollars" are to U.S. dollars.
MARKET DATA AND FORECASTS
This prospectus includes statistical data and forecasts concerning the
communications industry that we obtained from industry publications. These
publications generally indicate that they have obtained information from sources
that they believe are reliable, but that they do not guarantee the accuracy and
completeness of the information. In particular, we do not know what rates of
general economic growth in the countries in which we operate were assumed in
preparing forecasts. Forecasts of developing industries, such as ours, are not
based upon sophisticated analysis of a substantial amount of historical data as
is the case for more mature industries. Often, interviews with corporate leaders
in developing industries, such as ours, form the basis for much statistical data
and forecasts. Thus, statistical data and forecasts for developing industries,
such as ours, are much less likely to be accurate. We also have not sought the
consent of any of these sources to refer to their data in this prospectus.
iii
<PAGE> 6
OUR OPERATING SUBSIDIARIES
Our local operating subsidiaries are detailed below:
<TABLE>
<CAPTION>
SHAREHOLDER TOTAL
INTEREST INVESTMENT(1)
--------- -------------
<S> <C> <C> <C> <C>
Vesper(2) -- Brazil Full-service, VeloCom--49.4%(5) $793.9 million
-- 17 states competitive BCI--34.4%
-- 165 cities integrated Qualcomm--16.2%
-- approximately communications
125 MM total provider
POPs(3)
-- approximately
68 MM covered
POPs(4)
BV Interativa -- Brazil Internet access, VeloCom--45% $9.1 million
-- 18 points of e-commerce, web BCI--45%
presence in portal, web Qualcomm--10%
Brazil hosting and
value added web
services
VeloCom Argentina -- Argentina Competitive VeloCom--100% $37.0 million
-- 5 cities broadband
-- approximately wireless data
20MM POPs service provider
and Internet
Service Provider
Odecar S.A. -- Uruguay Competitive VeloCom--85% $0.7 million
-- Montevideo broadband El Pais--15%
-- approximately wireless data
1.3MM POPs service provider
and Internet
Service Provider
</TABLE>
- ------------
(1) This is total debt and equity investment by us and our partners as of April
30, 2000.
(2) Our fixed switched telephony licenses in Brazil are held by two companies,
each of which is a 99.9% owned subsidiary of a separate holding company
(Vesper Sao Paulo Holdings S.A. (Vesper Sao Paulo) and Vesper Holdings S.A.
(Vesper Northeast)), which is 49.4% owned by us. Because Vesper Sao Paulo
and Vesper Northeast have identical ownership structures and common senior
management, throughout this prospectus, we have, except as otherwise
indicated, referred to them together as a single entity, Vesper.
(3) Reflects the population of the entire Sao Paulo region and the 16-state
northeast region of Brazil.
(4) Reflects the population of those cities within the Sao Paulo region and the
16-state northeast region of Brazil that we have currently elected to cover
under our licenses in Brazil.
(5) 50.0% voting interest.
1
<PAGE> 7
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us, our common stock being sold in this offering and
certain of our subsidiaries' financial statements and notes thereto appearing
elsewhere in this prospectus.
VELOCOM
We are a rapidly growing facilities-based provider of integrated communications
services to businesses and residential customers. We operate in major Latin
American markets that are characterized by high growth potential, lack of
telecommunications infrastructure and a favorable regulatory environment. Our
services include voice telephony, high-speed and dial-up Internet access and
data transmission. As of April 30, 2000, $840.7 million total debt and equity
had been invested by us and our partners in our networks to meet the significant
demand for high quality network connectivity in our markets. We believe we are
uniquely positioned to offer customers on our networks the convenience and cost
advantages associated with receiving voice, Internet and data services from a
single provider. Our goal is to deliver bundled services using the best
technological solutions available over integrated broadband networks that we own
and operate.
We focus on Latin America, currently concentrating on the Mercosur markets of
Brazil, Argentina and Uruguay. Our objective is to capitalize on the
significant, unmet demand and lack of infrastructure investment in these markets
for telephony, Internet and data services. In Brazil, fixed teledensity, the
number of fixed telephone lines per 100 people, is approximately 15.4%, compared
to 65% in the United States. Lack of infrastructure investment is shown, for
example, by the fact that only an estimated 0.4% of commercial buildings in the
major cities of Brazil are connected to a fiber optic network, compared with
7.0% in the United States. According to industry sources, Argentina represents
the fastest growing market for overall data traffic over the next five years,
with a projected compound annual growth rate of 94% while Brazil's projected
compound annual growth rate over the same period for overall data traffic is
63%. The growth in the Latin American Internet market is among the highest in
the world. Between 1998 and 2003, the number of Latin American Internet users is
projected to increase from 4.8 million to 36.7 million, a compound annual growth
rate of 51%.
In Brazil, we offer our telephony and data transport services through Vesper, in
which we hold a 49.4% economic interest and a 50% voting interest, and our
Internet services through BV Interativa, a joint venture we formed in March 2000
and in which we hold a 45% interest. In Argentina, we offer our Internet
services, and expect by the end of 2000 to offer data transport services,
through our wholly owned subsidiary, VeloCom Argentina. We also plan to use our
operational base in Argentina to provide broadband data and Internet services in
Montevideo, Uruguay by the end of 2000.
Our operating licenses in Brazil cover a total of approximately 125 million
people (POPs), of which we have currently elected to serve cities covering
approximately 68 million POPs, including Sao Paulo and Rio de Janeiro, Latin
America's second and fourth largest metropolitan markets, respectively. We have
built in Brazil high-capacity integrated (wireless and wireline) last-mile
communications networks in 44 cities, generally located in the central business
districts and select residential neighborhoods of our served markets. To date,
we have largely deployed a 1.9 GHz code division multiple access (CDMA) wireless
network. We plan to expand our current market presence and deploy last-mile
networks serving an additional 121 cities over the next 18 months. We will
continue to expand the scale and data transmission speeds of these networks
through the migration of existing technology and the development and deployment
of additional access solutions, including fiber optic and high-speed wireless
access technologies.
In Brazil, we also provide Internet access, web hosting and other value-added
web services through points of presence in 18 cities, including Sao Paulo, Rio
de Janeiro and Belo Horizonte.
In Argentina, we currently offer high-speed, "always-on" Internet access
services, and expect by the end of 2000 to offer data transport services, over
our broadband wireless networks. Our licenses in Argentina cover areas
accounting for most of Argentina's gross domestic product, including the
country's five largest cities. Today, the wireless networks we have deployed and
activated cover approximately one million POPs.
2
<PAGE> 8
OUR COMPETITIVE STRENGTHS
We believe the following competitive strengths distinguish us from our
competitors:
-- First Mover Advantage. We have duopoly status in 165 cities located
throughout the 16 states in the northeast of Brazil and the state of
Sao Paulo until December 31, 2001. During this period, we are the
only provider of switched fixed telephony services allowed to compete
with the formerly government-owned incumbent operator in those
cities. Additionally, we have a unique geographic footprint as we are
the only communications provider in Brazil that holds switched fixed
local telephony licenses covering more than one region. In Brazil,
our licenses cover an area that accounts for approximately 75% of the
country's gross domestic product (GDP) and, in Argentina and Uruguay,
our licenses cover all of the major metropolitan areas.
-- Unique Licenses. Our operating licenses in Brazil were acquired at
very low cost ($0.60/POP, as compared with $53/POP average cost of
the B band mobile telephony licenses auctioned by the Brazilian
government in recent years), and provide us with more favorable terms
than those of our competitors, such as unregulated prices and no
universal service requirements. Our operating licenses in Brazil also
provide us an exclusive right to use our assigned spectrum
frequencies within the 1.9 GHz and 3.4 GHz wireless bands in the 165
cities where we have duopoly status. In Argentina, we currently hold
the largest aggregate wireless spectrum block in the 3.4 GHz and 28
GHz ranges.
-- Strategic Relationships with Leading Industry Participants. We have
established key financial and strategic relationships in order to
pursue our strategy of becoming a leading integrated communications
provider. These relationships include Bell Canada International Inc.
(BCI) and Qualcomm Incorporated (Qualcomm) -- our partners in Vesper
and BV Interativa -- and Nortel, Lucent and Ericsson, which have
provided us with substantial vendor financing and equipment supply
commitments.
-- Strong Equity Sponsorship. We have significant equity sponsorship
from financial and strategic sponsors with proven track records of
developing successful global communications concerns. Our financial
investors include: Telecom Partners, Centennial Ventures, Crescendo
Ventures, SLI Wireless (SLI), BankAmerica Investment Corporation,
First Union Investors, Inc., Mellon Ventures and General Cinema
Corporation Investments. Our strategic investors include: El Paso
Energy Communications Company (El Paso), Qualcomm, Formus
Communications, Inc. (Formus) and Grupo Vicunha.
-- Experienced Latin American Management Team. Our management team has
extensive experience and a proven track record in acquiring,
deploying and operating successful communications businesses in the
United States and international markets. We also have strong
"in-region" local management teams who have a broad range of
experience in the telecommunications sector in Latin America.
OUR STRATEGY
Our goal is to become the leading facilities-based provider of integrated
communications services to both businesses and residential customers in major
Latin American markets by providing technological solutions best suited to meet
the needs of our customers. Our strategy is to:
-- Aggressively Build Market Position. We plan to aggressively build
market position by taking advantage of our unique operating licenses
to capture a portion of the high level of pent-up demand in Latin
America for voice, Internet and data services.
-- Target Most Attractive Market Segments in Latin America. Since we
are not required to provide universal service under any of our
operating licenses, we will seek to operate at attractive margins by
selectively targeting geographic and customer market segments.
-- Deploy Flexible, Leading Edge Technology. We are deploying
scaleable, cost-efficient networks that can be rapidly expanded and
readily adapted to future technology developments. We believe that
our hybrid, integrated network strategy will enable us to cost
effectively match our service offerings with the requirements of our
customers.
3
<PAGE> 9
-- Expand and Enhance Our Networks and Service Offerings. We are
continuing to expand our local broadband networks by deploying
additional facilities within areas where we own licenses, acquiring
new licenses through auction, including personal communications
service (PCS) and local multipoint distribution service (LMDS) in
Brazil and local and long distance voice licenses in Argentina, or
selectively acquiring broadband operating entities. We are continuing
to expand our service offerings to include other value-added data
services beyond Internet access, such as virtual private networks
(VPNs), voice over Internet protocol (VoIP), high-speed, "always-on"
Internet access, business and consumer portals, web hosting,
co-location and e-commerce services.
-- Leverage Our Regional Presence. We will continue to take advantage
of regional synergies associated with operating communications
businesses in the Mercosur region. We ultimately plan to interconnect
our Brazil, Argentina and Uruguay networks to increase the proportion
of our traffic that is on our networks.
4
<PAGE> 10
THE OFFERING
Common stock offered................ shares
Common stock to be outstanding after
this offering..................... shares
Over-allotment option............... shares
Voting rights....................... One vote per share
Use of proceeds..................... We intend to use the net proceeds to
make capital contributions to certain
of our subsidiaries to fund the
build-out of our networks, including
associated operating losses, and for
general corporate purposes, including
to fund certain development activities
such as the auctions for PCS and LMDS
spectrum in Brazil and to pursue
certain strategic acquisitions of
broadband wireless, cable and fiber
providers in Latin America.
Dividend policy..................... We have not paid any cash dividends on
our common stock and we do not intend
to pay cash dividends in the
foreseeable future. We plan to retain
earnings, if any, for use in the
operation of our business and to fund
future growth. In addition, our vendor
financing agreements currently severely
restrict the payment of dividends. See
"Management Discussion and Analysis of
Financial Conditions and Results of
Operations--Liquidity and Capital
Resources."
Proposed Nasdaq National Market
symbol............................ VELO
As of April 30, 2000, we had 89,592,158 shares of common stock outstanding, as
adjusted to give effect to the conversion of 78,308,332 outstanding shares of
preferred stock into 78,308,332 shares of common stock upon the closing of this
offering, assuming all outstanding equity commitments are funded. This does not
include outstanding options to purchase 6,277,833 shares of common stock at a
weighted average exercise price of $3.85 per share, or outstanding warrants to
purchase 125,000 shares of common stock at $8.10 per share. See "Capitalization"
and "Management -- Option Grants in Fiscal Year 1999."
5
<PAGE> 11
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables set forth certain historical consolidated financial
data of the company for the periods from April 29, 1998 (the date of the
company's inception) through December 31, 1998 and 1999 and for the year ended
December 31, 1999. The consolidated financial data includes our accounts and
those of our majority owned subsidiaries. For those investments in companies in
which our ownership interest is 20% to 50% and we exert significant influence
through board representation and management authority (as is the case for Vesper
in which we own a 49.4% interest), the equity method of accounting is used. We
derived our selected historical consolidated financial data as of December 31,
1998 and 1999 and for the periods from April 29, 1998 through December 31, 1998
and 1999 and the year ended December 31, 1999 from our audited consolidated
financial statements included elsewhere in this prospectus. You should read the
following selected consolidated financial data together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our audited consolidated financial statements and related footnotes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
VELOCOM INC.
------------------------------------------------
CUMULATIVE FROM CUMULATIVE FROM
APRIL 29, 1998 APRIL 29, 1998
(INCEPTION) TO YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 1999
--------------- ------------ ---------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
General and administrative expenses........ $ 914 $ 8,657 $ 9,571
---------- ---------- ----------
Operating loss............................. (914) (8,657) (9,571)
---------- ---------- ----------
Other Income (Expense):
Interest income............................ 70 1,074 1,144
Interest expense........................... -- (87) (87)
Other...................................... 17 17
---------- ----------
Net loss before other items................ (844) (7,653) (8,497)
---------- ---------- ----------
Share in results of affiliated companies..... -- (23,721) (23,721)
---------- ---------- ----------
Net loss................................... $ (844) $ (31,374) $ (32,218)
Basic and diluted net loss per common
share...................................... $ (0.34) $ (5.69) $ (7.48)
Basic and diluted weighted average number of
common shares outstanding.................. 2,463,404 5,517,332 4,312,419
OTHER FINANCIAL DATA:
Cash flow provided by (used in):
Operating activities....................... $ (769) $ (7,598) $ (8,367)
Investing activities....................... (46) (95,682) (95,728)
Financing activities....................... 3,155 125,940 129,095
Capital expenditures....................... (46) (1,916) (1,962)
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------
1998 1999
------ -------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $2,340 $25,000
Restricted cash............................................. -- 1,913
Investment in affiliates.................................... -- 69,101
Property and equipment...................................... 45 9,552
Spectrum licenses........................................... -- 35,814
Convertible preferred stock, mandatorily redeemable:
Series A.................................................. -- 92,103
Series B.................................................. -- 45,194
Total stockholders' equity (deficit)........................ 2,311 (4,963)
</TABLE>
6
<PAGE> 12
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks not presently known to us or that
we currently deem immaterial may also impair our business operations.
Our business, financial condition, results of operations and the market
price of our common stock could be materially adversely affected by any of the
following risks and you might lose all or part of your investment.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES
Since our inception on April 29, 1998, we have experienced negative cash
flows from operations and have incurred net losses totaling approximately $32.2
million through December 31, 1999. We expect to continue to incur significant
operating losses and negative cash flow from operations for at least the next
several years in connection with building out our networks, implementing our
business plan, expanding and enhancing our products and service offerings and
pursuing acquisitions and other business opportunities. There can be no
assurance that our networks or any of our other services will ever provide a
revenue base adequate to achieve or sustain profitability or to generate
positive cash flow and the failure to do so would have a material adverse effect
on our business, financial condition, results of operations and the market price
of our common stock.
WE HAVE A LIMITED OPERATING HISTORY
We have a limited operating history and may not perform up to our
expectations. We commenced commercial operations in Brazil in January 2000, and
in Argentina in March 2000, and have since focused primarily on organizational
and start-up activities. Because we are at an early stage of development, we
face risks generally associated with establishing a new business enterprise.
Accordingly, prospective investors have limited historical financial and
operating information to use in evaluating our performance and determining
whether they should purchase our common stock. When considering our prospects,
prospective investors must consider the risks, expenses and difficulties
encountered by companies in their early stages of development in rapidly
evolving markets.
OUR SUCCESS DEPENDS ON MARKET ACCEPTANCE OF, AND CUSTOMER DEMAND FOR, OUR
SERVICES, AND WE ARE ONLY BEGINNING TO INTRODUCE MANY OF THE SERVICES THAT WE
EXPECT TO OFFER
Our success will depend heavily on the extent to which prospective
customers use our services. For us to succeed, there must be strong demand for
our existing services and the enhanced services we intend to introduce in the
future. Our success in creating demand will be subject to business, economic,
regulatory and competitive factors that are beyond our control. Moreover, demand
for our existing and planned services at price levels that will permit us to
become profitable in the long term or to sustain profitability is uncertain.
WE MAY BE UNABLE TO RAISE THE ADDITIONAL CAPITAL NECESSARY TO CONTINUE GROWING
OUR BUSINESS
Deploying and operating communications systems is a capital intensive
business. In addition to capital expenditure requirements, we will be required
to fund anticipated losses. We will require significant amounts of additional
capital to fund:
-- the build-out and operation of our networks;
-- investments in new opportunities, including capital for license
acquisition costs or investments in other businesses;
-- development or expansion into new services and businesses;
-- general working capital needs; and
-- responses to unanticipated competitive pressures.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of prevailing economic conditions and
financial, business and other factors, many of which are
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beyond our control. We cannot assure you that the capital actually required to
complete our networks in our initial target markets will not exceed our
expectations. If demand in these markets exceeds current expectations, our
capital requirements may increase materially. In addition, we may identify new
markets in the future and, as opportunities develop, we may be required to make
additional investments in our networks and facilities or pursue strategic
alliances to consummate those opportunities.
If required, we or our subsidiaries expect to raise additional capital
through the sale of debt and equity securities and through vendor financing. We
cannot assure you that we or our subsidiaries will be able to raise sufficient
capital or that such funding will be available on a timely basis or on terms
acceptable to us or our subsidiaries, if at all. If we raise capital through the
sale of equity securities, you may experience substantial dilution. If our
subsidiaries raise capital through the sale of equity securities, our interests
in them may be diluted. Dilution of our interest in Vesper, in particular, could
be a problem for us because it could subject us to the registration requirements
of the Investment Company Act of 1940, compliance with which could adversely
affect our business. If we fail to obtain financing, we may have to delay or
abandon some or all of our expansion plans, which could have a material adverse
effect on our business, financial condition, results of operations and the
market price of our common stock.
CONTINUED GROWTH OF OUR BUSINESS DEPENDS UPON OUR ABILITY TO MANAGE EXPANSION
AND DEVELOPMENT EFFECTIVELY
Our ability to manage our expansion effectively will require us to continue
to implement and improve our operating, financial and accounting systems and to
hire, train and manage new employees. Among other things, the continued
expansion and development of our business will also depend on our ability to:
-- build out our networks and install the related infrastructure in a
timely manner;
-- secure financing;
-- obtain any required government authorizations;
-- evaluate and penetrate potential new markets; and
-- hire sufficient qualified employees.
In addition, we must perform these tasks in a timely manner, at reasonable
costs and on satisfactory terms and conditions. Failure to effectively manage
our planned expansion could have a material adverse effect on our business,
financial condition, results of operations and the market price of our common
stock.
OUR SUBSIDIARIES WILL HAVE SUBSTANTIAL DEBT CONTAINING RESTRICTIVE TERMS
Vesper has agreements with various equipment vendors to borrow
approximately $1.8 billion to finance the equipment and services necessary to
build out our networks in Brazil. Vesper expects to incur substantial
indebtedness under these vendor financing agreements in the near and medium term
and under other facilities entered into to refinance amounts owing under these
vendor financing agreements and for other planned capital expenditures. These
agreements restrict Vesper's ability to make distributions to VeloCom and make
it difficult for Vesper to obtain future financing. These agreements also
specify certain financial and operating covenants with which Vesper must comply.
If it fails to meet these performance requirements, the vendor financing may be
restricted or cancelled. Under the capital contribution agreements we have
entered into with respect to Vesper, we and the other shareholders in Vesper
would be required, on Vesper's failure to comply with certain financial
covenants and the request of the lenders under the financing agreements, to make
investments in Vesper in an aggregate amount of $685.0 million, of which our
share would be $338.4 million (and of which we have already invested $155.8
million as of April 30, 2000). We cannot assure you that Vesper will have
sufficient cash flow from operations to meet its debt payment obligations under
its current vendor financing arrangements or other financing agreements that it
may enter into in the future.
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Our subsidiaries' high level of indebtedness could have important
consequences for us, and consequently our stockholders, including:
-- making it difficult for the subsidiaries to obtain future
financing;
-- limiting our subsidiaries' ability to react to changes in the
marketplace and making them more vulnerable to future economic
downturns;
-- our subsidiaries may be more indebted than a number of their
competitors, which could place them at a competitive disadvantage
in the future;
-- a substantial portion of any operating income our subsidiaries may
earn must be allocated to making principal and interest payments,
which reduces the amount of funds available to build out our
networks;
-- limiting our subsidiaries from making distributions to VeloCom;
-- reducing the value of stockholders' investments in VeloCom because
debt holders have priority regarding our subsidiaries' assets in
the event of bankruptcy or liquidation; and
-- limiting our or our subsidiaries' ability to pursue other business
opportunities.
SHARED CONTROL OF CERTAIN OF OUR SUBSIDIARIES MAY PRECLUDE US FROM IMPLEMENTING
STRATEGIES WE FAVOR
We are the largest shareholder in Vesper and we and BCI are the largest
shareholders in BV Interativa, and in each case we share control with BCI. We
are actively involved in the management of each of these companies. However, we
may be precluded from implementing strategies we favor because the approval of
BCI is required for the taking of any significant actions with respect to each
of Vesper and BV Interativa. In particular, the shareholder agreements governing
the operation of each of these companies prohibit certain actions from being
taken without the affirmative vote of 70% of the shareholders. These actions
include: entering into contracts with any shareholder, director or officer, or
any affiliate of any of them; declaring or paying dividends; approving any
material amendments to the business plan, approving an annual business plan, or
approving operating budgets and capital budgets; adopting financing policies and
financing requirements; and applying for a license or other governmental
authorization not required in the ordinary course of business, or entering into
a new business or market. These shareholder agreements also impose certain
restrictions on the transfer of shares held by us. As a result there can be no
assurance that we can recognize economic benefits from our ownership interests
in these companies through the sale of our interests or the receipt of dividends
or other distributions. Future investments we may make in other companies in
Latin America may also result in minority ownership interests and therefore be
subject to similar risks. A discussion of the shareholder agreements governing
the operations of Vesper and BV Interativa appears below under the heading
"Business--Other Material Agreements."
HOLDING COMPANY STRUCTURE
We are a holding company, which means we conduct all of our operations and
derive all of our operating income through our subsidiaries, the most important
of which, Vesper, we only share control. Our only significant assets are the
ownership interests in our subsidiaries and existing cash and cash equivalents,
which we intend to invest in operating companies. Local laws and contract
restrictions may prevent our subsidiaries from paying us dividends or other
distributions. In particular, the vendor financing agreements entered into by
Vesper restrict its ability to make dividends or other distributions to us. As a
result, our ability to generate any significant cash through dividends or other
distributions from our subsidiaries in the near future is severely restricted.
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WE FACE NUMEROUS RISKS THAT COULD ADVERSELY AFFECT THE BUILD-OUT OF OUR NETWORKS
DEVELOPING AND BUILDING OUT OUR NETWORKS MAY HAVE A NEGATIVE IMPACT ON OUR
RESULTS OF OPERATIONS
Developing and building out our networks, which includes the expansion into
new services for our business customers, will involve:
-- obtaining additional funding to finance large amounts of capital
expenditures;
-- competition from large, well-financed international
telecommunications carriers;
-- substantial start-up and marketing costs;
-- interconnection difficulties; and
-- regulatory risks, including obtaining the appropriate licenses.
WE MUST COMPLETE THE BUILD-OUT OF OUR NETWORKS EFFICIENTLY AND ON SCHEDULE TO
IMPLEMENT SUCCESSFULLY OUR BUSINESS STRATEGY
The construction, operation and any upgrading of our networks is a
significant undertaking. We will depend heavily on vendors--particularly,
Lucent, Nortel and Ericsson--to successfully complete these complex construction
projects. Administrative, technical, operational and other problems that could
arise may be more difficult to address and solve due to our project's size and
complexity. We may be materially adversely affected as a result of any
significant increase in required but unanticipated capital expenditures or a
significant delay in the anticipated completion dates of our networks. The
successful and timely completion of the construction of our networks will be
affected by a variety of factors, many of which we cannot control, including:
-- timely performance by the vendors, including Lucent, Nortel and
Ericsson, and other third-party suppliers of network components,
which are only available in the quantities and quality we require
from limited sources;
-- our ability to obtain required licenses and regulatory approvals,
including local, municipal and state permits;
-- performance of the equipment used in our networks; and
-- our ability to attract and retain qualified personnel.
OPERATION AND EXPANSION OF OUR NETWORKS WILL REQUIRE SUBSTANTIAL ADDITIONAL
RESOURCES THAT WE MAY NOT HAVE
Even if we complete the build-out of our networks in a timely and cost
effective manner, we will also face challenges in managing and operating these
networks. These challenges include operating and maintaining the operating
equipment and managing the sales, advertising, customer support, billing and
collection functions of the business. Our failure in any of these areas could
undermine customer satisfaction, increase customer turnover, reduce revenues and
otherwise have a material adverse effect on our business, financial condition,
results of operations and the market price of our common stock.
We may need to expand and adapt our networks to respond to:
-- higher than expected growth in the number of our customers;
-- increased demands by our existing customers to transmit larger
amounts of data;
-- changes in our customers' service requirements; or
-- technological advances by our competitors.
We will require substantial additional financial, operational and
managerial resources to expand or adapt our networks. We cannot assure you that
we will be able to expand or adapt the infrastructure of our networks
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to meet the industry's evolving standards or our customers' growing demands and
changing requirements on a timely or cost-effective basis, or at all. Also, we
may not be able to deploy successfully any expanded and adapted network
infrastructure. The failure to expand or adapt our networks to respond to these
developments on a timely basis and at a commercially reasonable cost could have
a material adverse affect on our business, financial condition, results of
operations and the market price of our common stock.
RISK OF SYSTEM FAILURE
Our success depends on our ability to deliver reliable, high-speed, high
capacity communications services through our networks. Our networks, and other
networks providing services to us, are vulnerable to damage or cessation of
operations from fire, earthquakes, severe storms, power loss, telecommunications
failures, capacity limitations and similar events, particularly if the events
occur within a high traffic location of the network. We have designed our
networks to minimize the risk of such system failure. Nonetheless, we cannot
assure you that we will not experience failures, shutdowns or even catastrophic
failure of entire networks. Any such failure or shutdown could have a material
adverse effect on our business, financial condition, results of operations and
the market price of our common stock.
OUR FAILURE TO ACQUIRE, INTEGRATE AND OPERATE NEW TECHNOLOGIES COULD HARM OUR
COMPETITIVE POSITION
The communications industry is characterized by rapid and significant
technological advancements and the introduction of new products and services. We
do not possess significant intellectual property rights with respect to the
technologies we use, and we are dependent on our equipment vendors and other
third party suppliers for the development of and access to new technology. In
addition, we generally own the equipment we use to provide our services, and we
own the infrastructure, including base stations and switching equipment, that
constitute our communications networks. Therefore, technological changes that
render our equipment out of date, less efficient or more expensive to operate
than newer equipment could cause us to incur substantial increases in capital
expenditures to upgrade, modify or replace such equipment.
We cannot predict which of the many possible future product and service
offerings will be important to establish and maintain a competitive position in
our markets or what expenditures will be required to develop and provide such
products and services. The company's future financial performance will depend,
in part, upon our ability to anticipate and adapt to rapid regulatory and
technological changes occurring in the communications industry and upon our
ability to offer, on a timely basis, services that meet evolving industry
standards. There can be no assurance that we will be able to adapt to such
technological changes or offer such services on a timely basis or establish or
maintain a competitive position. There can be no assurance that one or more of
these factors will not vary unpredictably, which could have a material adverse
effect on our business, financial condition, results of operations and the
market price of our common stock. In addition, there can be no assurance, even
if these factors turn out as anticipated, that we will be able to implement our
strategy or that our strategy will be successful in this rapidly evolving
market.
Our ability to remain competitive in the marketplace is directly associated
with the evolution of our current and future communication technologies in order
to increase capacity, data transmission speeds and value-added services.
There are significant risks associated with this evolution, including:
-- significant vendor delays in providing commercial infrastructure and
customer premises equipment;
-- the failure of new technologies to meet reliability and performance
expectations; and
-- higher technology prices due to early stage implementation and/or
lack of economies of scale.
WE MAY NOT BE ABLE TO NEGOTIATE INTERCONNECTION AGREEMENTS ON FAVORABLE TERMS
We require interconnection agreements with other communications companies
to connect calls or data transmissions between our customers and non-customers
or between our customers in different cities and regions. To date, we have been
successful in negotiating these agreements in Brazil, but this process has been
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facilitated by the fact that the incumbent operators are currently required by
law to negotiate these agreements. Future negotiations with operators that are
not subject to this legal requirement may be more difficult and result in
unsatisfactory terms. Incumbent operators in other countries in which we may
pursue opportunities in the future may not be required to provide
interconnections, and there may be no competitive alternatives. Although each of
Vesper and VeloCom Argentina has entered into interconnection agreements with
other communications companies servicing Brazil and Argentina, respectively, we
cannot assure you that each of them will be able to negotiate additional
agreements or renegotiate its existing interconnection agreements on favorable
terms.
WE FACE SIGNIFICANT COMPETITION IN LATIN AMERICA
The communications industry in Latin America is highly competitive and
generally characterized by rapid technological changes and low barriers to
entry. Our success depends on our ability to compete with existing and new
communications providers in each of our markets, including global, national and
regional long distance and local exchange communications companies, wireless
telephone companies and microwave carriers, national, regional and local
Internet service providers, cable television companies and direct broadcast
satellite and wireless communications providers. Although in Brazil we will
benefit from our duopoly position with respect to our switched fixed telephony
services until December 31, 2001, we believe that competition will continue to
intensify in our non-protected markets as the number of new market entrants
increases. Many of our existing and potential competitors have substantially
greater financial, marketing and other resources than us. If our competitors
devote significant additional resources to the provision of communications
services to our target customer base, their action would have a material adverse
effect on our business, financial condition, results of operations and the
market price of our common stock. We cannot assure you that we will be able to
compete successfully against these existing and potential competitors.
Although, as a result of pent-up demand and what we believe to be poor
quality service provided by our incumbent competitors, we do not expect to
compete primarily on price in the Brazilian communications market, price is the
primary basis for competition in the data transmission and Internet markets in
Brazil and Argentina. We have no control over the prices set by our competitors
(including the provision by these competitors of free Internet access), and some
of our competitors may be able to use their financial resources to cause severe
price competition. Any such price competition would have a material adverse
effect on our business, financial condition, results of operations and the
market price of our common stock.
WE MAY HAVE DIFFICULTY IN INTEGRATING ACQUIRED BUSINESSES
As part of our business strategy, we intend to acquire other businesses. We
expect to face competition for acquisition candidates, which may limit the
number of acquisition opportunities and may lead to higher acquisition prices.
Also, we may not be able to identify, acquire or manage additional businesses
profitably or to successfully integrate any acquired businesses with our
business. Businesses that we acquire may have liabilities that we underestimate
or do not discover during our pre-acquisition investigations. Further, each
acquisition may involve other special risks that could cause the acquired
business to fail to meet our expectations. For example:
-- the acquired business may not achieve expected results;
-- we may not be able to retain key personnel of the acquired business;
-- we may incur substantial, unanticipated costs, delays or other
operational or financial problems when we try to integrate the
business with our own;
-- the transfer of required permits, authorizations or licenses may be
more difficult, time consuming or costly than we anticipated; or
-- our management's attention may be diverted.
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WE FACE MULTIPLE RISKS ASSOCIATED WITH PROVIDING INTERNET SERVICES
We anticipate that the provision of Internet services will be an important
segment of the services available through our communications networks, and the
risks associated with the provision of Internet access and services discussed
below could adversely affect our business, results of operations, financial
condition and the market price of our common stock.
THE MARKET FOR INTERNET ACCESS AND SERVICES REMAINS UNPREDICTABLE
We offer Internet access and services to individual customers and
businesses. As is typical in newer industries, demand and market acceptance
remain unknown factors in the provision of Internet services. In addition,
critical issues concerning the commercial use of the Internet remain unresolved
and may impact the growth of Internet use. Despite growing interest in the many
commercial uses of the Internet, many businesses in Latin America and elsewhere
have been deterred from purchasing Internet services for a number of reasons,
including:
-- inconsistent quality of service;
-- lack of cost-effective, high-speed options;
-- limited access points;
-- inability to integrate business applications on the Internet;
-- the need to deal with multiple and frequently incompatible vendors;
-- inadequate protection of the confidentiality of stored data and
information moving across the Internet; and
-- a lack of tools to simplify Internet access and use.
Published reports have also indicated that capacity constraints caused by
growth in the use of the Internet may, unless resolved, constrain development of
the Internet to the extent that users experience delays, transmission errors and
other difficulties. For example, inadequate transmission infrastructure in Latin
America (such as an insufficiency of telephone lines for Internet access) could
forestall the growth of Internet services in that region.
WE MAY BECOME SUBJECT TO GOVERNMENT REGULATION, AND FACE POTENTIAL LIABILITY
FOR INFORMATION DISSEMINATED THROUGH OUR NETWORK
As an Internet access provider, we may incur liability for information
disseminated through our networks. The Internet access business has, to date,
not been materially restricted by regulation in our markets, including Brazil.
The legal and regulatory environment of Internet access and e-commerce is
uncertain, however, and may change. Governments in our markets may adopt new
laws and regulations for Internet service offerings, or may apply existing laws
to the new forms of e-commerce. Uncertainty and new regulation could increase
our costs or slow the growth of e-commerce on the Internet significantly. This
could delay growth in demand for our Internet and data services and limit the
growth of our revenues. New and existing laws may cover issues such as:
-- sales and other taxes;
-- user privacy;
-- pricing controls;
-- characteristics and quality of products and services;
-- consumer protection;
-- cross-border commerce;
-- libel and defamation;
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-- copyright and trademark infringement;
-- pornography and indecency; and
-- other claims based on the nature and content of Internet materials.
As the law in this area develops, the potential imposition of liability
upon us for information carried on and disseminated through our networks could
require us to implement measures to reduce our exposure to such liability, which
may require the expenditure of substantial resources or the discontinuation of
certain service offerings. Any costs that are incurred as a result of these
measures, contesting any claims, defending lawsuits, or the consequent
imposition of liability could have a material adverse effect on our business,
financial condition, results of operations and the market price of our common
stock.
OUR INTERNET NETWORK MAY EXPERIENCE SECURITY BREACHES
The ability to provide secure transmission of information over the Internet
is a significant barrier to electronic commerce and communications. We have
implemented certain network security measures, such as limiting physical and
network access to our routers. Nonetheless, we cannot assure that our network
infrastructure will not be vulnerable to computer viruses, break-ins and similar
disruptive problems caused by our customers or other Internet users. Computer
viruses, break-ins or other problems caused by third parties could lead to
interruptions, delays or cessation in service to our customers. Furthermore,
these incidents could deter potential customers and adversely affect existing
customer relationships.
Security problems represent an ongoing threat to public and private data
networks. Addressing problems caused by computer viruses, break-ins or other
problems caused by third parties could have a material adverse effect on us, and
the cost of eliminating these security breaches could be prohibitively
expensive.
The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Inappropriate use of the Internet by third parties
could also potentially jeopardize the security of confidential information
stored in the computer systems of our customers. Although we attempt to limit
contractually our liability in such instances, the occurrence of these problems
may result in claims against us or liability on our part. These claims,
regardless of their ultimate outcome, could result in costly litigation and
adversely affect our business or reputation or our ability to attract and retain
customers. Moreover, until more consumer reliance is placed on security
technologies available, the security and privacy concerns of existing and
potential customers may inhibit the growth of the Internet service industry and
our customer base and revenues.
ECONOMIC AND POLITICAL CONDITIONS IN LATIN AMERICA POSE NUMEROUS RISKS TO OUR
OPERATIONS
Substantially all of our revenues will be derived from operations in Latin
America. An investment in our common stock is subject to risks of doing business
in Latin America. Other than the United States, each country where we operate
has experienced political and economic instability in recent years. Moreover, as
events in the Latin American region have demonstrated, negative economic or
political developments in one country in the region can lead to or exacerbate
economic or political crises elsewhere in the region. Furthermore, events in
recent years in other developing markets, such as Russia and Asia, have placed
pressures on the stability of the currencies of a number of countries in Latin
America, including Brazil and Argentina. Volatility in regional currencies and
capital markets may also have an adverse effect on our ability to gain access to
international capital markets for necessary financing and refinancing. A lack of
international capital sources for emerging market borrowers could have a
material adverse effect on us and many of our customers.
We cannot assure you that economic difficulties in Latin America will
cease, including volatility in regional currencies and capital markets, which
would have a material adverse effect on our business, financial condition,
results of operations and the market price of our common stock.
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BRAZIL
Brazil constitutes the greater share of our business and revenues and is
expected to remain our most significant market for the foreseeable future.
Accordingly, economic and political developments in Brazil are of particular
importance to our future success and requires us to continually assess the risks
associated with our operations in Brazil and our business and operating
strategy. The Brazilian economy has been characterized by frequent and
occasionally drastic intervention by the Brazilian government and volatile
economic cycles. The Brazilian government has often changed monetary, taxation,
credit, tariff and other policies to influence the course of Brazil's economy.
Throughout the 1980s and into the 1990s, the Brazilian economy has suffered
from periods of extremely high rates of inflation and recession. Inflation, as
well as certain governmental measures to combat inflation, has in the past had
significant negative effects on the Brazilian economy. Since the real's
introduction in 1994 to stabilize the economy, Brazil's inflation has been
substantially lower than in previous periods. However, if Brazil experiences
substantial inflation again in the future, our operating expenses and borrowing
costs may increase.
Historically, Brazil's currency has frequently depreciated in relation to
the U.S. dollar. At the end of 1998, foreign exchange reserves in Brazil had
declined to $40 billion from nearly $70 billion at the end of August 1998. These
outflows, which resulted from the Russian economic crisis (and the subsequent
impact on risk perception of investments in emerging market countries in
general) and high rates of inflation prevailing in the Brazilian economy, put
pressure on the Brazilian real. The Brazilian government permitted the real to
float freely against the U.S. dollar in January 1999. Since that time, the real
has devalued to a low of R$2.17=$1.00 on March 3, 1999. At April 30, 2000, the
real traded at a rate of R$1.80 =$1.00. The Brazilian government has intervened
only occasionally to control unstable movements in the foreign exchange rate. At
the present time, it is not yet possible to predict whether the government will
continue to permit the real to float freely. We cannot assure you that the real
will not again be devalued relative to the U.S. dollar, or that the real will
not fluctuate significantly relative to the U.S. dollar. Devaluations of the
real relative to the U.S. dollar also create additional inflationary pressures
in Brazil that may negatively affect us. They generally curtail access to
foreign financial markets and may require government intervention, including
recessionary government policies.
Our operations in Brazil also could be affected by political instability.
Support for President Fernando Henrique Cardoso, now serving a second term, has
decreased significantly since his re-election, affecting his ability to command
the government coalition in the Brazilian Congress. Changes in the composition
of the governing coalition, in the cabinet or the presidency may undermine
investor confidence or produce policy changes that may adversely affect our
operations in Brazil.
ARGENTINA
Although the current primary focus of our business is on Brazil, we expect
Argentina to constitute an increasing share of our business and revenues. The
instability and volatility in the world financial markets, which began with the
crisis in the markets of Southeast Asia in 1998 and spread to Russia and Brazil,
has negatively affected the Argentine economy and financial markets. In addition
to the effects of the economic difficulties experienced in 1999 in Brazil,
Argentina's largest trading partner, Argentina has experienced a decline in
investor confidence as a result of domestic political and economic developments
and has suffered from a continuing economic recession that began in 1999. In
October 1999, Moody's cut Argentina's long-term foreign currency rating to B1
from Ba3. We are unable to predict the effect of the current recession on our
business, financial condition and results of operations or the market price of
our common stock. In addition, we cannot assure you that future political or
economic uncertainties will not negatively impact the Argentine economy, or that
the Argentine monetary authorities will continue to support the existing fixed
peso/dollar exchange rate.
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WE ARE VULNERABLE TO CURRENCY FLUCTUATIONS, DEVALUATIONS AND RESTRICTIONS THAT
MAY INCREASE OUR LOSSES AND CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS
We are exposed to risk from fluctuations in foreign currency exchange
rates. As of April 30, 2000, our subsidiaries had approximately $478.3 million
of outstanding U.S. dollar-denominated indebtedness, and we or our subsidiaries
will in the future incur additional indebtedness denominated in U.S. dollars.
Declines in the value of the local currencies where our subsidiaries operate
relative to the U.S. dollar will increase the interest costs in those local
currencies for the U.S. dollar-denominated indebtedness and result in foreign
exchange losses on repayments of principal. Since substantially all of our
subsidiaries' revenues are denominated in the applicable local currency,
currency devaluation will not be offset by any exchange-related increase in
revenue.
Since our financial statements are in U.S. dollars, devaluations of local
currency relative to the U.S. dollar also will adversely affect our results of
operations reported in U.S. dollars as well as the value of our ownership
interests in our subsidiaries and other future ventures outside the United
States.
Our competitors and potential future competitors, including the incumbent
operators and large, multinational telecommunications companies, may be less
exposed to currency risk or may be better able to hedge their currency risk and
could thereby gain a relative competitive advantage in the event of a currency
devaluation. We do not currently hedge against foreign currency exchange rate
risks. Pursuant to Brazilian law, our contracts with customers in Brazil cannot
be denominated in dollars or linked to the exchange rate between the Brazilian
real and the U.S. dollar. The expansion of our business in Brazil, including the
development of our Internet and data business, will therefore increase our
exposure to exchange rate risks.
Latin American economies have experienced shortages in foreign currency
reserves and restrictions on the ability to repatriate local earnings and
convert local currencies into U.S. dollars. The imposition of these restrictions
could adversely affect our subsidiaries' ability to meet their U.S.
dollar-denominated obligations or distribute funds to us.
For these reasons, any devaluation of local currencies in the countries
where we operate relative to the U.S. dollar or the imposition of exchange
controls could have a material adverse effect on our business, financial
condition, results of operations and the market price of our common stock.
WE FACE REGULATORY RISKS AND UNCERTAINTY WITH RESPECT TO LOCAL LAWS AND
REGULATIONS
Our business is dependent upon the procurement and maintenance of licenses
to provide various telecommunications network services in the countries in which
we operate. We expect those licenses that are subject to expiration will be
renewed in due course upon our application to the appropriate authorities. Due
to the political and economic risks associated with the countries in which we
operate, we cannot assure you that we will be able to maintain our licenses in
force or that they will be renewed upon their expiration. The operating licenses
held by Vesper require Vesper to achieve certain network build-out levels within
prescribed time periods and the failure to meet these requirements could result
in the revocation of these licenses or the imposition of fines. The loss, or
substantial limitation upon the terms, of our licenses could have a material
adverse effect on our business, financial condition, results of operations and
the market price of our common stock. For specific details of our licenses in
the various countries in which we operate, including the expiration date of such
licenses, see "Business--Operations--Brazil--Regulation" and
"Business--Operations--Argentina--Regulation". We cannot assure you that we will
succeed in obtaining all requisite regulatory approvals to operate in those
countries in which we may desire to do business.
Local laws and regulations differ significantly among the jurisdictions in
which we operate and in which we may operate in the future. The interpretation
and enforcement of these laws and regulations vary and are often based on the
informal views of the local ministries which, in some cases, are subject to
influence by the incumbent operators. The conditions governing our service
offerings may be altered by future legislation or regulation. In some of our
principal existing and target markets, laws and regulations prohibit or limit
the provision of certain telecommunications services.
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IT MAY BE DIFFICULT TO ENFORCE OUR LEGAL RIGHTS IN FOREIGN COUNTRIES
Many of the agreements with our strategic partners or with our subsidiaries
are governed by the laws of the country where the subsidiary is located, which,
in some cases, may negatively impact our ability to enforce our contractual
rights against the strategic partners or subsidiary or obligate us to resolve
any disputes through arbitration or court proceedings in those countries. We
cannot accurately predict whether we will be able to efficiently and fairly
resolve any disputes that might arise, especially in those countries with
evolving legal systems. Even if we prevail in a dispute, we may not be able to
enforce our rights. Our inability to enforce our contractual rights or decisions
in our favor may have a material adverse effect on our business, financial
condition, results of operations and the market price of our common stock.
IF WIRELESS HANDSETS POSE HEALTH AND SAFETY RISKS, WE MAY BE SUBJECT TO NEW
REGULATIONS, AND DEMAND FOR OUR SERVICES MAY DECREASE
Although our customers do not currently use wireless handsets in our
networks, we are seeking regulatory approval to allow them to do so to reduce
the cost and time required for handset installation. Media reports, however,
have suggested that certain radio frequency emissions from wireless handsets may
be linked to various health concerns, including cancer, and may interfere with
various electronic medical devices, including hearing aids and pacemakers.
Concerns over radio frequency emissions and any legislation that may be adopted
in respect of this and other risks, may have the effect of discouraging or
prohibiting the use of wireless handsets, which could have a material adverse
effect on our business, financial condition, results of operations and the
market price of our common stock.
WE ARE DEPENDENT ON KEY PERSONNEL FOR OUR FUTURE SUCCESS
Our success depends to a significant degree on members of our and our
subsidiaries' senior management and certain key employees. Our success also
depends in part upon our ability to hire and retain highly skilled and qualified
operating, marketing, financial and technical personnel. Competition for
qualified employees in the communications industry is intense and, accordingly,
we cannot assure you that we will be able to hire or retain necessary personnel.
In addition, the successful build-out and implementation of our communications
networks will require us to recruit, hire and retain a significant number of
highly skilled employees. There may be a limited supply of qualified personnel
in our countries of operations.
CERTAIN PROVISIONS OF OUR CORPORATE DOCUMENTS COULD PREVENT OR DELAY AN
ACQUISITION OF US THAT IS BENEFICIAL TO OUR STOCKHOLDERS
Our corporate documents and Delaware law contain provisions that could make
it more difficult for a third party to acquire control of our company, even if a
change in control would be beneficial to stockholders, and could adversely
affect the market price of our common stock. We will, for example, upon the
closing of this offering be subject to Section 203 of the Delaware General
Corporation Law, which restricts some transactions between us and our
stockholders.
THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND OUR STOCK PRICE MAY BE
VOLATILE
There is no public market for our common stock. An active public market for
our common stock may not develop or be sustained after this offering. The price
of our common stock is likely to change after this offering. The market price of
our common stock may fluctuate significantly in response to a number of factors
(some of which are beyond our control), including:
-- variations in operating results;
-- changes in financial estimates by securities analysts;
-- changes in market valuations of communications companies;
-- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
17
<PAGE> 23
-- our success or failure to build out and implement our communications
networks and expansion plans;
-- an adverse decision by a regulatory agency in one of our primary
markets;
-- increases or decreases in reported holdings by significant
stockholders;
-- additions or departures of key personnel;
-- future sales of common stock; and
-- stock market price and volume fluctuations.
Recently, stock markets in the United States have experienced significant
price and volume fluctuations, and the market prices of securities of
telecommunications service providers and technology companies, particularly
Internet-related companies, have been highly volatile. Investors may not be able
to resell their shares of common stock at or above the initial public offering
price. In the past, periods of volatility in the marketplace for a company's
securities often have been followed by the initiation of securities class action
litigation in the United States against the company. The institution of such
litigation against us could result in substantial costs and a diversion of our
management's attention and resources, which could have a material adverse effect
on our business, financial condition, results of operations and the market price
of our common stock.
SHARES OF OUR COMMON STOCK BECOMING AVAILABLE FOR SALE COULD ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK AND MAY IMPAIR OUR ABILITY TO RAISE CAPITAL
THROUGH THE SALE OF ADDITIONAL STOCK
The shares sold in this offering will generally be freely
tradable without restriction. We will have shares of our common stock
outstanding upon completion of this offering that will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
The 78,308,332 shares of common stock that will be outstanding after our
preferred stock is converted upon completion of this offering, assuming all
outstanding equity commitments are funded, and substantially all of the
11,283,826 shares of common stock currently outstanding, will be entitled to
certain registration rights. See "Description of Capital Stock--Shares Eligible
for Future Sale".
Immediately after this offering, we also will have an additional 6,277,833
shares of common stock that are the subject of options, 4,960,768 of which are
exercisable (3,392,716 of which contain early exercise provisions and would, if
exercised, be subject to forfeiture if not fully vested) and 1,317,065 of which
will not then be currently exercisable. In addition, there will be an additional
125,000 shares of common stock that are the subject of warrants, none of which
are expected to be then exercisable. To the extent that these options and
warrants are properly exercised, the underlying shares of common stock will be
freely tradable immediately upon exercise of the options and warrants.
Certain of our existing stockholders have executed lock-up agreements that
limit their ability to sell their common stock. These stockholders have agreed,
subject to certain exceptions, not to sell or otherwise dispose of any shares of
our common stock for a period of 180 days after the date of this prospectus
without the prior written approval of Morgan Stanley & Co. Incorporated. When
the lock-up agreements expire, these shares and the shares underlying the
options and warrants will become eligible for sale, in some cases subject to the
volume, manner of sale and notice requirements of Rule 144. The availability of
these shares may depress the market price of our common stock. See "Description
of Capital Stock--Shares Eligible for Future Sale."
OUR COMMON STOCK MAY BE SUBSTANTIALLY DILUTED AS A RESULT OF THE INITIAL PUBLIC
OFFERING PRICE
The initial public offering price of our common stock is substantially in
excess of the net tangible book value per share, which results in a benefit to
all of our existing stockholders. As a result, purchasers of common stock in
this offering will experience immediate and substantial dilution of $ per
share (assuming an initial public offering price of $ per share) of our
common stock from the public offering price. In addition, the 11,283,826 shares
of common stock and 78,308,332 shares of preferred stock, assuming all
outstanding equity commitments are funded, outstanding and owned by the existing
stockholders prior to this
18
<PAGE> 24
offering were originally acquired at a substantially lower price per share on
average as compared to the price expected to be paid by new investors for the
shares of common stock in this offering.
WE DO NOT INTEND TO PAY DIVIDENDS ON OUR COMMON STOCK AND ANY FUTURE PAYMENT OF
DIVIDENDS IS LIMITED BY THE TERMS OF THE VENDOR FINANCING AGREEMENTS TO WHICH WE
OR OUR SUBSIDIARIES ARE PARTY
We have not paid any cash dividends on our common stock and do not intend
to pay cash dividends in the foreseeable future. We plan to retain earnings, if
any, for use in the operation of our business and to fund future growth. In
addition, our vendor financing agreements currently severely restrict the
payment of dividends. Any future decisions as to the payment of dividends will
be at the discretion of our board of directors, subject to applicable law.
USE OF PROCEEDS
We will receive net proceeds from this offering of approximately $
million. This assumes that our common stock is offered at $ per share, the
midpoint of the range set forth on the cover page of this prospectus, and is
after deducting underwriting discounts and commissions and the estimated
expenses of this offering. We intend to use the net proceeds to make capital
contributions to certain of our subsidiaries to fund the build-out of our
networks, including associated operating losses, and for general corporate
purposes, including to fund certain development activities, such as the auctions
for PCS and LMDS spectrum in Brazil, and to pursue certain strategic
acquisitions of broadband wireless; cable and fiber providers in Latin America.
Pending this application, we will invest the net proceeds in short-term liquid
securities.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock and we do not
intend to pay cash dividends in the foreseeable future. We plan to retain
earnings, if any, for use in the operation of our business and to fund future
growth. In addition, our vendor financing agreements currently severely restrict
the payment of dividends. See "Management Discussion and Analysis of Financial
Conditions and Results of Operations--Liquidity and Capital Resources."
19
<PAGE> 25
CAPITALIZATION
The following table shows our cash and cash equivalents, convertible
preferred stock and total capitalization as of December 31, 1999 on an
historical basis and as adjusted to give effect to:
-- the issuance of the 20,395,834 remaining Series B/B-1 preferred
stock, which is subject to an unconditional funding commitment;
-- the issuance of the Series C preferred stock on April 20, 2000;
-- the automatic conversion of all shares of preferred stock into
78,308,332 shares of common stock; and
-- this offering.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 25,000 $
======== =======
Convertible Preferred Stock, mandatorily redeemable, $.0001
par value:
Series A, 31,000,000 shares authorized; 30,706,333 shares
issued and outstanding, actual; none issued and
outstanding, as adjusted............................... 92,103 --
Series B, 41,666,667 shares authorized; 7,657,073 shares
issued and outstanding, actual; none issued and
outstanding, as adjusted............................... 45,194 --
Series C, 5,150,000 shares authorized; 5,102,000 shares
issued and outstanding, actual; none issued and
outstanding, as adjusted............................... --
Stockholders' Equity (Deficit):
Preferred stock; undesignated, 4,000,000 shares
authorized; none issued and outstanding, actual; none
issued and outstanding, as adjusted....................
Common stock, $.0001 par value, 106,666,667 shares
authorized; 11,283,826 shares issued and outstanding,
actual; shares issued and outstanding, as
adjusted............................................... 1
Additional paid-in capital.................................. 27,040
Other cumulative comprehensive income....................... 214
Deficit accumulated during development stage................ (32,218)
-------- -------
Total stockholders' equity (deficit)................. (4,963)
-------- -------
Total capitalization.............................. $132,334 $
======== =======
</TABLE>
The number of shares of common stock is based on the number of shares
outstanding as of April 30, 2000 and does not include the following:
-- 4,960,768 shares of common stock that could be issued upon the
exercise of options outstanding as of April 30, 2000 at exercise
prices ranging from $1.00 to $10.00;
-- 125,000 shares that could be issued upon the exercise of warrants
outstanding as of April 30, 2000 at an exercise price of $8.10; and
-- 5,722,167 additional shares that could be issued under our option
plans.
20
<PAGE> 26
DILUTION
As of December 31, 1999, our pro forma net tangible book value, after
giving effect to (i) the issuance of $ million of private equity capital
subsequent to December 31, 1999, net of approximately $ million in equity
issuance costs and (ii) the automatic conversion of all shares of preferred
stock outstanding immediately prior to this offering into 78,308,332 shares of
our common stock upon this offering, assuming all outstanding equity commitments
are funded, was $ million, or $ per share of common stock. Net
tangible book value per share represents the amount of our total tangible assets
reduced by the amount of our total liabilities, divided by the number of shares
of common stock outstanding. As of December 31, 1999, our pro forma net tangible
book value, as adjusted for the sale of shares in this offering at an
assumed initial public offering price of $ per share (the midpoint of the
range set forth on the cover page of this prospectus), after deducting the
estimated underwriting discounts and commissions and other expenses, and
assuming no exercise of the underwriters' over-allotment option, would have been
approximately $ per share of common stock. This represents an immediate
increase of $ per share to existing stockholders and an immediate dilution
of $ per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of December
31, 1999............................................... $
Increase in net tangible book value per share attributable
to purchasers in this offering.........................
------
Pro forma net tangible book value per share after this
offering..................................................
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table summarizes, as of December 31, 1999, after giving
effect to (i) the issuance of $ million of private equity capital subsequent
to December 31, 1999, net of approximately $ million in equity issuance
costs and (ii) the automatic conversion of all shares of preferred stock
outstanding immediately prior to this offering into 78,308,332 shares of our
common stock upon this offering, assuming all outstanding equity commitments are
funded, the total consideration paid to us and the average price per share paid
by the existing stockholders and by the investors purchasing shares of common
stock in this offering (before deducting the estimated underwriting discounts
and commissions and other expenses, and assuming no exercise of the
underwriters' over-allotment option):
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------- ----------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. % $ % $
New investors in this offering....
--------- ----- ------- ----- ------
Total................... % $ % $
========= ===== ======= ===== ======
</TABLE>
If the underwriters' over-allotment option is exercised in full:
-- the number of shares of common stock held by the existing stockholders
would be reduced to % of the total number of shares of common
stock to be outstanding after this offering; and
-- the number of shares of common stock held by new investors would be
increased to or % of the total number of shares of common
stock to be outstanding after this offering.
The 89,592,158 shares of common stock outstanding and owned by our existing
stockholders prior to this offering (as adjusted to give effect to the
conversion of 78,308,332 outstanding shares of preferred stock into 78,308,332
shares of common stock upon the closing of this offering, assuming all
outstanding equity commitments are funded) were originally acquired at a
substantially lower price per share on average as compared to the price expected
to be paid by new investors for the shares of common stock offered
hereby.
The tables above exclude as of April 30, 2000, (i) 125,000 shares of common
stock that may be issued should the holders of certain stock warrants elect to
exercise their warrants prior to the consummation of this offering, and (ii)
shares of common stock subject to outstanding options. To the extent
the stock warrants or outstanding options are exercised, there will be further
dilution to new investors. See "Capitalization," "Management--Executive
Compensation," "Management--Stock Option Plans" and "Description of Capital
Stock."
21
<PAGE> 27
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed statement of
operations for the year ended December 31, 1999 gives effect to the acquisition
of 100% of VeloCom Argentina as if it had occurred on January 1, 1999 and gives
effect to the increase in ownership interests of Vesper Northeast and Vesper Sao
Paulo to 49.4% as if the increase had occurred on their respective dates of
inception (January 18, 1999 and May 1, 1999, respectively). The pro forma
adjustments are based upon currently available information and upon certain
assumptions that we believe are reasonable under current circumstances. The
unaudited pro forma consolidated financial information does not purport to
represent what our results of operations would actually have been if the
transactions described above had actually occurred on the dates indicated. The
unaudited pro forma consolidated financial information and accompanying notes
should be read in conjunction with our audited consolidated financial statements
and notes thereto and other financial information pertaining to us included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------
VELOCOM
VELOCOM ARGENTINA VESPER
HISTORICAL TRANSACTION(1) TRANSACTION(2) PRO FORMA
---------- -------------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Costs and Expenses:
General and administrative expenses.... $ 8,657 $ 8,405 $ -- $ 17,062
-------- ------- ------- ---------
Operating loss......................... (8,657) (8,405) -- (17,062)
-------- ------- ------- ---------
Other Income (Expense):
Interest income........................ 1,074 -- -- 1,074
-------- ------- ------- ---------
Interest expense....................... (87) -- -- (87)
-------- ------- ------- ---------
Other.................................. 17 (59) -- (42)
-------- ------- ------- ---------
Net loss before other items............ (7,653) (8,464) -- (16,117)
-------- ------- ------- ---------
Share in results of affiliated
companies,
net................................. (23,721) -- (3,801) (27,522)
-------- ------- ------- ---------
Net Loss............................... $(31,374) $(8,464) $(3,801) $ (43,639)
======== ======= ======= =========
Basic and diluted net loss per common
share.................................. $ (5.69) $ (1.44)
======== =========
Basic and diluted weighted average number
of common shares outstanding(3)........ 5,517,332 30,253,662
======== =========
</TABLE>
- ------------
(1) Represents the results of operations of VeloCom Argentina for the period
from January 1, 1999 to September 30, 1999.
(2) Represents the increase in ownership percentage to 49.4% of Vesper Northeast
and Vesper Sao Paulo as if the increase occurred on January 18, 1999 and May
1, 1999, respectively.
(3) Represents the conversion of all outstanding preferred stock into common
stock as if it was converted on the date it was issued during 1999. In
addition, it represents the pro forma effects as if the stock issued in the
transactions described above was issued January 1, 1999.
22
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables set forth certain historical consolidated financial
data of the company for the periods from April 29, 1998 (the date of the
company's inception) through December 31, 1998 and 1999 and for the year ended
December 31, 1999. The consolidated financial data includes our accounts and
those of our majority owned subsidiaries. For those investments in companies in
which our ownership interest is 20% to 50% and we exert significant influence
through board representation and management authority (as is the case for Vesper
in which we own a 49.4% interest), the equity method of accounting is used. We
derived our selected historical consolidated financial data as of December 31,
1998 and 1999 and for the periods from April 29, 1998 through December 31, 1998
and 1999 and the year ended December 31, 1999 from our audited consolidated
financial statements included elsewhere in this prospectus. You should read the
following selected consolidated financial data together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our audited consolidated financial statements and related footnotes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
VELOCOM INC.
------------------------------------------------
CUMULATIVE FROM CUMULATIVE FROM
APRIL 29, 1998 APRIL 29, 1998
(INCEPTION) TO YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 1999
--------------- ------------ ---------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
General and administrative expenses........ $ 914 $ 8,657 $ 9,571
---------- ---------- ----------
Operating loss............................. (914) (8,657) (9,571)
Other Income (Expense):
Interest income............................ 70 1,074 1,144
Interest expense........................... -- (87) (87)
Other...................................... -- 17 17
---------- ---------- ----------
Net loss before other items................ (844) (7,653) (8,497)
---------- ---------- ----------
Share in results of affiliated companies..... -- (23,721) (23,721)
---------- ---------- ----------
Net loss................................... $ (844) $ (31,374) (32,218)
Basic and diluted net loss per common
share................................... $ (0.34) $ (5.69) $ (7.48)
Basic and diluted weighted average number of
common shares outstanding.................. 2,463,404 5,517,332 4,312,419
OTHER FINANCIAL DATA:
Cash flow provided by (used in):
Operating activities....................... $ (769) $ (7,598) $ (8,367)
Investing activities....................... (46) (95,682) (95,728)
Financing activities....................... 3,155 125,940 129,095
Capital expenditures....................... (46) (1,916) (1,962)
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
----------------
1998 1999
------ -------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $2,340 $25,000
Restricted cash............................................. -- 1,913
Investment in affiliates.................................... -- 69,101
Property and equipment...................................... 45 9,552
Spectrum licenses........................................... -- 35,814
Convertible preferred stock, mandatorily redeemable:
Series A.................................................. -- 92,103
Series B.................................................. -- 45,194
Total stockholders' equity (deficit)........................ 2,311 (4,963)
</TABLE>
23
<PAGE> 29
The following tables set forth certain historical combined consolidated
financial data of Vesper Northeast for the period from January 18, 1999
(inception) through December 31, 1999 and Vesper Sao Paulo for the period from
May 1, 1999 (inception) through December 31, 1999 on a combined basis. Vesper is
our most significant investment and is accounted for using the equity method of
accounting. We derived the selected historical consolidated financial data as of
December 31, 1999 and for the period from inception through December 31, 1999
from the audited combined consolidated financial statements included elsewhere
in this prospectus. You should read the following selected combined consolidated
financial data together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the audited combined consolidated
financial statements and related footnotes included elsewhere in this
prospectus.
VESPER
<TABLE>
<CAPTION>
CUMULATIVE FROM
INCEPTION TO
DECEMBER 31,
1999
---------------
(IN THOUSANDS)
<S> <C>
STATEMENT OF OPERATIONS DATA:
General and administrative expenses............... $ 67,517
---------
Operating loss.................................... (67,517)
Other Income (Expense):
Interest income, net.............................. 1,163
Foreign currency transaction gain................. 10,642
---------
Net loss applicable to common stockholders........ $ (55,712)
---------
OTHER FINANCIAL DATA:
Cash flow provided by (used in):
Operating activities.............................. $ (81,896)
Investing activities.............................. (428,202)
Financing activities.............................. 603,662
Capital expenditures.............................. (399,136)
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1999
------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 94,588
Property and equipment, net.......................... 500,923
Licenses............................................. 83,957
Loans and financing.................................. 414,605
Total shareholders' equity........................... 127,958
</TABLE>
24
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a rapidly growing facilities-based provider of integrated
communications services to businesses and residential customers. We operate in
major Latin American markets that are characterized by high-growth potential,
lack of telecommunications infrastructure and a favorable regulatory
environment. Our services include voice telephony, high-speed and dial-up
Internet access and data transmission. We focus on Latin America, currently
concentrating on the Mercosur markets of Brazil, Argentina and Uruguay.
In Brazil, we offer our telephony and data transport services through
Vesper, in which we hold a 49.4% economic interest and a 50% voting interest,
and our Internet services through BV Interativa, a joint venture we formed in
March 2000 and in which we hold a 45% interest. In Argentina, we offer our
Internet services, and expect by the end of 2000 to offer data transport
services, through our wholly owned subsidiary, VeloCom Argentina. We also plan
to use our operational base in Argentina to provide broadband data and Internet
services in Montevideo, Uruguay by the end of 2000. In connection with this
anticipated launch, in December 1999 we formed a Uruguayan joint venture,
Odecar, in which we have an 85% interest.
Following the acquisition of the operating licenses by Vesper for the Sao
Paulo and northeast regions of Brazil, we consummated a series of transactions
with certain of our strategic partners in an effort to increase our ownership
interest in Vesper and increase our asset mix and market opportunities. As a
result of these transactions, we increased our ownership interest in Vesper to
49.4% (and acquired our 100% interest in VeloCom Argentina and certain other
communications assets in Latin America). With these transactions, we also
acquired a voting right over 0.6% of Qualcomm's equity interest in Vesper.
The following table summarizes our current organizational structure:
<TABLE>
<CAPTION>
SHAREHOLDER
SUBSIDIARY INTEREST
---------- -----------
<S> <C>
Vesper...................................................... VeloCom--49.4%(1)
BCI--34.4%
Qualcomm--16.2%
BV Interativa............................................... VeloCom--45%
BCI--45%
Qualcomm--10%
VeloCom Argentina........................................... VeloCom--100%
Odecar S.A. ................................................ VeloCom--85%
El Pais--15%
</TABLE>
- ---------------
(1) 50.0% voting interest.
In Brazil, we have built high-capacity integrated (wireless and wireline)
last-mile communications networks in 17 states. We began offering an integrated
package of telephony and data transmission services in January 2000 pursuant to
two operating licenses issued by the Brazilian government. We also provide
Internet access, web hosting and other value-added web services throughout
Brazil.
In Argentina, we have deployed a high-speed wireless data transport and
"always-on" Internet access network. We began offering packet-switched Internet
access services in March 2000 pursuant to certain nationwide licenses granted by
the Argentine government. By the end of 2000 we expect to be providing high
bandwidth data and Internet services to corporate customers and
telecommunications carriers in 24 cities in Argentina, including its five
largest markets, and broadband data and Internet services in Uruguay.
We are in the early stages of development and have from inception generated
significant net operating losses and negative cash flows. Similar to other
start-up, facilities-based communications providers, we require substantial
capital. Accordingly, we have required substantial capital contributions from
our stockholders and our subsidiaries' stockholders, and have borrowed
substantial amounts, to fund our network build-out. As we
25
<PAGE> 31
build out and deploy our networks, we expect that we will continue to generate
net operating losses and negative cash flows.
RECENT OR PENDING ACQUISITIONS AND DISPOSITIONS
On April 10, 2000, we completed a sale of certain of our Colombian and
Peruvian license holding companies that were acquired in September 1999. The
purchase price was approximately $8.3 million of which approximately $7.8
million was received at closing and $0.5 million was placed in escrow for
release in 90 days. Since the carrying value of these assets held for sale
approximates the purchase price, the company will not recognize any gain or loss
on this disposition.
BASIS OF PRESENTATION
Because we only recently commenced operations, our financial statements for
the fiscal year ended December 31, 1999 are presented on a development stage
company basis. The effect on these financial statements is to report cumulative
results of operations and cash flows since our inception on April 29, 1998. The
consolidated financial statements include our accounts and those of our
majority-owned subsidiaries (VeloCom Argentina and Odecar). For those
investments in companies in which our ownership interest is 20% to 50% and we
exert significant influence through board representation and management
authority (as is the case for Vesper and from March 17, 2000 (the date of
acquisition), BV Interativa), the equity method of accounting is used. Under
this method, the investment, originally recorded at cost, is adjusted to
recognize our proportionate share of net earnings or losses of those companies,
limited to the extent of our investment. As of December 31, 1999, we held a
49.4% economic interest in Vesper, which we accordingly account for under the
equity method of accounting.
The financial statements that appear beginning on page F-39 of this
prospectus present historical financial information through September 30, 1999
for the entities that now comprise our operations in Argentina, VeloCom
Argentina. You should refer to Note 1 to those financial statements.
In the discussion below, references to "we" and "our" mean VeloCom and its
majority-owned subsidiaries, and we will discuss separately the effect on our
financial condition and results of operations of the companies in which our
investment is accounted for using the equity method.
REVENUES
Our revenues will be derived primarily from fees charged to subscribers for
services. Our pricing plans are subject to change from time to time and are not
subject to regulatory approval. We initially expect to charge an activation fee
and a flat monthly fee (which will include both an access fee and line charges).
We also expect to derive revenue from the sale of some of the components of our
customer premises equipment.
OPERATING COSTS
Our operating costs will include costs and expenses related to both the
cost of service and the cost of sales. These costs include the cost of
maintaining the networks, site lease costs, leasing of network facilities,
technical expense, utilities and compensation expense.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expense consist primarily of subscriber
acquisition costs, marketing and advertising and compensation expense and, to a
lesser extent, expenses such as travel, professional fees, rent and other
general corporate expenses.
SHARE IN RESULTS OF AFFILIATED COMPANIES
Because we account for Vesper using the equity method of accounting, its
results of operations will impact our net income or loss through our
recognition, under share in results of affiliated companies, of our 49.4% equity
interest in the net income or loss of Vesper.
26
<PAGE> 32
Vesper's revenues will be derived primarily from fees charged to customers
for its services. Vesper's pricing plans are subject to change from time to time
and are not subject to regulatory approval. We expect that Vesper initially will
charge an installation or activation fee, a flat monthly fee and a per minute
local-use charge.
Vesper's operating costs will include costs and expenses related to both
the cost of service and the cost of sales. These costs include the cost of
maintaining the networks, site lease costs, leasing of network facilities,
technical expense, utilities and compensation expense. Vesper's general and
administrative expense consist primarily of subscriber acquisition costs,
marketing and advertising and compensation expense and, to a lesser extent,
expenses such as travel, professional fees, rent and other general corporate
expenses.
RESULTS OF OPERATIONS
Because we are a development stage company that only recently commenced
commercial operations, the results of operations discussed below may not reflect
the character of our future results.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
General and Administrative Expenses. General and administrative expenses
were $8.7 million for our first full fiscal year ended December 31, 1999
compared to $0.9 million for our first fiscal year, which commenced on April 29,
1998 and ended December 31, 1998, an increase of $7.8 million. This increase
reflects the growth in our operations and was due primarily to an increase in
employees at our corporate headquarters to support capital formation and
business development efforts, professional fees and travel expenses. In
addition, a portion of this increase was due to the acquisition of VeloCom
Argentina on September 27, 1999.
Operating Loss. We incurred an operating loss of $8.7 million for the
fiscal year ended December 31, 1999 compared to $0.9 million for the fiscal year
ended December 31, 1998, an increase of $7.8 million. This increase in operating
loss was due to the increase in general and administrative expenses in fiscal
year 1999 connected with our growth in operations and the fact that we did not
generate any revenues because we had not yet commenced operations.
Interest Income. Interest income was $1.1 million for the fiscal year
ended December 31, 1999 compared to $0.1 million for the fiscal year ended
December 31, 1998, an increase of $1.0 million. This increase was due to an
increase in available cash resulting from the sale of the company's Series A and
Series B preferred stock during 1999.
Interest Expense. Interest expense was $0.1 million for the fiscal year
ended December 31, 1999 compared to no interest expense for the fiscal year
ended December 31, 1998. The interest expense in 1999 resulted from notes
payable issued by us in connection with the acquisition of VeloCom Argentina,
our majority-owned subsidiary, in September 1999. These notes payable were paid
in full in November 1999.
Share in Results of Affiliated Companies. We recognized a loss of $23.7
million for the fiscal year ended December 31, 1999. This loss reflects our
percentage (which increased from approximately 35.0% to 49.4% effective
September 30, 1999) of Vesper's net loss of $55.7 million for its fiscal year
ended December 31, 1999.
From its inception on January 18, 1999 through December 31, 1999, Vesper
did not have any operating revenues because it had not yet started commercial
operations. For the same period, Vesper's general and administrative expenses
were $67.5 million (which accounted for its entire operating loss) and it had
interest income of $1.2 million and income from gain on foreign currency
transactions of $10.6 million. We expect that Vesper will continue to generate
net losses as it builds out and deploys its networks in Brazil.
LIQUIDITY AND CAPITAL RESOURCES
Building telecommunications and data networks is capital intensive. Since
our inception, we have engaged primarily in start-up activities requiring
substantial expenditures. As a result, we have incurred
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<PAGE> 33
significant operating and net losses. Further development of our business,
including the build-out and operation of our local access networks and
investments in Internet infrastructure, will require significant additional
expenditures and therefore we expect that these losses will continue for the
next several years. Cash provided by our operations will not be sufficient to
cover these operating and net losses or our capital expenditures.
Since our inception on April 29, 1998, we have funded our cash needs
primarily through a series of private equity financings. We have raised
approximately $425.2 million through the issuance of or commitment to issue
shares of our common stock and preferred stock. The following table shows the
shares issued and capital raised from each of these equity financing
transactions (amounts in table are in thousands, except per share amounts):
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
COMMON PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK TOTAL
------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Issued and paid in full as of December 31,
1999...................................... $27,067 $92,119 $ 45,942 $ -- $165,128
Funded subsequent to December 31, 1999...... 86,684 51,020 137,704
Absolute commitment to be funded prior to
September 30, 2000........................ -- -- 122,375 -- 122,375
------- ------- -------- ------- --------
Total....................................... $27,067 $92,119 $255,001 $51,020 $425,207
======= ======= ======== ======= ========
</TABLE>
The Series B preferred stock that has not been paid for is unconditionally
committed and can be called by the company at any time prior to certain
scheduled closings (June and September 2000) with five business days notice.
From inception through December 31, 1999, Vesper has raised approximately
$183.2 million through the issuance of equity (including $90.2 million we have
already invested) and borrowed approximately $414.6 million, all of which
through vendor financing.
CAPITAL EXPENDITURES
For the fiscal year ended December 31, 1999, we incurred capital
expenditures of $1.9 million primarily for the deployment of our networks.
During the fiscal year ended December 31, 1998, we incurred minimal capital
expenditures primarily for our corporate office facility.
For Vesper's first fiscal year ended December 31, 1999, it incurred capital
expenditures of $399.1 million, primarily for the deployment of its networks in
Brazil.
OPERATING, INVESTING AND FINANCING ACTIVITIES
Cash used in operating activities was $0.8 million for the fiscal year
ended December 31, 1998 and $7.6 million for the fiscal year ended December 31,
1999, an increase of $6.8 million that was primarily due to increased general
and administrative expenses. We used cash for investing activities of $95.7
million for the fiscal year ended December 31, 1999 and a minimal amount for the
fiscal year ended December 31, 1998. Net cash for investing activities was used
primarily for investing in Vesper, mainly to meet its net losses incurred as it
built-out its infrastructure, and for property and equipment in connection with
VeloCom Argentina's build-out of its infrastructure. Cash provided by financing
activities was $3.2 million for the fiscal year ended December 31, 1998 and
$125.9 million for the fiscal year ended December 31, 1999. For each period,
cash was primarily generated by the sale of equity securities.
At Vesper, cash used in operating activities was $81.9 million for its
fiscal year ended December 31, 1999. Vesper used cash for investing activities
of $428.2 million for its fiscal year ended December 31, 1999. Net cash for
investing activities was used by Vesper primarily for investing in the build-out
of its infrastructure. Financing activities provided Vesper with $603.7 million
for its fiscal year ended December 31, 1999 and was generated by the issuance of
equity and borrowings under Vesper's vendor financing agreements.
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<PAGE> 34
FUTURE CAPITAL REQUIREMENTS
Through April 30, 2000, we invested equity of approximately $210.7 million
in connection with the development of our business and those of Vesper and BV
Interativa. The aggregate amount of our estimated future capital requirements to
fund the build out of our local fixed wireless broadband access networks,
operating losses and investments in Internet infrastructure from May 1, 2000
through December 31, 2001, assuming no new license or business acquisitions, are
summarized below (amounts in table are in millions):
<TABLE>
<CAPTION>
VESPER AND
BV INTERATIVA OPERATIONS WHOLLY OWNED ESTIMATED CURRENT VELOCOM'S
------------------------- AND MAJORITY FUTURE CAPITAL CASH AND REMAINING
VELOCOM OWNED REQUIREMENTS OF COMMITTED FUNDING
TOTAL SHARE OPERATIONS(3) VELOCOM CAPITAL REQUIREMENTS
----------- ---------- ------------- --------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Equity contributions... $ 935.0 $440.0 $ 60.0 $500.0 $200.0 $300.0
Debt financing......... 1,500.0(1) (2) 100.0(4) 100.0 0 100.0
-------- ------ ------ ------ ------ ------
Total........ $2,435.0 $440.0 $160.0 $600.0 $200.0 $400.0
======== ====== ====== ====== ====== ======
</TABLE>
- ---------------
(1) This represents Vesper's debt financing requirements, which we anticipate
will be financed through vendor financing arrangements and other facilities
already in place, which, however, are subject to certain contingencies, and
described below. We do not expect BV Interativa to require debt financing
for its capital expenditure requirements through December 31, 2001.
(2) Not applicable.
(3) Wholly-owned and majority-owned operations consist of VeloCom Argentina,
Odecar and VeloCom corporate operating expenses.
(4) We currently are negotiating vendor financing to include this amount for
VeloCom Argentina.
The actual amount and timing of our future capital requirements and those
of Vesper and BV Interativa may differ materially from our estimates. As
indicated above, our estimates do not include the significant capital that would
be required for obtaining new licenses, such as a PCS license in Brazil, or for
acquiring other businesses. As we discuss under "Use of Proceeds," we may use a
portion of the net proceeds from this offering for both these purposes, but no
business acquisition currently is probable and we cannot predict whether we will
be successful in obtaining additional licenses. We also discuss under "Risk
Factors -- We Face Numerous Risks that Could Adversely Affect the Build-Out of
Our Network" the risks associated with the build-out of our networks, which
could result in significantly greater capital requirements than we currently
estimate.
In addition, we cannot be certain that financing will be obtained to
satisfy these future capital requirements on acceptable terms or at all. If we
are required to substitute equity financing for debt financing, you may
experience substantial dilution, which we discuss under "Risk Factors -- We May
Be Unable to Raise the Additional Capital Necessary to Continue Growing Our
Business." If financing cannot be obtained on acceptable terms, planned
expansion plans may be curtailed or delayed and funding may not be available for
ongoing operations.
VESPER FINANCING AGREEMENTS
Vendor Financing Agreements--Sao Paulo Region. Vesper Sao Paulo has signed
agreements with Lucent to borrow up to $781.5 million of long-term vendor
financing (available in three separate tranches), of which $173.5 million had
been borrowed as of April 30, 2000. Of this amount, a portion is available for
interest and fees under the financing, and the balance is available to purchase
from Lucent equipment and services for Vesper's network in the Sao Paulo region
and to pay related costs. The lenders are not obligated to make loans unless
certain conditions are satisfied, including compliance with specified financial
maintenance and operating covenants.
Subject to mandatory or optional prepayment under certain circumstances,
principal amounts borrowed under two of the tranches will be repayable on a
semi-annual basis commencing June 2003, with an effective final maturity date of
December 27, 2004, and principal amounts borrowed under the third tranche will
be repayable in full on December 27, 2004. The financing will bear interest at a
floating rate commencing on the first disbursement date, payable on a quarterly
basis.
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To secure repayment of disbursements under the Lucent financing, Vesper Sao
Paulo has granted Lucent a first priority security interest over equipment,
infrastructure and other assets related to Vesper's network in the Sao Paulo
region to be acquired with the proceeds of the financing. We and the other
Vesper Sao Paulo shareholders have agreed, on Vesper Sao Paulo's failure to
comply with certain financial covenants and at the request of Lucent, to make
equity contributions in the aggregate amount of $385 million (with our share
being up to $190.2 million) of which approximately $135.6 million (including
approximately $67.0 million from us) has been contributed as of April 30, 2000.
Copies of the agreements with Lucent related to the financing are filed as
exhibits to the registration statement of which this prospectus is a part.
Vendor Financing Agreements--Northeast Region. Vesper Northeast has signed
agreements with Nortel, Qualcomm, Ericsson and Harris Corporation (Harris) to
issue up to $997.0 million in aggregate principal amount of long-term capital
market notes, of which $304.8 million in principal amount were outstanding as of
April 30, 2000. Of the total principal amount issuable, however, $415.0 million
(subject to certain adjustments) will not be issuable until the occurrence of
certain events, including the assumption by third party lenders of all or a
portion of the original lenders' obligations to purchase unissued notes, the
assignment or transfer by the original lenders of outstanding notes, the
repayment by Vesper Northeast of outstanding notes or the exchange, at the
option of Nortel, Qualcomm, Ericsson or Harris, of all or any portion of the
outstanding notes for subordinated debt securities of Vesper Northeast.
Moreover, the lenders' obligations to purchase any notes are conditioned on the
satisfaction of certain conditions, including compliance with specific financial
maintenance and operating covenants and the receipt by Vesper Northeast of
approval from the Central Bank of Brazil with respect to the issuance of the
notes. Vesper Northeast will use a portion of the financing to pay interest and
fees and the balance to purchase from Nortel, Qualcomm, Ericsson and Harris
equipment and services for Vesper's network in the northeast region and to pay
related costs.
Subject to mandatory or optional partial repurchase under certain
circumstances, the notes mature on July 1, 2012. The lenders have the option,
however, in their sole discretion, to require that all, but not less than all,
of the notes be repurchased on July 1, 2004 for a repurchase price equal to the
aggregate outstanding principal amount of the notes plus any accrued and unpaid
interest thereon. The notes will bear interest at a floating rate of interest
commencing on the issuance date, payable on a quarterly basis.
To secure the repayment or repurchase of notes as required under this
financing, Vesper Northeast has granted to the lenders a first priority security
interest in equipment, infrastructure and other assets and property related to
Vesper's network in the northeast region. Any non-equity financing made by us to
Vesper Northeast will be subordinated in right of payment to the notes and the
proceeds of that financing will be pledged to the lenders as further security
for Vesper Northeast's obligations and as security for our contribution
obligations described in the next sentence. We and the other Vesper Northeast
shareholders also have agreed, on Vesper Northeast's failure to comply with
certain financial covenants and at the request of the lenders, to make equity
contributions to Vesper Northeast in the aggregate amount of up to $300 million
(with our share being up to $148.2 million) of which approximately $180.0
million (including approximately $88.9 million from us) has already been
contributed as of April 30, 2000.
Copies of the agreements with Nortel, Qualcomm, Ericsson and Harris related
to this financing are filed as exhibits to the registration statement of which
this prospectus is a part.
ICMS Financing. Vesper Northeast has entered into an arrangement with the
Rio de Janeiro state government pursuant to which the state government has
agreed to finance 60.0% of Vesper Northeast's ICMS (value added tax) state tax
obligations over the next four years. We estimate that this arrangement will
provide Vesper Northeast with approximately $150 million of financing over this
period. This financing is denominated in Brazilian Reais, bears interest at an
annual rate of 4.5% and matures in 12 years.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
We are exposed to changes in currency exchange rates because our revenues
and costs are denominated in foreign currencies, while a substantial portion of
our liabilities will be denominated in U.S. dollars. As a result, our financial
condition and results of operations may be affected by changes in the value of
the local currencies in which we transact business.
To date, we have not adopted any hedging strategies to manage our exposure
to foreign currency exchange rate risk. We will continue to evaluate whether to
adopt hedging strategies if a market develops to limit exposure to fluctuations
in the currencies of any of the countries in Latin America in which we operate.
We fund our Latin American operations from the United States on a monthly
basis, balancing the need for timely payments of in-country payables with
maintaining low cash balances in any foreign country, thereby minimizing risk
from currency devaluation.
While we intend to take steps to minimize exchange rate risks to the extent
available, we cannot assure you that we will not be materially adversely
affected by variations in currency exchange rates.
INTEREST RATE SENSITIVITY
Vesper has interest rate risk exposure related to funds it borrows under
its vendor financing agreements because these borrowings bear interest at a
floating rate. We currently do not mitigate the risk of interest rate movements
through the use of interest rate swaps or other hedging techniques, but we may
choose to do so in the future.
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BUSINESS
OVERVIEW OF THE COMPANY
We are a rapidly growing facilities-based provider of integrated
communications services to businesses and residential customers. We operate in
major Latin American markets that are characterized by high-growth potential,
lack of telecommunications infrastructure and a favorable regulatory
environment. Our services include voice telephony, high-speed and dial-up
Internet access and data transmission. As of April 30, 2000, approximately
$840.7 million total debt and equity had been invested by us and our partners in
our networks to meet the significant demand for high-quality network
connectivity in our markets. We believe we are uniquely positioned to offer
customers on our networks the convenience and cost advantages associated with
receiving voice, Internet and data services from a single provider. Our goal is
to deliver bundled services using the best technological solutions available
over integrated broadband networks that we own and operate.
We focus on Latin America, currently concentrating on the Mercosur markets
of Brazil, Argentina and Uruguay. Our objective is to capitalize on the
significant, unmet demand and lack of infrastructure investment in these markets
for telephony, Internet and data services. In Brazil, fixed teledensity, the
number of fixed telephone lines per 100 people, is approximately 15.4%, compared
to 65% in the United States. Lack of infrastructure investment is shown, for
example, by the fact that only an estimated 0.4% of commercial buildings in the
major cities of Brazil are connected to a fiber optic network, compared with
7.0% in the United States. According to industry sources, Argentina represents
the fastest growing market for overall data traffic over the next five years,
with a projected compound annual growth rate of 94% while Brazil's projected
compound annual growth rate over the same period for overall data traffic is
63%. The growth in the Latin American Internet market is among the highest in
the world. Between 1998 and 2003, the number of Latin American Internet users is
projected to increase from 4.8 million to 36.7 million, a compound annual growth
rate of 51%.
Our operating licenses in Brazil cover a total of approximately 125 million
POPs, of which we have currently elected to serve cities covering approximately
68 million POPs, including Sao Paulo and Rio de Janeiro, Latin America's second
and fourth largest metropolitan markets, respectively. We have built in Brazil
high-capacity integrated (wireless and wireline) last-mile communications
networks in 44 cities, generally located in the central business districts and
select residential neighborhoods of our served markets. To date, we have largely
deployed a 1.9 GHz CDMA wireless network. We plan to expand our current market
presence and deploy last-mile networks serving an additional 121 cities over the
next 18 months. We will continue to expand the scale and data transmission
speeds of these networks through the migration of existing technology and the
development and deployment of additional access solutions, including fiber optic
and high-speed wireless access technologies.
We also offer in Brazil Internet access, web hosting and other value-added
web services through network points of presence in 18 cities, including Sao
Paulo, Rio de Janeiro and Belo Horizonte.
In Argentina, we currently offer high-speed, "always-on" Internet access
services, and expect by the end of 2000 to offer data transport services, over
our broadband wireless networks. Our licenses in Argentina cover areas
accounting for most of Argentina's gross domestic product, including the
country's five largest cities. Today, the wireless networks we have deployed and
activated cover approximately one million POPs. We also plan to use our
operational base in Argentina to provide broadband data and Internet services in
Montevideo, Uruguay later this year.
OUR COMPETITIVE STRENGTHS
We believe we are well positioned to capitalize on the expanding and
rapidly evolving communications and Internet services markets in Latin America.
The following are our key competitive strengths:
-- FIRST MOVER ADVANTAGE.
-- Duopoly Status. Our operating licenses grant us duopoly status in
165 cities located throughout the 16 states in the northeast of
Brazil and the state of Sao Paulo until December 31, 2001. During
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<PAGE> 38
this period, we are currently the only provider of switched fixed
telephony services allowed to compete with the formerly
government-owned incumbent operator in those cities (Telefonica in
the Sao Paulo region and Telemar in the northeast region). While the
incumbents are providing these services predominantly over
copper-based legacy networks, we are able to selectively deploy
technologically advanced wireless and next generation fiber optic
technologies to serve our customers' needs.
-- Unique Geographic Footprint. We are the only communications
provider in Brazil that holds switched fixed local telephony
licenses covering more than one region. In Brazil, our licenses
cover an area that accounts for approximately 75% of the country's
gross domestic product and total of approximately 125 million POPs,
of which we have currently elected to serve cities covering
approximately 68 million POPs, including Sao Paulo and Rio de
Janeiro, Latin America's second and fourth largest metropolitan
markets, respectively. In Argentina and Uruguay, our licenses cover
all of the major metropolitan areas.
-- UNIQUE LICENSES.
-- Exclusive Spectrum Allocation. Our operating licenses in Brazil
grant us the exclusive right to use our assigned spectrum
frequencies within the 1.9 GHz and 3.4 GHz wireless bands in the
165 cities where we have duopoly status. In Argentina, we
currently hold the largest aggregate wireless spectrum block at
both the 3.4 GHz and 28 GHz ranges. We believe these spectrum
advantages will enable us to offer a wider range of services, more
rapidly, to a broader potential market than our competitors.
-- Low Acquisition Cost. In Brazil, the average cost of our
operating licenses was only $0.60/ POP, as compared with $53/POP
average cost of the B band mobile telephony licenses auctioned by
the Brazilian government in recent years. In Argentina, we secured
significant spectrum at both the 3.4 GHz and 28 GHz bands at
minimal cost.
-- Favorable License Terms. Our operating licenses in Brazil contain
more favorable terms than those of the incumbents. In particular,
our licenses do not impose limits on the prices we can charge
customers or require us to provide universal service. As a result,
we are able to selectively target specific demographic market
segments.
-- STRATEGIC RELATIONSHIPS WITH LEADING INDUSTRY PARTICIPANTS. We have
established key financial and strategic relationships in order to
pursue our strategy of becoming a leading integrated communications
provider. These relationships include BCI, one of our partners in
Brazil and a major operator of communications businesses in Latin
America; Qualcomm, a VeloCom stockholder, one of our partners in
Brazil and a leading developer of CDMA and high speed data rate (HDR)
technologies; and Nortel, Lucent and Ericsson, major global
communications equipment manufacturers that have provided us with
substantial vendor financing and equipment supply commitments.
-- STRONG EQUITY SPONSORSHIP. We have significant equity sponsorship
from financial and strategic sponsors with proven track records of
developing successful global communications concerns. Our financial
investors include: Telecom Partners, Centennial Ventures, Crescendo
Ventures, SLI Wireless, BankAmerica Investment Corporation, First
Union Investors, Inc., Mellon Ventures and General Cinema Corporation
Investments. Our strategic investors include: El Paso Energy
Communications Corporation, Qualcomm, Formus Communications and Grupo
Vicunha. Certain of these sponsors, such as Qualcomm and El Paso
Energy, have also entered into or committed to enter into strategic
marketing and development alliances with us.
-- EXPERIENCED LATIN AMERICAN MANAGEMENT TEAM. Our management team has
extensive experience and a proven track record in acquiring,
deploying and operating successful communications businesses in the
United States and international markets. In particular, Fred A.
Vierra, Chairman of the Board of Directors, was formerly Chief
Executive Officer of Tele-Communications International, Inc.; David
J. Leonard, Chief Executive Officer, was formerly President and Chief
Executive Officer of UIH Latin America (recently renamed United
GlobalCom--Latin America); and Nicolas Kauser,
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<PAGE> 39
Chief Technology Officer, was formerly Executive Vice President,
Chief Technology Officer at AT&T Wireless Services (formerly McCaw
Cellular Communications). In addition, we have strong "in-region"
local management teams that have been assembled from, among others,
Global One, BellSouth, BCI, Lucent do Brasil and the former Telebras
companies. These local teams understand the competitive landscape in
which we operate and are attuned to the cultural and political
environments in the region, and will be key factors in our success.
OUR STRATEGY
Our goal is to become a leading facilities-based provider of integrated
communications services to both businesses and residential customers in major
Latin American markets by providing technological solutions best suited to meet
the needs of our customers. Our strategy is to:
-- AGGRESSIVELY BUILD OUR MARKET SHARE. We plan to aggressively build
market share in our target markets by taking advantage of the high
level of pent-up demand in Latin America for voice, Internet and data
services. In Brazil, we expect this strategy to be fostered by the
limited competition we will face as a result of the duopoly market
structure, which extends until December 31, 2001. We focus on the
underserved small and medium-sized business and high-usage
residential customers and offer higher-quality services at
competitive prices. We are building brand name recognition in Brazil
through a broad-based mass marketing campaign utilizing print,
television and outdoor advertising. We are well-positioned to take
maximum advantage of an established brand name because of our unique
multi-region footprint in Brazil. We anticipate increasing our market
position by responding to what we believe to be the high level of
customer dissatisfaction with the incumbent communications providers
in Latin America by supporting our higher-quality service offerings
with dedicated customer service. Unlike the incumbents, our more
advanced network technology permits us to offer such features as
"plug and play" services (i.e., self-installable customer premises
equipment, which is not compatible with the incumbents' wireline
networks).
-- TARGET MOST ATTRACTIVE MARKET SEGMENTS IN LATIN AMERICA. Since we
are not required to provide universal service under any of our
operating licenses, we will seek to operate at attractive margins by
selectively targeting geographic and customer market segments. By the
end of 2000, we expect to be providing voice and data services in 78
cities in Brazil and 24 cities in Argentina.
-- DEPLOY FLEXIBLE, LEADING EDGE TECHNOLOGY. We are deploying scalable,
cost-efficient networks that can be rapidly expanded and readily
adapted to future technology developments. For example, our 1.9 GHz
wireless network in Brazil has the ability to provide both mobile and
fixed voice and data services. This will allow us to quickly and
efficiently offer PCS service should we be successful in obtaining
that license, or to provide a platform for use by other PCS license
holders. Our networks are designed in anticipation of evolving
technology such as "third generation," or 3G, technologies which will
significantly increase the speed and bandwidth performance of our
CDMA voice and data network. We are incorporating multiple last-mile
access solutions, including wireline and wireless, into our core
network architecture. We believe that our hybrid, integrated network
strategy will enable us to cost effectively match our service
offerings with the requirements of our customers.
-- EXPAND AND ENHANCE OUR NETWORKS AND SERVICE OFFERINGS. We are
continuing to expand our networks by deploying additional facilities
within areas where we own licenses, or by acquiring new licenses
through auction, including PCS and LMDS in Brazil and local and long
distance voice licenses in Argentina, or selectively acquiring
broadband, cable and fiber operating entities. We are continuing to
expand our service offerings to include other value-added data
services beyond Internet access, such as VPNs, VoIP, high-speed,
"always-on" Internet access, business and consumer portals, web
hosting, co-location and e-commerce services. After the expiration of
the duopoly period in Brazil, we plan to provide national and
international long distance service and local communications services
in the regions where we do not currently operate.
-- LEVERAGE OUR REGIONAL PRESENCE. We will continue to take advantage
of regional synergies associated with operating communications
businesses in the Mercosur region. We ultimately plan to
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<PAGE> 40
interconnect our Brazil, Argentina and Uruguay networks to increase
the proportion of our traffic that is on our network. We believe that
our presence in three of the largest metropolitan areas in the world
will enable us to create attractive service packages for corporate
customers. In addition to these regional service opportunities, we
expect to realize advantages stemming from technical and operational
"knowledge-sharing" between our respective local management teams.
INDUSTRY OVERVIEW
Latin America is a large and attractive telecommunications market with a
population of almost 500 million and a combined GDP of approximately $1.7
trillion in 1999. Because penetration rates remain significantly below the
levels of the United States and Europe, we believe the Latin American
telecommunications industry has the potential to grow at a faster rate than the
global telecommunications industry overall.
According to industry sources, the Latin American telecommunications market
is expected to experience compounded annual growth in:
-- total telecommunications revenues of approximately 16% from 1999 to
2004;
-- wireless subscribers of approximately 28% from 1999 to 2004;
-- wireless service revenues of approximately 21% from 1999 to 2004;
-- active Internet accounts of approximately 87% from 1997 to 2002; and
-- data services of approximately 30% through 2002.
BRAZIL
Brazil is the most populous country in Latin America, with approximately
164 million people at the end of 1999, and, at year-end 1998, was the eighth
largest economy in the world. As the largest Latin American market based on
size, population and GDP, we believe Brazil provides the region's best
telecommunications opportunities. In July 1998, Brazil privatized its principal
public telecommunications operator, Telebras, and has since established an
independent regulator, Agencia Nacional de Telecomunicacoes--ANATEL, to oversee
its telecommunications industry. Following the privatization of Telecomunicacoes
Brasileiras S.A.--Telebras, ANATEL also established four telecommunications
licenses designed to "mirror" the operating concessions of the long distance
operator Empresa Brasileira de Telecomunicacoes--Embratel and the country's
three regional fixed-line service providers. These operating licenses were
awarded by public auctions, based upon price and technical factors such as
build-out parameters and penetration thresholds. Pursuant to these auctions, the
mirror license for the northeast region of Brazil (including Rio de Janeiro,
Minas Gerais and Espirito Santo) was awarded to us in February 1999, and the
mirror license for the state of Sao Paulo was awarded to us in May 1999. As part
of the privatization, the Brazilian government also auctioned ten mobile
licenses, the B band licenses, to compete under a duopoly structure with the
eight incumbent former Telebras mobile operators, which hold the A band mobile
licenses.
In 1999, fixed line teledensity increased from approximately 12.3% to
15.4%. The relatively low fixed-line teledensity, together with a high level of
pent-up demand, provides our Brazilian subsidiaries with enormous potential for
growth as shown by the significant increase in wireless penetration rates in
1999, which grew from 4.5% to 8.9%. Cellular subscribers (not including
subscribers for paging services) have grown from approximately 1.5 million at
the end of 1995 to approximately 15.3 million at the end of 1999.
Brazil has one of the highest Internet growth rates in the world. In 1999,
the number of Internet dial-up accounts increased by almost 50% from 1.3 million
to 1.9 million.
ARGENTINA
With a population of approximately 36 million people at the end of 1999,
Argentina is one of Latin America's largest economies with an estimated 1999 GDP
of $279.5 billion. Argentina's telecommunications sector was privatized in 1990
when Empresa Nacional de Telecomunicaciones, the then state-owned entity,
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was split into two regional monopolies. The Argentine government began
demonopolization of the sector beginning in November 1999, granting two new
licenses that became operative at that time and several others that will become
operative in November 2000. We have applied for both a local and a long distance
voice license in Argentina, which we expect will be granted by the end of 2000.
The Argentine communications market is more developed than that of Brazil,
but like Brazil continues to grow rapidly. Over the past four years, the number
of fixed line subscribers has increased from 6.0 million to 8.1 million
resulting in a fixed line teledensity of approximately 21%, leaving considerable
room for growth. Cellular subscribers (not including subscribers for paging
services) have grown from approximately 411,000 in 1995 to approximately 4.5
million at year-end 1999, resulting in a wireless penetration rate of
approximately 12.2% and representing a compound annual growth rate of 73%.
Internet usage increased from 170,000 users in 1997 to 386,000 users in 1999,
and is expected to reach 695,000 by year end 2000, representing a three year
annual growth rate of 60%. The approximate $450 million data services market at
the end of 1999 is expected to grow at approximately 25% a year to approximately
$663 million by the end of 2000.
OUR COMMUNICATIONS NETWORK AND NETWORK DEPLOYMENT PLAN
BRAZIL
Network Deployment. In order to serve our customers' current and future
communication needs, we have been and are continuing to construct
technologically advanced local wireless networks throughout our service areas
complemented by fiber in the denser and most attractive demographic areas in our
region. We are now operating technologically advanced wireless local networks in
44 cities in 17 states in Brazil. These networks are generally located in
central business districts and select residential neighborhoods of major cities,
including Sao Paulo, Rio de Janeiro and Belo Horizonte.
Our initial deployment has utilized CDMA technology in the 1.9 GHz
frequency spectrum and has focused on achieving widescale deployment across a
broad geographic area in order to meet our license requirements and capture
market share as rapidly as possible. The architecture currently being deployed
consists of fiber backbones on a leased and built basis capable of multiple
protocols including asynchronous transfer mode (ATM), frame relay (FR) and
Internet protocol (IP), and will support wideband and broadband access through
wireless and "fiber to the curb" architectures. We are now in the process of
further expanding our CDMA footprint. We also expect to significantly enhance
the bandwidth and speed characteristics of our wireless networks in the next 12
months, through hardware and software upgrades currently being developed by
several equipment vendors, including Lucent, Nortel and Ericsson, to take
advantage of the evolution of wireless networks to 3G technologies.
As of April 30, 2000, we deployed our network in 29 cities in the northeast
region and 15 cities in the Sao Paulo region. We have committed to deploy our
networks in 112 cities in the northeast region and 53 cities in the Sao Paulo
region by the end of 2001.
The infrastructure of the local access networks is composed predominately
of CDMA base stations, with local distribution in certain cities of the
northeast region and areas of Rio de Janeiro also including fiber-to-curb
access. The core networks are supported by multi-service switches (packet and
circuit switched enabled). We own substantially all of the equipment that
comprises the network infrastructure. Lucent Technologies is our primary
infrastructure equipment vendor for the Sao Paulo networks and Nortel Networks
and Ericsson are our primary infrastructure equipment vendors for the networks
in the northeast region. A description of these vendor supply arrangements with
Lucent, Nortel and Ericsson appears below under the heading "--Equipment Supply
Agreements."
Local Fiber Optic Networks. A core part of the local networks in our
largest service areas are rings of fiber optic cables constructed and deployed
primarily in central business districts or dense urban areas. These rings are
primarily used to connect our wireless base stations to our core network
facilities and interconnect our switches. We also are using fiber optic cable to
provide services directly to certain customers with significant, high bandwidth
data and voice requirements and plan to expand that usage in the future.
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We are now leasing fiber facilities and rings in the Rio de Janeiro
metropolitan area, the Sao Paulo metropolitan area, Belo Horizonte and six other
cities. In addition, we expect to have fiber rings in eight cities under
construction or completed by year-end 2000. We have also entered into, and will
continue to negotiate for, a number of contractual arrangements with strategic
infrastructure development companies to secure or provide additional local fiber
rings and last mile connectivity, long haul transmission for network backhaul,
tower sites, rights-of-way to multi-dwelling and commercial buildings, site
permitting and network construction. These agreements provide critical fiber
capacity for both data and voice services.
Inter-City Backbone Facilities. For the inter-city backbones, we are
currently using a combination of leased fiber optic networks, satellite and
microwave transmission facilities. We intend to construct our own inter-city
facilities as such actions are economically and/or strategically justified.
Operations. We have outsourced the development of key information systems,
such as network management and billing, to several international hardware and
software vendors, including IBM, SAP and EDS.
Network Operating Centers, or NOCs, are maintained in Rio de Janeiro and in
Sao Paulo. The primary purpose of these NOCs is the centralized and integrated
management of all equipment deployed in the networks. These centers continuously
monitor the performance of the various pieces of transmission and switching
equipment, the operating systems, the performance of customer transmission paths
and circuits and customer premises equipment in the networks. In the future,
these two NOCs will be interlinked, so that a temporary shutdown in one region
can be compensated by the NOC in the other region. The NOCs operate 24 hours per
day and 7 days per week.
Customer Premises Equipment. For customers on our 1.9 GHz CDMA technology
platform, customer premises equipment features a compact, self-contained
integrated antenna, transceiver and network interface unit. This customer unit
is easy to install and provides voice, digital fax and dial up access to the
Internet (although our network in the northeast region, other than in Rio de
Janeiro, is not expected to be able to offer digital fax and Internet access
until later this year). We retain ownership of the equipment, and customers are
required to return the equipment to us upon termination of service. The customer
premises equipment for our networks in Brazil is supplied by Motorola and Lucky
Goldstar, Inc. We expect to contract with additional customer premises equipment
vendors in the future.
3.4 GHz Access Networks. In March 2000, we issued a request for
information to selected vendors regarding the construction of a broadband packet
voice and data network utilizing technologies in the 3.4 GHz spectrum. This
request specified a solution with minimum requirements of two voice lines and a
data line with burst capabilities exceeding 1 megabit per second (Mbps) of
transmission capabilities. We are planning to deploy a trial system by the end
of 2000. See "--Our Technology Solutions" below for a detailed description.
Interconnection Agreements. We have interconnection agreements with a
number of other communications companies servicing Brazil. These agreements
permit the systems operated by us and the other providers to communicate and
exchange voice and data with each other. The terms of these agreements are
subject to strict regulatory rules and regulations designed, in part, to prevent
established market participants from imposing unfair terms on new market
entrants. Settlement payments required under these agreements vary depending
upon the type of interconnection established in any given connection (e.g.,
local-to-local, local-to-long distance, local-to-mobile). We have entered into
interconnection agreements with long distance, incumbent and mobile operators,
and all of the cellular providers in the northeast region, including both A and
B band cellular operators. We have entered into an agreement with Embratel that
permits us to route our Internet traffic to Embratel's network.
Equipment Supply Agreements. We have executed equipment supply agreements
with Lucent for the Sao Paulo region of Brazil under which Lucent has a "ready
for service" project management role over the deployment of our network in that
region and is also obligated to train our personnel to operate and maintain the
equipment. Under the terms of the agreement, we are committed to purchase, and
Lucent is responsible for supplying and installing, network infrastructure
equipment, including switches, routers and base stations, worth a minimum of
$470 million.
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We have executed equipment supply and services agreements with Nortel and
Ericsson for the northeast region of Brazil. Under their respective supply
agreements, Nortel and Ericsson have "turn-key" project management roles over
the deployment of their portions of our network in the northeast region. Under
the terms of these agreements, we have committed to purchase, and the vendors
are responsible for providing, equipment and services worth a minimum of $600
million, including switching and CDMA wireless infrastructure equipment from
Nortel and base stations and fixed wireless infrastructure equipment from
Ericsson. As part of their respective supply agreements, Nortel and Ericsson are
also obligated to train our personnel to operate and maintain the equipment.
Copies of these agreements have been filed as exhibits to the registration
statement of which this prospectus is a part.
ARGENTINA
Network Deployment. We are in the process of deploying a broadband, high
speed wireless local network in Buenos Aires that currently has coverage of
approximately 1.1 million POPs. This network will utilize the 3.4 GHz frequency
spectrum and employ up to 3.0 Mbps full duplex data transmission capabilities.
This Lucent-developed technology is branded as WaveACCESS 3500 and is commonly
referred to as a Wireless Data Access (WDA) platform. We believe that WDA
technology provides us with a significant strategic and "first-mover" advantage
in the deployment of high-speed "always-on" wireless Internet access to the
residential and small and medium-sized business markets.
The initial infrastructure of our WDA network currently includes base
stations and digital switching centers. The base stations are all roof-top
mounted and serve as wireless hubs for all data traffic on the network. This
traffic is backhauled from these wireless hubs over a backhaul system (utilizing
a combination of fiber optic cable and microwave transmissions) to the digital
switching centers, where the traffic is then routed accordingly. We own
substantially all of the equipment that comprises our network infrastructure,
and we are in the process of negotiating an equipment-based financing
arrangement for our network infrastructure equipment.
We plan to build out networks in cities totaling approximately 20 million
POPs within three years. Commercial coverage in the Buenos Aires metropolitan
area utilizing the WDA platform commenced in March 2000. We expect that the
WDA-based network will be expanded beyond the Buenos Aires metropolitan area to
include the cities of Tigre and Pilar within the next three months, the cities
of Cordoba, Rosario and La Plata by year-end 2000 and the city of Mendoza during
2001.
To facilitate the rapid rollout of our networks, advanced negotiations are
taking place with infrastructure development groups to secure long haul
transmission for network backhaul, rights-of-way to multi-dwelling and
commercial buildings, site permitting and network construction.
We expect to launch a second technological platform as part of our network,
commonly known as an LMDS point-to-multipoint platform, by the end of 2000. This
LMDS technology offers lower entry and deployment costs than fiber, combined
with a high rate of spectrum efficiency. LMDS is commonly referred to as
"wireless fiber" since its speed and functionality are similar to fiber. LMDS
technology is designed for medium to large heavy data usergroups. Accordingly,
we plan to offer our LMDS platform primarily to our medium to large-sized
business customers. An attractive feature of this LMDS platform is that it will
enable us to serve as a "carrier's carrier" by providing the core network
pipeline for other providers of communications services in Argentina.
Extension of Service to Uruguay. We plan to use our operations in
Argentina as a base to launch broadband data and internet services to corporate
customers in Montevideo, Uruguay by the end of 2000.
Operations. The network's current customer care and billing systems
software was customized based on popular platforms used in Argentina by various
communications companies. We expect to begin replacing these systems with more
flexible, skeletal systems by the end of 2000. A NOC is maintained in our
corporate headquarters in Argentina. This NOC operates 24 hours per day and 7
days per week.
We expect to have a small corporate headquarters in Montevideo, Uruguay,
primarily to house a small sales force and the minimal on site technical staff
necessary, totaling approximately 10 employees. The
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operation and maintenance of our network in Uruguay, including a substantial
portion of systems monitoring, technical support and customer service, will be
performed by us from our offices in Argentina.
Customer Premises Equipment. The customer premises equipment for our
network features a wireless modem and ethernet Local Access Network (LAN) card.
The LAN card is plugged into the customer's computer and communicates with the
wireless modem. The wireless modem can be used in a shared environment of up to
10 residential users connected to a hub. We provide our customers with the
wireless modem portion of the customer premises equipment free of charge. We
retain ownership of the wireless modem, and customers are required to return the
modem to us upon termination of service. The ethernet LAN card portion of the
customer premises equipment is purchased by our customers. The customer premises
equipment for our WDA network is supplied by Lucent. We expect to contract with
additional customer premises equipment vendors in the future.
Equipment Supply Agreements. In Argentina we are currently negotiating
supply agreements and related financing terms with our primary equipment
vendors.
PRODUCTS AND SERVICES
BRAZIL
We launched telephony and data transmission services in January 2000, and
in March 2000 began offering Internet access and other value-added services. Our
services currently include:
Local Phone Services. We provide customers with a complete range of local
phone services, including:
-- basic local services;
-- access to national and international long distance carriers;
-- Digital PBX, which allows for intra-office routing of calls and
voicemail from a switch installed on a customer's premises;
-- Centrex, which allows for intra-office call routing and voicemail
from a switch installed at the local telephone company's premises;
-- toll-free services;
-- leased lines;
-- dedicated corporate lines; and
-- custom calling services.
Long Distance Services. We currently offer our customers intra-regional
long distance services. Our customers access our long-distance services by
choosing our two-digit "dial-up access" code when making calls. Upon expiration
of the duopoly period on December 31, 2001 we expect to expand our long distance
service offerings to include integrated national and international long distance
service (if authority is granted by the Brazilian government to do so), and
calling card, conferencing and other enhanced services.
Value-Added Services. We offer a full suite of value-added services to our
residential and business customers, including:
-- voice mail with message waiting signal;
-- message storage and delivery;
-- teleconferencing;
-- personal greetings;
-- speed dialing;
-- caller identification;
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-- call blocking and call forwarding;
-- calling cards; and
-- private-label card options.
Internet Services. We offer free and paid Internet access and other
value-added web services throughout Brazil, including dedicated Internet access
to enterprise customers. We operate 18 network points of presence, including
points of presence in Sao Paulo, Rio de Janeiro and Belo Horizonte, which
provide our customers with access to the Internet. The value-added web services
currently offered or planned to be offered by us include the following:
-- web hosting;
-- data services;
-- VoIP service on a private network basis;
-- co-location services;
-- intranets and extranets;
-- e-commerce;
-- consulting;
-- domain name registration; and
-- limited data storage services.
VPN and Dedicated Private Line. We provide local dedicated data access
circuits as well as the intra-regional long distance portion of those circuits.
These links are used to connect offices for file sharing, e-mail and workgroup
applications.
ARGENTINA
We commenced operations in Argentina on March 13, 2000, and as of April 30,
2000, had 494 customers. We currently provide our customers with high-speed,
packet-switched Internet access services at targeted average access speeds of at
least 256 kilobits per second (Kbps), with bursting rates of up to 1.5 Mbps
increasing to 3.0 Mbps by 2001.
Our services currently include:
-- broadband wireless Internet access, including e-mail accounts and
web page publishing under special domain names;
-- dial-in Internet access accounts for remote access; and
-- multi-location private network connectivity.
We are in the process of deploying a variety of Internet, data and
communications services, including:
-- high-speed Internet access and data transmission;
-- international gateway access from regional locations;
-- fixed IP addresses;
-- webhosting;
-- housing and co-location;
-- LAN interconnection (data transmission service between local area
networks supporting ethernet interfaces and Maximum Information
Rate (MIR) class of service); and
-- E1 and fractional E1 links.
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We plan to develop the following service offerings in the near future:
-- LAN connections;
-- intranets and extranets;
-- VPNs;
-- on-line advertising and e-commerce; and
-- Applications Service Provisioning (shared applications available
on demand to Internet and intranet users, such as financial
systems, accounting tools and back up services).
To complement our data services offerings, we applied for local and long
distance voice licenses to begin providing telephony service in 2001 in selected
markets. Preliminary trials of VoIP have been conducted at our test lab in
anticipation of obtaining the voice license. The network access technology
currently in place will, with upgrades, handle voice traffic in addition to
data, with voice routing either over the IP network or to local exchange
carriers for routing through the public communications networks.
CUSTOMERS AND CUSTOMER SERVICE
BRAZIL
Customers. We launched commercial service in 44 cities in January 2000 and
as of April 30, 2000 we had orders for approximately 144,000 access lines and
are currently installing lines at a rate of approximately 2,000 per day. Our
customer base for our telephony and data services is currently comprised
primarily of:
-- residential customers;
-- mid-sized and small businesses; and
-- micro and home office businesses.
In the future, we expect to expand our customer base to include large businesses
(including financial institutions) and government agencies.
We acquired an Internet service provider in late March 2000, and as of
April 30, 2000 we had approximately 40,000 users.
Customer Service. We believe that customers in the Brazilian target
markets are highly dissatisfied with their incumbent fixed line communications
service providers. A high level of customer service is a key element in
establishing customer loyalty, attracting new customers and generating positive
word-of-mouth advertising. We offer high-quality, responsive, personalized and
customizable services through our two customer service centers, which are
supported by local installation and repair technicians who handle customer
installation, repair and maintenance in each of the markets we serve. The local
service technician activities are coordinated and managed by our two NOCs. We
believe a local presence coordinated through regional customer service and
operating centers allows us to deliver superior customer service on a cost
effective basis.
We maintain one customer service center in Macae for the northeast region
and one in Campinas for the Sao Paulo region. These customer service centers:
-- have a combined total customer service representative seat
capacity of 495 (scaleable to 1,250) as of April 30, 2000, which
we believe will adequately meet our needs until 2001;
-- are fully automated and utilize advanced technology, including
integrated voice recognition and automatic call distribution (ACD)
technology;
-- can handle call volumes of approximately 80,000 calls per day;
-- utilize integrated data base management systems that can
immediately access all of a customer's data and allow us to
quickly respond to customer inquiries; and
-- will be fully capable of providing overflow and backup support for
each other by year-end 2000.
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Each customer service representative employed at these centers completes
approximately four weeks of in-house training specializing initially in
residential customer service issues. Certain customer service representatives
receive additional specialized training to handle business customers, billing
and collections. In addition, escalation procedures are in place to channel
highly technical issues to qualified personnel, and the customer service centers
compile and maintain a data base of prospects. Fraud management procedures also
have been instituted as part of our customer service representation.
Each of our customer service representatives completes approximately 130
hours of classroom and approximately 30 hours of on-the-job training. Currently,
customer service requests involving our telephony and data services are handled
by telephone or via the Internet. Data regarding customer service requests is
collected and analyzed in an effort to improve our customer service operations.
We currently operate customer care centers for our Internet service in Rio
de Janeiro, Sao Paulo and Belo Horizonte. We expect to implement ACD technology
and, where feasible, combine our customer service operations with those operated
for our telephony services.
ARGENTINA
Customers. We launched commercial service in March 2000 and as of April
30, 2000 we had approximately 800 orders for service. Our customer base is
currently comprised primarily of:
-- residential customers;
-- small to mid-sized businesses; and
-- micro and home office businesses.
Our primary target market is small and medium-sized businesses, which we
believe have traditionally been underserved by larger communications providers,
have limited resources and are increasingly looking to outsource their Internet,
data and communications requirements. These businesses typically lack the
expertise to address all of their Internet, data and communications requirements
in-house and are therefore best positioned to benefit from our integrated
solution. The customer base for the LMDS platform we plan to launch later this
year will comprise medium to large-sized business customers only, including
carriers seeking to use our core networks as a carrier for their own networks.
Customer Service. We believe that customers in our Argentina target
markets are highly dissatisfied with the dial-up services provided by the
incumbent communications service providers and with Internet access provided
through cable modems. A high level of customer service is a key element in
establishing customer loyalty, attracting new customers and generating positive
word-of-mouth advertising. We offer high-quality, responsive, personalized and
customizable services.
We currently provide customer service through a customer service center
located at our corporate headquarters in Buenos Aires. The customer service
center:
-- had a total customer service representative seat capacity of 40 as of
April 30, 2000;
-- is fully automated and utilizes advanced technology, including
integrated voice recognition technology;
-- can handle call volumes of over 130 calls per hour; and
-- utilizes integrated data base management systems that can immediately
access all of a customer's data and allow us to quickly respond to
customer inquiries.
Each of the customer service representatives completes approximately 35
hours of in-house training. Currently, all customer service requests are handled
by telephone or via the Internet. However, we intend to open a customer showroom
in our corporate headquarters building that will cater to business customers.
Data regarding customer service requests is collected and analyzed in an effort
to improve our customer service operations.
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SALES AND MARKETING
BRAZIL
Marketing and Branding. We are aggressively implementing a multi-level
marketing campaign through print, television and direct marketing activities
aimed at specified market segments in order to increase our market share. Brand
and product advertising efforts include print, radio and television advertising
carried out on both the local and national levels as well as billboard and other
types of outdoor advertising. This external communication is reinforced by
customer communications initiatives, in the form of welcome programs and a
customer loyalty program currently under development. We also actively collect
and analyze market and customer data in an effort to continually improve our
marketing efforts.
We are also working with a Brazilian marketing firm to develop and
implement a branding campaign for our Internet services. As part of this
program, we will be launching a website and a personal computer (PC) program
that will allow customers to receive a PC/Internet access bundle at one low
monthly rate.
Sales and Distribution. Our sales efforts currently target micro and home
office businesses, small and mid-sized businesses and residential consumers in
the upper and middle income segments.
For business customers, the primary distribution channels for our telephony
and data products and services currently involve targeted efforts by specially
trained account executives who utilize data profiling to locate prospective
business customers and offer them comprehensive voice and data business
solutions. Recognizing differences in customer needs and in the length of the
sales cycle, different levels of attention are devoted according to size and
complexity of business, with telemarketing employed for micro businesses, sales
account executives focused on medium business and industry specialists dedicated
to sales and servicing of corporate accounts. Particular attention has been
focused to date on high-density buildings with a large percentage of small
business customers where early gains can be achieved.
For residential customers, the primary distribution channels for our
products and services currently include inbound calls from prospective customers
to our call centers; inbound inquiries from prospective customers through the
Internet direct marketing and telemarketing; points-of-presence in a variety of
retail outlets, including post offices, lottery houses, newspaper stands and
banks, for sale of prepaid cards and credits; direct sales efforts, including
direct marketing material, door-to-door sales and special promotional and
community events. In the future, we plan to have owned and operated company
stores.
In April 2000, we launched on a trial basis Vesper Express, a "plug and
play" service and distribution program that involves delivery of the customer
premises equipment via a third-party with a self-installation kit. We believe
Vesper Express will be our most efficient long-term sales and distribution
strategy for residential customers because it will significantly reduce the
speed and cost of installation and is a service offering currently not offered
by our incumbent competitors. We are negotiating with a number of select
national chain stores and retailers to act as distribution outlets for sales of
our "plug and play" services.
All of our sales personnel receive approximately 30 hours of in-house
training.
The sales efforts for our Internet services currently target residential
consumers and businesses, and the primary distribution channels currently
include direct sales and telemarketing.
ARGENTINA
In connection with the launch of service, our marketing organization
initiated a brand awareness and acquisition campaign that utilized outdoor and
subway billboards, direct mail, and on-screen advertising in movie theaters
within our initial coverage area. We expect future marketing efforts to involve
similar multi-media campaigns, and trade publication advertising augmented with
retail point of presence promotions and demonstrations, and that these efforts
will be geographically segmented and primarily target users with the demographic
profiles that match our selected customer base. We also actively collect and
analyze market and customer data in an effort to improve our marketing and
retention efforts.
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Our sales efforts currently target upper and middle class residential
consumers, micro and home office businesses and small and mid-sized businesses.
In addition, following the launch of the LMDS platform, our sales efforts will
expand to include medium to large-sized businesses, including other providers of
communications services. For residential customers, the primary distribution
channels for our service offerings include: inbound calls from prospective
customers to customer service representatives; independent selling agents; event
sponsorship; and retail stores. For business customers, our service offerings
are distributed through direct sales carried out by account executives utilizing
data profiling to locate prospective business customers. All of our sales
personnel receive approximately 40 hours of in-house training.
COMPETITION
BRAZIL
Brazil is the largest communications market in Latin America and has
attracted and is expected to continue to attract numerous providers of
telephony, data and Internet service, many of whom are larger and better
financed than we are. The operating licenses granted to us, however, established
a duopoly with respect to the provision by us and the incumbents (Telemar, which
is not affiliated with an international operator and Telefonica, which is
controlled by Telefonica of Spain), of switched fixed telephony services in our
regions until December 31, 2001. Consequently, until the expiration of the
duopoly period, the incumbent providers represent our only source of competition
with respect to switched fixed telephony services in the 165 cities where we
have duopoly status. We do not expect to compete primarily on price because
there is a high level of pent-up demand for voice and data services in Brazil,
we have superior networks compared to the legacy networks used by the incumbent
providers and we provide high quality, comprehensive customer care. Although the
use of cellular phones for switched fixed telephony services could be viewed as
a competitive alternative to the services we provide, we believe we can
effectively compete with the cellular services on the basis of price and quality
of service.
Upon the expiration of the duopoly period, we expect potential competitors
to apply for the necessary licenses to compete against us and the incumbent
providers with respect to the provision of these services. Accordingly, we
expect competition to intensify following the expiration of the duopoly period.
With respect to the provision of data services, there are a number of
operators with non-exclusive licenses in our regions, many of which have
substantially greater resources than we do.
The Internet market in Brazil is highly competitive, particularly following
the advent of free service. We expect to compete primarily on the basis of price
and by offering bundled services.
ARGENTINA
The market for data and Internet services in Argentina is highly
competitive. We anticipate that competition will continue to intensify as the
use of the Internet continues to grow. The tremendous growth and market size of
the data and Internet access industry has attracted many new start-up businesses
as well as existing businesses from different industries. Current competitors
include:
-- national, regional and local Internet service providers;
-- global, national and regional long distance and local exchange
communications companies;
-- cable television companies;
-- direct broadcast satellite and wireless communications providers;
-- on-line service providers; and
-- web hosting providers and providers of other enhanced value
Internet services.
Our primary competitors in Argentina include the major communications
companies currently operating there and providing data and Internet access
services, many of which have substantially greater resources than we do.
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We seek to differentiate our services from those of our competitors by
providing our customers with sophisticated, integrated data solutions and
superior customer service. We believe, given the current public switched fixed
network usage-based pricing structure, that our "always-on" flat-rate priced
data network provides an attractive pricing alternative. Since we operate over
standard, open Internet protocols, we are able to bypass the local networks and
provide a better quality of service as well.
OUR TECHNOLOGY SOLUTIONS
We seek to offer customers a set of technology options to meet their
changing needs, and introduce new technologies as necessary. Our current choice
of access technologies includes 1.9 GHz CDMA, 3.4 GHz wideband fixed wireless,
point-to-multipoint and point-to-point broadband and fiber to the curb, combined
with xDSL technologies. Fiber strands and point-to-point microwaves are the
basis of our high-capacity transmission backbone. Our network architecture
supports various communication protocols such as circuit, ATM, FR and IP.
1.9 GHz CDMA. The CDMA fixed wireless access has been extensively deployed
in our networks in Brazil, constituting our basic service offering. This
technology, accepted worldwide and market proven by leaders in the cellular and
PCS industry, has enabled us to quickly deploy our network in Brazil and capture
pent-up market demand. The major technical benefits of CDMA include: (1) higher
capacity (several times higher than competing GSM and TDMA cellular/PCS
technologies); (2) efficient use of spectrum; (3) "soft handoff" (which allows
the simultaneous conversation between adjacent radio base stations to reduce
dropped calls); (4) variable rate voice coding (which allows speech bits to be
transmitted at only the rates necessary for high quality); and (5) multipath
signal processing techniques that combine power for increased RF signal
integrity.
The key strategic advantages of implementing CDMA in our network include:
-- faster market-wide solution via wireless access, providing digital
carrier quality telephony service.
-- indoor, self-installation capable customer premises equipment;
so-called "plug-and-play" capabilities for faster and cost
efficient subscriber intake.
-- PCS-based fixed wireless access technology, capable of providing
mobile voice and data services (when regulations permit).
-- ability to provide advanced cellular-type services to our
customers in the near future, such as limited mobility, short
messaging and wireless access protocol.
-- provision of revenue-generating features, such as voice mail, call
waiting, call forwarding, caller ID and conference calling.
-- technology migration to third generation wireless over the next 12
months enabling the provision of high-speed circuit and packet
data services up to 144 Kbps (3G cdma2000 1xRTT).
-- technology well positioned for migration to IP-based voice and
data, with burst speeds up to 2 Mbps in 2002 (3G cdma2000 3xRTT or
wideband CDMA).
1.9 GHz HDR. HDR is a spectrally efficient CDMA technology developed by
Qualcomm to optimize delivery of packet data services. It uses the existing RF
component of CDMA to provide high-speed Internet access to multiple users, with
peak data rates up to 2.4 Mbps. The HDR system provides fixed and mobile packet
data via the mobile IP protocol, using radio base stations directly
interconnected with packet data routers. We believe this technology, which is
expected to be available in mid-2002, could be used for the provision of
broadband services to our subscribers. We are exploring the launch of HDR over
our existing CDMA network. We have committed to Qualcomm to deploy HDR on a
trial basis as soon as commercially available.
3.4 GHz Wideband. We are planning to augment our CDMA network with the
deployment of a wideband 3.4 GHz network to meet high-speed data and voice needs
in the high-end residential, micro and home office, and small and medium-sized
business segments. We have issued an industry-wide request for
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proposals to select the wireless access technology and vendor for this solution.
The requirements for this system include the ability to provide voice services
via VoIP and data services with minimum burst data speeds of 1 Mbps. Vendors
that meet the requirements are being identified and we expect to have commercial
service in Brazil by the end of 2000. The technologies with IP-based
architecture, such as Lucent WaveACCESS 3500 deployed in Argentina, provide
high-speed burst rates for Internet connections in addition to future VoIP
services and are scheduled for commercial availability in 2001.
Point-to-Multipoint (LMDS). We expect to launch a second technological
platform, known as an LMDS point-to-multipoint platform, as part of our network
in Argentina by the end of 2000. LMDS is a high-bandwidth wireless connection
that provides broadband capacity starting at several Mbps up to a maximum of 155
Mbps. LMDS services include high-speed data transfer and Internet access,
wireless local telephone service, wireless transmission of telephone calls in
bulk quantity, remote access to corporate local area networks, interactive
video, video broadcasting and videoconferencing.
Point-to-Point. Conventional point-to-point transmission technology
provides E1 lines to subscribers connected to the network via a dedicated
two-way radio link set up between a pair of narrow beam antennas with
line-of-sight to each other. Each E1 line provides 2.048 Mbps that can be used
for telephony, IP services and ATM services. Point-to-point links to
multi-tenant buildings, combined with routers, multiplexers or add/ drop
equipment can provide any combination of voice and data services to multiple
subscribers. The point-to-point radios can also be used for broadband
applications, similar to LMDS via the use of available transmission technologies
up to 155 Mbps. We currently use point-to-point transmission technology as part
of our network backhaul in Brazil and we expect in the future to use this
technology as part of our Argentine network.
Fiber/xDSL. We have begun deploying a combined fiber and DSL technology
for last-mile access, and we will continue to expand this deployment in
locations where high capacity and density of subscribers create demand for these
solutions, for instance the Rio de Janeiro and Sao Paulo metropolitan areas. DSL
technology increases the data carrying capacity of conventional lines to speeds
up to 6Mbps depending on the length of the last copper drop to the subscribers.
The fiber and combined fiber xDSL allow the provision of a complete broadband
solution to our subscribers.
REGULATION
BRAZIL
Regulatory Scheme. The provision of telecommunications services in Brazil
is regulated by ANATEL pursuant to the Lei Geral de Telecomunicacoes (General
Telecommunications Law), the legislation that established the basic guidelines
for the privatization of telecommunication services in Brazil. Fixed switched
telephony services, in particular, cannot be provided without first receiving a
Termo de Autorizacao (authorization) from ANATEL and are further subject to a
number of other general and specific regulations, certain of which are discussed
below.
Following the privatization of the Brazilian telecommunications industry,
ANATEL granted four authorizations to provide fixed switched telephony services
within Brazil, two of which were granted to us. Within each specified region,
only the authorized provider and the incumbent provider can offer fixed switched
telephony services. Pursuant to a regulation, the Plano Geral de Outorgas (PGO),
the duopoly structure implemented in each of the four specified regions remains
in effect until December 31, 2001. After that date, any party (other than those
subject to certain limitations under the PGO) can apply for an authorization
from ANATEL to provide fixed switched telephony services in Brazil in accordance
with specific rules that will be established by ANATEL.
The four initial authorizations granted by ANATEL require the authorized
providers to comply with certain service coverage requirements. However, unlike
the incumbent operators, the authorized providers are not subject to tariff
regulation, universal service obligations or continuity of their services. The
initial authorizations also require the authorized providers to provide
interconnection between their respective networks and the networks of other
providers of telecommunications services, whether public or private,
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whenever requested and in accordance with certain regulations. The authorized
providers are compensated for the use of their networks in accordance with these
regulations. Finally, the initial authorizations require the authorized
providers to follow certain procedures and guidelines when contracting for
services and purchasing equipment and material related to their licenses. The
authorized providers, for example, must consider offers placed by independent
suppliers, including domestic suppliers, and to make their decisions with a view
to complying with objective criteria of price, delivery conditions and technical
specifications.
The authorized providers of fixed switched telephony services are also
subject to the Regulation for Switched Fixed Telephone Service Numbering
approved by Resolution No. 86, of December 30, 1998, which establishes rules
regarding users' access codes, public utility services access codes,
non-geographic access codes and the switched fixed telephony services provider
selection code, which is the code that enables users to choose which provider of
long distance fixed switched telephony services, among those operating within
the user's region, will carry the user's call.
The authorized providers of fixed switched telephony services are allowed
to deploy fixed wireless technology in their network systems under a number of
regulations, including Resolution No. 46/98, pursuant to which ANATEL allocates
frequency bands enabling the implementation of fixed wireless technology. The
incumbent operators, however, are not permitted to deploy fixed wireless
technology in the municipalities covered by our licenses until February 2001 and
May 2001, respectively. The license for the use of frequency bands by each
authorized provider is provided for in its authorization from ANATEL. After
December 31, 2001 (the expiration of the duopoly period), additional licenses
for the use of frequency bands not previously allocated exclusively for fixed
wireless technology applications may be granted upon bidding procedures.
The rights of users of fixed switched telephony services in Brazil are
established under ANATEL's Resolution No. 85/98. The primary rights established
under this regulation include: unrestricted access to service; freedom to choose
the fixed switched telephony services operator to carry calls;
non-discriminatory treatment; assurance of privacy; prior notice before any
modification to the service conditions; and redress of damages incurred as a
result of violation of a user's rights, access code portability and temporary
interruption of services.
The General Telecommunications Law requires that any spin-off, merger,
transformation, consolidation, divestiture of capital or transfer of corporate
control of a licensed provider of telecommunications services in Brazil receive
preliminary approval from ANATEL. On February 4, 1999, ANATEL published
Resolution No. 101, which approved the Regulations on Ascertainment of Control
and Transfer of Telecommunications Services Providers. These regulations define
control as the de facto or legal power to directly or indirectly guide the
company's activities or operations, internally or externally, on an individual
basis or by way of agreement. The regulations clarify that a company's
operations encompass, among other things, corporate planning and the
establishment of economic, financial, technological, engineering, marketing and
pricing policies.
Licenses Generally. The operating licenses acquired by us in 1999 as part
of the Brazilian government's privatization efforts permit the provision of
fixed switched telephony for local and intra-regional long distance services.
The operating licenses are valid for an indefinite period of time within their
respective regions. The spectrum allocations granted in connection with these
licenses are valid until 2019 and can be renewed, upon payment of a fee, for a
subsequent 20-year period. Whereas the incumbent operators are subject to
build-out, quality of service, tariff and universal service targets, we are
subject only to specific coverage, penetration and quality of service targets
within our respective regions. In addition, our operating licenses provide us an
exclusive right to use our assigned spectrum frequencies within the 1.9 GHz and
3.4 GHz wireless bands. This right to exclusive use of the spectrum does not,
however, cover those cities not included by us in our build-out schedules.
During the initial duopoly period, which extends until December 31, 2001,
we may operate only the licensed services within our regions. Thereafter, but
not earlier than the date we have fulfilled all of the operating license
build-out and other service requirements (described below) for each region that
we have committed to fulfill by December 31, 2002, we will be allowed to apply
for expanded service offerings that will allow us to compete freely throughout
Brazil. If these applications are successful, we will be able to provide
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end-to-end national long distance connectivity, deliver international long
distance traffic, and enter the local communications business in the southern
region of Brazil. We believe the ability to provide these additional service
offerings will be offered by the Brazilian government through an auction
process; however, no definitive mechanism has yet been established.
Noncompliance with the terms of the operating licenses is subject to a graduated
system of penalties of up to R$50 million, and the licenses may be cancelled
under certain circumstances.
The following table summarizes certain key aspects of our operating
licenses:
<TABLE>
<CAPTION>
DESCRIPTION OF LICENSES NORTHEAST REGION SAO PAULO REGION
----------------------- ---------------- ----------------
<S> <C> <C>
Issue Date................... February 4, 1999 May 5, 1999
Territory.................... Northeast Region (16 states) Sao Paulo Region (1 state)
Population................... 90 million 35 million
Term......................... Indefinite Indefinite
Acquisition Fee.............. R$60 million ($0.37 per POP) R$70 million ($1.18 per POP)
Spectrum..................... Exclusive access for Exclusive access for
specified frequencies for 112 specified frequencies for 53
cities having populations cities having populations
greater than 50,000 (spectrum greater than 50,000 (spectrum
reserved for Vesper) 1.9 GHz: reserved for Vesper) 1.9 GHz:
20 MHz (including 10 MHz in 20 MHz (including 10 MHz in
reserve) 3.4 GHz: 50 MHz reserve) 3.4 GHz: 50 MHz
(including 30 MHz in reserve) (including 30 MHz in reserve)
Competition.................. Mandated duopoly in local Mandated duopoly in local
service until December 31, service until December 31,
2001 2001
Coverage Obligations......... Required service in cities Required service in cities
with 200,000 + people, state with 200,000 + people, the
capitals and 61 other cities state capital and 28 other
cities
Tariff Structure............. Complete flexibility Complete flexibility
Interconnection.............. Mandated interconnection Mandated interconnection
negotiated rates with negotiated rates with
incumbents incumbents
Number Portability........... Mandated provision Mandated provision
</TABLE>
We have also secured additional data licenses, including licenses to
provide packet-switched data and deliver dedicated "always-on" high speed
Internet access services, in our operating regions.
Coverage Requirements for Primary Cities. Under the terms of the bids made
to obtain the operating licenses, we are obligated to provide coverage in the 51
primary cities in the northeast service region and the 25 primary cities in the
Sao Paulo service region. These coverage requirements are an annually targeted
capacity penetration percentage of the covered populations, which increases
between the years 1999 and 2002 as described below. Our network deployment
plans, in terms of local access capacity, switching capacity, and trunking
capacity, are configured to meet the capacity penetration obligations of these
licenses. We have satisfied the applicable coverage requirements for 1999.
<TABLE>
<CAPTION>
NORTHEAST REGION PRIMARY SAO PAULO REGION PRIMARY
CITY BUILD-OUT SCHEDULE CITY BUILD-OUT SCHEDULE
- --------------------------------------- ---------------------------------------
CUMULATIVE REQUIRED CAPACITY CUMULATIVE REQUIRED CAPACITY
DEPLOYMENT PENETRATION(YEAR-END) DEVELOPMENT PENETRATION(YEAR-END)
- ---------------- --------------------- ---------------- ---------------------
<S> <C> <C> <C> <C> <C>
1999: 29 cities 6.37% 1999: 13 cities 3.37%
2000: 51 cities 6.95% 2000: 20 cities 4.32%
2001: 51 cities 9.78% 2001: 25 cities 5.53%
2002: 51 cities 13.63% 2002: 25 cities 5.53%
</TABLE>
Coverage Requirements for Secondary Cities. Subsequent to the acquisition
of the operating licenses, we registered an expansion plan with ANATEL to deploy
networks in 61 secondary cities in the northeast
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service region and 28 secondary cities in the Sao Paulo service region. These
secondary cities have populations under 200,000 people and the amended licenses
impose an obligation on Vesper to achieve a capacity penetration target of 1% of
the covered population by year-end 2001. Our build-out schedule in the northeast
region targets the 61 secondary cities to be covered by year-end 2001, which
would bring the total number of cities in the northeast service region to 112.
Our Sao Paulo build-out schedule targets the 28 secondary cities to be covered
by year-end 2001, which would bring the total number of cities in the Sao Paulo
service region to 53.
Quality of Service Requirements. Our licenses require us to comply with
certain performance standards determined by ANATEL concerning areas such as
service quality, repair requests, customer assistance, billing and network
modernization. We are subject to monthly reporting requirements with respect to
these performance standards, and our failure to meet these performance standards
or comply with these reporting requirements could subject us to penalties
imposed by ANATEL.
ARGENTINA
Regulatory Scheme. The provision of telecommunications services in
Argentina is regulated by the Secretaria de Comunicaciones, which establishes
policy and grants licenses, and the Comision Nacional de Comunicaciones (CNC),
which administers policy, pursuant to Telecommunications Law No. 19,798 (1972)
and other regulations, such as Decree No. 62/90, and Decree No. 264/98. The
Telecommunications Law provides a general framework while specific
telecommunications regulations are set forth in various presidential decrees and
resolutions. The Argentine government's liberalization of the telecommunications
sector began in 1989 with the privatization of ENTEL, the state-owned monopoly
telecommunications operator, into two regional (non-overlapping territory)
telecommunications service providers, following Argentina's commitments before
the World Trade Organization. In early 1999, the Argentine data and Internet
sector was fully liberalized and an unlimited number of national data and
Internet licenses are now available.
The provision of non-telephony telecommunications services in Argentina
over fixed wireless and LMDS networks, such as the Internet and data transport
services we provide or expect to provide there, cannot be provided without first
obtaining a non-expiring, non-exclusive, license to provide such services from
the CNC. Licenses for these types of services also need an allocation of
frequency bandwidth restricted to certain regions and require the payment of a
frequency fee and a revenue fee.
Telephony services in Argentina can only be provided by four incumbent
operators until November 2000. After that time, an unlimited number of licenses
will be made available by the CNC. Certain of these licenses have already been
granted by the CNC but are not operable until November 2000. The CNC is
obligated to award licenses for telephony services if certain requirements are
satisfied by the applicants, including a minimum coverage requirement and the
posting of a bond.
Licensed telecommunications service providers in Argentina are required by
law to provide interconnection between their respective networks and the
networks of other providers of telecommunications services. Telecommunications
providers are free to negotiate interconnection rates, terms, and conditions.
However, a failure to obtain an interconnection agreement could lead to
intervention by the CNC and the fixing of an interconnection rate.
The transfer or acquisition of majority control of a licensed provider of
telecommunications services is subject to the prior approval of the CNC.
Licenses. We hold certain nationwide licenses with near-nationwide
frequency allocations (covering all major metropolitan areas) for high-speed
packet-switched data and Internet access issued by the Argentine government,
including:
-- a non-exclusive license for data transmission, video conferencing and
value added services (together with a near-nationwide use of spectrum
in the 3.4 GHz range); and
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-- non-exclusive licenses for data transmission, video conferencing,
value-added services and transportation of broadcasting signals
(together with the use of spectrum in the 28 GHz range) for the
Buenos Aires metropolitan area and the cities of Rosario, Cordoba, La
Plata and Mendoza.
Each of these licenses was acquired for minimal fees, have non-expiring
terms, do not entail any mandatory coverage obligations, are not subject to any
pricing regulation, have low annual costs and are subject to mandatory
interconnection requirements and negotiated rates with the incumbents.
We also hold a non-exclusive license for data transmission, video
conferencing and value-added services (together with the use of 1,000 MHz of
spectrum in the 28 GHz range) covering the Montevideo, Uruguay metropolitan area
(including the municipality of Maldonado), encompassing a population of
approximately 1.3 million people.
MANAGEMENT
BRAZIL
Our management in Brazil has significant experience in developing and
operating communications companies in Latin America and elsewhere. The following
people comprise our senior management team in Brazil:
Virgilio Freire, Chief Executive Officer. Mr. Freire has over 30 years of
experience in the communications industry. Mr. Freire served as President of
Lucent do Brasil from 1996 to 1999 and worked for BellSouth from 1994 to 1996.
Mr. Freire also held senior level positions at Nortel do Brasil, TVA S.A. (a
leading cable operator) and was employed at Telebras for over 20 years.
Gilles LeClerc, Chief Operating Officer. Mr. LeClerc has over 30 years of
experience in the communications industry with BCI and BCE. Mr. LeClerc served
as Chief Operating Officer, or senior executive, for four communications
startups in which BCI has been involved, including Axtel, a company offering
fixed wireless services in Mexico; the consolidation of three cable telephony
companies and Mercury Communications to create Cable and Wireless, U.K., one of
the UK's largest cable telephony providers; Clear Communication, a local, long
distance and data company in New Zealand; and the launch of a fixed line
operation in Saudi Arabia. Prior to Mr. LeClerc's international ventures, he
spent 25 years as a senior executive with BCE's operations, where he was
President of Telebec.
Robert Birch, Chief Financial Officer. Mr. Birch is an engineering
graduate of Oxford University, England, and is a Chartered Accountant. He
started his career in public accounting working 10 years with Deloitte & Touche
in the UK, U.S. and Brazil. For the last nine years, he worked at Citibank and
has extensive experience in financing and advising clients in the
telecommunications industry. For the last three years he was responsible for
Citibank's corporate finance business in Spain and Portugal.
Francisco Neves, Chief Corporate Officer. Mr. Neves has served as Vice
President, Corporate Development of Vesper since inception and more recently as
Vice President, Network Operations. Mr. Neves' responsibilities as Chief
Corporate Officer will include government relations, supply chain, quality,
legal and regulatory matters, partnership alliances, human resources and
corporate communications. Before joining Vesper, Mr. Neves worked at Embratel,
Telebras, the Brazilian Ministry of Communication and for Grupo Vicunha.
ARGENTINA
Our management in Argentina has significant experience in developing and
operating communications companies in Latin America. The following people
comprise our senior management team in Argentina:
William H. Ricke, Jr., Chief Executive Officer. Mr. Ricke has over 15 years
of experience in the communications industry. Mr. Ricke served as General
Manager, Mercosur, for Global One Communications from 1998 through 1999 and
prior to that he served as President of Global One, Mexico, and as Vice
President--Sales and Marketing of Global One, Canada. From 1985 through 1994,
Mr. Ricke served in a variety of positions for Sprint and its subsidiaries.
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Alejandro Torriglia, Director of Sales and Marketing. Mr. Torriglia has
over ten years of experience in the communications industry. Mr. Torriglia has
served as the Director of Marketing and Sales, Mercosur, for Global One
Communications and previously as the Marketing Delivery Manager for AT&T (USA).
Ricardo Sawon, Director of Strategic Marketing. Mr. Sawon has over ten
years of experience in the communications industry. Mr. Sawon served as the
Marketing and Sales Director of Startel (Argentina), and the Sales Director of
Advance (Telefonica Argentina).
Marcelo Boulay, Director of Network Operations. Mr. Boulay has over ten
years of experience in the communications industry. Mr. Boulay served as the
Network Operations Director for Global One Communications (Argentina) from 1997
through 1999. He has also served as the Manager of Communications for XEROX
Argentina from 1987 to 1997.
Dr. Juan Carlos Camara, Chief Financial Officer. Mr. Camara has over 25
years of financial management experience in Argentina. Mr. Camara was the former
Director of Sales and Marketing at 3M Argentina between 1992 and 1999. He also
served as the Director of Finance at 3M Argentina between 1981 and 1991.
Rodolfo Caffaro Kramer, Corporate Attorney. Mr. Kramer has over eight years
of legal experience in telecommunications in Argentina. He is the former legal
counsel for Cooperative Telefonica de Pilar and the external legal counsel for
C.T.I.
EMPLOYEES
BRAZIL
At April 30, 2000, we had 2,775 employees for our telephony and data
services business. Of the current total, 354 are employed in management and
administration, 2,266 are employed in operational and technical, and 155 are
employed in sales and marketing. At April 30, 2000, we had approximately 102
employees for our Internet services business. Of the current total, four are
employed in management and administration, 94 are employed in operational and
technical, and four are employed in sales and marketing. We do not have any
long-term employment contracts with any of these employees, including
management. We are negotiating a collective bargaining agreement with two labor
organizations that represent all telecommunications workers in Brazil. We are
not obligated to negotiate with these organizations or to have any type of
collective bargaining agreement with our employees. However, we have decided to
pursue these negotiations in an effort to avoid disputes between us and our
employees in the future. We believe relations with our employees in Brazil are
good.
ARGENTINA
As of April 30, 2000, we had 122 employees. Of the current total, 30
employees are in management and administration, 22 employees are in sales and
marketing, 28 employees are in operations, seven employees are in information
technology and 17 employees are in other categories. As of April 30, 2000, we
did not have any employees in Uruguay. We do not have any longterm employment
contracts with any of these employees, including management, and none of our
employees are members of any union. We believe that relations with our employees
in Argentina and Uruguay are good.
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OTHER MATERIAL AGREEMENTS
SHAREHOLDER AGREEMENT
Our operating licenses in Brazil are held by separate Brazilian companies,
each of which is owned by a holding company (Vesper Northeast and Vesper Sao
Paulo) in which we and the other shareholders (BCI and Qualcomm) have identical
share ownership. Except as indicated in the following discussion, the principal
terms of the shareholder agreements for each of Vesper Northeast and Vesper Sao
Paulo are substantially identical and are as follows:
Advisory Committee. Vesper is managed and supervised by an advisory
committee consisting of seven members. VeloCom and BCI each has the right to
nominate three of the seven members (plus an alternate), and Qualcomm has the
right to nominate one non-voting member, to the advisory committee.
Funding and Capital Requirements. VeloCom, BCI and Qualcomm has each
committed to participate in first stage funding not to exceed $725 million in
the aggregate, of which $315.6 million has already been contributed. VeloCom's
allocable share of the remaining first stage funding is $202.4 million.
Shareholders have no contractual obligation to make future equity contributions
to Vesper beyond the first stage funding, but their ownership will be diluted if
they do not fund any approved funding plan.
Actions Requiring Supermajority Vote of Shareholders or Advisory
Committee. Certain actions may not be taken by Vesper without the approval of at
least 70% of the issued and outstanding voting shares or members of the advisory
committee appointed by 70% of the voting shares, or of both in certain cases.
These actions include the following:
-- entering into contracts with any shareholder, member or officer of
Vesper, or any affiliate thereof;
-- declaring or paying dividends;
-- approving any material amendments to the business plan, approving an
annual business plan, or approving operating budgets and capital
budgets;
-- adopting the financing policy and financing requirements of Vesper or
establishing the terms and conditions of any shareholder loans;
-- applying for a license or other governmental authorization not
required in the ordinary course of business, or entering into a new
business or market; or
-- approving a private offering or initial public offering of Vesper.
Actions Requiring Unanimous Consent of Shareholders or Advisory
Committee. Unanimous consent of all shareholders holding at least 12% of the
voting shares of Vesper or of the members appointed to the advisory committee of
Vesper by shareholders holding at least 12% of the voting shares is required for
certain actions, including the following:
-- sale of substantially all of the assets in either Vesper region;
-- transfer of the mirror license;
-- increasing the first stage funding above $385 million for Vesper Sao
Paulo and $340 million for Vesper Northeast; or
-- changing the purpose of Vesper to allow for activities outside the
communications area.
Restrictions on Transfer of Shares. No Vesper shareholder may transfer its
shares to a third party until the duopoly period expires on December 31, 2001.
In addition, there are certain restrictions on transfers of Vesper shares,
including rights of first refusal, tag-along rights (i.e., no transfer of shares
under certain circumstances unless other shareholders are given an opportunity
to join in the transfer) and drag-along rights (i.e., if shareholders holding
more than 70% of the Vesper voting shares wish to transfer their shares, they
can compel the remaining shareholders to transfer on the same terms). Certain
standstill provisions regarding the
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acquisition of shares ensure, under certain circumstances, that neither BCI or
VeloCom holds more than 50% of the outstanding Vesper shares.
Initial Public Offering. In connection with their agreement to use
reasonable efforts to proceed with an initial public offering of Vesper shares
on a United States, Canadian, Brazilian or other international stock exchange,
the shareholders have agreed to evaluate the viability of an offering at the
earlier of:
-- three years after the award of the initial mirror license to Vesper
or
-- Vesper attaining specified positive EBITDA levels.
USUFRUCT AGREEMENT
VeloCom and Qualcomm have entered into a usufruct agreement pursuant to
which Qualcomm has granted VeloCom a voting right over 0.6% of Vesper's
outstanding capital stock. This voting arrangement is binding on third party
transferees and will terminate on the date VeloCom owns 50% of Vesper's
outstanding capital stock.
BV INTERATIVA SHAREHOLDERS AGREEMENT
The operations of BV Interativa are governed by a shareholders agreement
entered into by VeloCom, BCI and Qualcomm on March 22, 2000. The principal terms
of this agreement are:
Funding and Capitalization. Each of VeloCom and BCI has a 45% interest in
BV Interativa and Qualcomm has a 10% interest. VeloCom, BCI and Qualcomm have
contributed an aggregate of US$1 million in initial funding. The capital of BV
Interativa may be increased from time to time. Shareholders have preemptive
rights to subscribe to any capital increases but are not obligated to
participate.
Board of Directors. BV Interativa is managed and supervised by a board of
directors consisting of four principal directors and four alternate directors.
Each of VeloCom and BCI has the right, as long as it holds a 20% or greater
interest in BV Interativa, to nominate two principal directors and two alternate
directors. Qualcomm has the right to designate one and Vesper has the right to
designate two non-voting observers to attend meetings of the board of directors.
Actions Requiring Supermajority Vote of Shareholders or Board of
Directors. Certain actions may not be taken by BV Interativa without the
approval of each of VeloCom and BCI as long as its ownership interest in BV
Interativa is at least 20% and the approval of at least 70% of the outstanding
voting shares or directors of the board of directors appointed by 70% of the
voting shares, or of both in certain cases. These actions include the following:
-- entering into contracts with any shareholder, director or officer of
BV Interativa, or any affiliate of any of them;
-- declaring or paying dividends;
-- approving any material amendments to the business plan, approving an
annual business plan, or approving operating budgets and capital
budgets;
-- adopting the financing policy and financing requirements of BV
Interativa or establishing the terms and conditions of any
shareholder loans;
-- applying for a license or other governmental authorization not
required in the ordinary course of business, or entering into a new
business or market; or
-- approving a private offering or initial public offering of BV
Interativa.
Restrictions on Transfer of Shares. The transfer of shares of BV
Interativa is restricted by rights of first negotiation and first refusal.
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TECHNICAL SERVICES AGREEMENTS
Each of Vesper Northeast and Vesper Sao Paulo has entered into certain
technical services agreements. Except as indicated in the following discussion,
the principal terms of these agreements are substantially identical and are as
follows:
BCI Agreements. Vesper and BCI entered into a Technical Services
Agreement, as well as a Know-How Transfer Agreement and Secondment Agreement, on
May 27, 1999 with respect to the northeast region (Vesper Northeast) and on July
30, 1999 with respect to the Sao Paulo region (Vesper Sao Paulo). Under the
Technical Services Agreement, BCI will provide, on a cost plus 15% basis,
technical and advisory assistance and consultants, from time to time, as
requested by Vesper to assist it with the deployment and operation of its
communications network and related activities.
Pursuant to the Know-How Transfer and Technical Services Agreement, BCI
will provide Vesper with certain know-how and technical data and related
training. In consideration, Vesper Northeast and Vesper Sao Paulo will pay the
following royalty fees:
-- Vesper Northeast
-- An annual fixed fee payable during the five-year term of the
agreement, commencing, with respect to the calendar year during
which service launch occurs, of $2 million, annually for each of
the first three years, and $1 million, annually for each of the
last two years. The payment of annual installments of the fixed fee
will be deferred until such time as Vesper Northeast attains
positive EBITDA (earnings before interest, taxes, depreciation and
amortization) for two consecutive quarters at which point all
deferred annual installments of the fixed fee will become
immediately payable.
-- Annual variable fees (additional fees) for a period of five years
commencing with respect to the first of the following occur: (i)
the end of the calendar year 2001, or (ii) the fiscal year
following the first fiscal year during which Vesper Northeast
generates positive EBITDA for two consecutive quarters. The
additional fees will be calculated as a percentage (starting at 10%
in the first year and decreasing to 6% in the fifth year) of EBITDA
in excess of the expected EBITDA in the business plan up to a
maximum of 1% of Vesper Northeast's gross revenues for the year.
-- Vesper Sao Paulo
-- An annual fixed fee payable during the eight-year term of the
agreement, commencing, with respect to the calendar year during
which service launch occurs, of $2 million. The payment of annual
installments of the fixed fee will be deferred until such time as
Vesper Sao Paulo attains positive EBITDA for two consecutive
quarters at which point all deferred annual installments of the
fixed fee will become immediately payable. Additionally, if the
vendor financing is refinanced through the proceeds of one or more
financings, and if certain other conditions are met, the payment of
this fixed fee may be limited to the first three calendar years
commencing with the service launch year. Furthermore, the agreement
provides that if Vesper Northeast and Vesper Sao Paulo are combined
into a single entity or are operated as a single entity, no fixed
fee will be payable under this agreement effective the date of
commencement of common operations.
-- Annual variable fees (additional fees) for a period of seven years
commencing with respect to the first of the following occur: (i)
the end of the calendar year 2001, or (ii) the fiscal year during
which Vesper Sao Paulo generates positive EBITDA for two
consecutive quarters. The additional fees will be calculated as a
percentage (starting at 10% in the first year, decreasing to 5% in
the sixth year and maintained at 5% in the seventh year) of EBITDA
in excess of the expected EBITDA in the business plan up to a
maximum of 1% of Vesper Sao Paulo's gross revenues for the year. If
the vendor financing is refinanced as mentioned above, BCI will be
entitled to payment of the additional fees only for years 1 through
5.
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<PAGE> 60
Pursuant to the terms of the Secondment Agreement, BCI agreed to second
BCI personnel to Vesper, to serve as employees of Vesper and facilitate transfer
of know-how. BCI will be entitled to receive compensation for its out-of-pocket
expenses relating to this agreement plus 15%.
Each of the agreements between Vesper and BCI provide for termination
rights as a result of the occurrence of certain events. In addition, if BCI is a
"defaulting shareholder" under the Vesper Shareholders Agreement or at any time
does not hold 12% or more of Vesper's outstanding equity, then its Know-How
Transfer and Technical Services Agreement and Secondment Agreement with Vesper
Sao Paulo will terminate unless the other Vesper shareholders determine
otherwise.
Vesper - VeloCom Agreement. Vesper and VeloCom have entered into a
five-year Technical Services Agreement pursuant to which VeloCom has agreed to
provide to Vesper various services such as information technology assistance,
business development assistance, business plan development and financial
advisory assistance, all on a cost plus 15% basis.
HEADQUARTERS--ADMINISTRATION
Our senior management and administrative functions are performed at our
Denver corporate headquarters, where we lease approximately 8,600 square feet of
office space. At April 30, 2000, these functions were performed by 28 employees,
including management personnel.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising in the ordinary course of business. We currently are not subject to any
material legal proceedings.
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<PAGE> 61
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages and positions of directors and
executive officers of VeloCom at April 30, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Fred A. Vierra.................................. 68 Chairman of the Board of Directors
William J. Elsner............................... 48 Director
Steven C. Halstedt.............................. 54 Director
Anthony Daffer.................................. 29 Director
Bernard W. Schotters............................ 55 Director
Guillermo Liberman.............................. 32 Director
Luis M. Gonzalez Lanuza......................... 45 Director
Bernard G. Dvorak............................... 40 Director
Jacques Gliksberg............................... 42 Director
Michael A. Greeley.............................. 37 Director
Scott Perper.................................... 44 Director
William A. Smith................................ 55 Director
David J. Leonard................................ 47 Chief Executive Officer and Director
Nicolas Kauser.................................. 61 Chief Technology Officer and Director
Barry L. Rowan.................................. 43 Chief Financial Officer
John H. Gowen................................... 31 Chief Business Development Officer
Michael S. Quinn................................ 37 Chief Corporate Development Officer
Billi R. McCullough............................. 29 General Counsel and Secretary
Gregory P. Sadler............................... 42 Vice President, Finance
R. Dwayne House................................. 33 Vice President, Operations
Henry J. Peraza................................. 49 Vice President, Brazil
Bradley T. Johnson.............................. 47 Vice President, Southern Cone
David C. Tomizuka............................... 32 Vice President, Internet Development
Cristiano Renno Amon............................ 29 Vice President, Technology
</TABLE>
Fred A. Vierra. Mr. Vierra has served as VeloCom's Chairman of the Board
of Directors since VeloCom's inception and is a Special Member of the General
Partner of Telecom Partners III. He is currently a Director of Jones
International Networks and Vice Chairman of the Board of Directors of eVenture.
From 1995 to 1998, Mr. Vierra served as Chief Executive Officer of
Telecommunications International. Prior to joining TCI, Mr. Vierra was the
President and Chief Operating Officer of United Artists Entertainment Company
(UAEC) from 1989 to 1994. He was also the President of United Cable Television
Corporation, which was merged into UAEC.
William J. Elsner. Mr. Elsner has been a Director of VeloCom since its
inception and is also a member of VeloCom's Finance Committee and Chairman of
the Executive Committee. Currently, Mr. Elsner is a Managing Member of Telecom
Management II, L.L.C. and Telecom Management III, L.L.C., and is also General
Partner of Telecom Partners III, L.P. and Telecom Partners II, L.P. In addition,
Mr. Elsner is a Managing Member of Telecom Partners Resources, L.L.C. and a
Director of ViaNet.Works, Inc. From 1991 to 1995 Mr. Elsner served as Chief
Executive Officer of United International Holdings, Inc. (UIH) and subsequently
worked as a private investor.
Steven C. Halstedt. Mr. Halstedt has been a Director of VeloCom since July
1998. He is currently a venture capital investor for Centennial Ventures and has
been a General Partner of Centennial Ventures since 1982. Mr. Halstedt is the
Chairman of the Board of Directors of Verio and also serves as a Director of
Formus
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<PAGE> 62
Communications, Centennial Holdings, Inc./LLC, Cordillera Communications,
Venture eCommerce, Inc. and SiteShell Corporation.
Anthony Daffer. Mr. Daffer has been a Director of VeloCom since December
1998. He is a General Partner of Crescendo Ventures (Crescendo), a venture
capital group that invests in early stage communications and e-commerce
companies. Prior to joining Crescendo, he was a General Partner of IAI Ventures,
Crescendo's predecessor.
Bernard W. Schotters. Mr. Schotters has been a Director of VeloCom since
June 1999 and is also currently the Chairman of VeloCom's Finance Committee. Mr.
Schotters is a Special Member of the General Partner of Telecom Partners III.
Mr. Schotters served as Executive Vice President and Principal Financial Officer
of TCI and its subsidiaries from 1998 to 2000. Additionally, Mr. Schotters
served as Senior Vice President of TCI from 1990 to 1998.
Guillermo Liberman. Mr. Liberman has been a Director of VeloCom since
October 1999. He is currently a business developer for SLI Wireless S.A. and
since December 1997, a Director of SLI. Additionally, he is a Director of El
Sitio. From 1993 to 1997, prior to holding the foregoing positions, Mr. Liberman
was Executive Director of Video Cable Comunicacion.
Luis M. Gonzalez Lanuza. Mr. Gonzalez Lanuza has been a Director of
VeloCom since October 1999 and is currently the President of SLI Wireless S.A.
Prior to joining SLI, Mr. Gonzalez Lanuza was a partner and head of the
Telecommunications Department in the Argentine law firm of Marval, O'Farrell &
Mairal.
Bernard G. Dvorak. Mr. Dvorak has been a Director of VeloCom since
December 1999. He is currently the Interim Chief Executive Officer, Chief
Financial Officer and Senior Vice President of Formus. Prior to joining Formus,
Mr. Dvorak was the Chief Financial Officer and subsequently the President and
Chief Executive Officer of Cordillera Communications Corp., and from 1989 to
1996 he served as Chief Financial Officer of United International Holdings, Inc.
Jacques Gliksberg. Mr. Gliksberg has been a Director of VeloCom since
January 2000. He is currently Managing Director of Banc America Equity
Partners -- Latin America and a Director of Acme Paging, L.P., MaxCom S.A. de
C.V., Structured Intelligence LLC, Organizacion Rescarven C.A. and BankAmerica
International Investment Corporation. Mr. Gliksberg is also a Partner of DK
Partners I, LA Strategic Capital Partners II and Nexus Capital Partners, LLC.
Michael A. Greeley. Mr. Greeley has been a Director of VeloCom since
January 2000. He is currently the Senior Vice President of GCC Investments, LLC,
and has been in this position since 1994. Prior to 1994, Mr. Greeley was a Vice
President at Wasserstein Perella & Co., Inc. Mr. Greeley also currently serves
as a director of El Sitio, Fuelman, Inc. and MotherNature.com, Inc.
Scott B. Perper. Mr. Perper has been a Director of VeloCom since January
2000. He is currently a Managing Partner of First Union Capital Partners, Inc.,
a venture capital investing firm and has been in this position since prior to
January 1, 1995.
William A. Smith. Mr. Smith has been a Director of VeloCom since April
2000. He is currently Executive Vice President, Corporate Development for El
Paso Energy Corporation. From 1995 through 1999 Mr. Smith served as Executive
Vice President, General Counsel for Sonat Inc. and prior to that, acted as Vice
Chairman of Sonat Exploration.
David J. Leonard. Mr. Leonard has been Chief Executive Officer and a
Director of VeloCom since September 1998. From 1995 to 1998, Mr. Leonard served
as President of United International Holdings, Inc. Latin America (UIHLA), and
was in charge of the company's operations in Brazil, Chile, Mexico, Peru,
Argentina and Venezuela.
Nicolas Kauser. Mr. Kauser has been our Chief Technology Officer since
September 1998 and Director of VeloCom since December 1998. Mr. Kauser was
previously Chief Technology Officer at AT&T Wireless Inc. (formerly McCaw
Communications, Inc.) and currently serves on the Board of Directors of NextLink
Communications, Inc.
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<PAGE> 63
Barry L. Rowan. Mr. Rowan has been Chief Financial Officer of VeloCom since
July 1999. From 1995 to 1999 Mr. Rowan served as Chief Financial Officer of
Fluke Corporation (Fluke) and previously as Senior Vice President and General
Manager of the Networks Division of Fluke from 1992 to 1998. Mr. Rowan is
currently a Director of ARIS Corporation.
John H. Gowen. Mr. Gowen has been with VeloCom since November 1998, first
serving as Vice President, Development before moving to his present position as
Chief Business Development Officer. Mr. Gowen was previously Vice President,
Development of MGM Networks from December 1997 to November 1998. Prior to
joining MGM, Mr. Gowen was Vice President, Development for UIH Asia/Pacific from
January 1995 to December 1997.
Michael S. Quinn. Mr. Quinn has been with VeloCom since July 1999, first
serving as Vice President, Strategic and Legal Affairs before moving to his
present position as Chief Corporate Development Officer in January 2000. Before
joining VeloCom, Mr. Quinn was a partner in the international practice group of
Holland & Hart LLP, a Denver, Colorado based law firm.
Billi R. McCullough. Ms. McCullough has been General Counsel and Secretary
of VeloCom since February 2000. Prior to joining VeloCom, she spent over four
years as an associate in the international practice group of Holland & Hart LLP.
Ms. McCullough also clerked for the United States Court of Appeals for the
Second Circuit from September 1994 to September 1995.
Gregory P. Sadler. Mr. Sadler has been Vice President, Finance of VeloCom
since November 1998. Mr. Sadler was previously Chief Financial Officer of UIHLA
from November 1996 through October 1998. Prior to that he was International
Controller for US WEST International from January 1989 through October 1996.
R. Dwayne House. Mr. House has been Vice President, Operations of VeloCom
since January 1999. He was previously Vice-President of Development for UIHLA
from July 1995 through December 1998. Prior to that, Mr. House worked in various
operations for UIHLA.
Henry J. Peraza. Mr. Peraza has been Vice President, Brazil since June
1999. Before joining VeloCom, he served as President of UIH Chile for a period
of five years. Mr. Peraza has fifteen years of experience in the cable
television and telecommunications industry.
Bradley T. Johnson. Mr. Johnson has been Vice President, Southern Cone of
VeloCom since May 1999. He was previously Senior Vice President of UIHLA from
April 1996 through May 1999. Prior to that, Mr. Johnson was an executive with
UIH in their European operations.
David C. Tomizuka. Mr. Tomizuka has been Vice President, Internet
Development of VeloCom since August 1999. Mr. Tomizuka was previously Vice
President of Business Development for Nextera Interactive and held this position
from 1996 to 1999, after completing his MBA degree from Stanford University. In
addition, from 1995 to 1996, Mr. Tomizuka was a Business Development Consultant
for UIH.
Cristiano Renno Amon. Mr. Amon has been Vice President, Technology of
VeloCom since February 2000. Prior to joining VeloCom, he was Senior Director of
Operations -- CDMA Systems, Latin America for Ericsson Wireless Communications
Inc. From 1997 to 1999, he was Director, Technical Development -- Wireless
Infrastructure Systems, Latin America for Qualcomm Incorporated and from 1995 to
1996 was in the Systems Engineering, Technical Marketing division of Qualcomm do
Brasil S.A. Prior to that, Mr. Amon held various positions with NEC Corporation
and NEC do Brasil's mobile communication division.
COMMITTEES OF THE BOARD OF DIRECTORS
We have a number of standing committees of the Board of Directors,
including the following:
Compensation Committee. The compensation committee, composed of a majority
of non-employee directors:
-- oversees executive compensation programs and ensures the alignment of
these programs with stockholder interests;
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<PAGE> 64
-- reviews and approves bonus policies, including determining the size
of the bonus pool and overseeing our Stock Option Plan;
-- reviews the performance and establishes the compensation of the Chief
Executive Officer and the directors;
-- recommends new officer positions and appointments; and
-- reviews substantive changes to our employee benefit programs.
The compensation committee is currently constituted by Mr. Anthony Daffer,
Mr. Jacques Gliksberg, Mr. Nicolas Kauser, Mr. Luis Gonzalez Lanuza and Mr. Fred
A. Vierra.
Audit Committee. The audit committee, composed of a majority of
non-employee directors, oversees the engagement of our independent auditors and,
together with our independent auditors, reviews our accounting practices,
internal accounting controls and financial results. The audit committee is
currently constituted by Mr. Anthony Daffer, Mr. Bernard G. Dvorak, Mr. Michael
Greeley, Mr. Scott Perper and Mr. Bernard Schotters.
Executive Committee. The executive committee is authorized to exercise, to
the maximum extent authorized by law, all of the powers and authority of the
Board of Directors between meetings of the Board other than, among other
actions:
-- authorizing distributions to stockholders;
-- filling vacancies of the Board of Directors;
-- amending the articles of incorporation or the bylaws;
-- approving a plan of merger not requiring stockholder approval; or
-- authorizing the issuance of shares or determine the terms of a class
or series of shares.
The executive committee is currently constituted by Mr. William J. Elsner, Mr.
Jacques Gliksberg, Mr. Steven C. Halstedt, Mr. Guillermo Liberman and Mr. Fred
A. Vierra.
Finance Committee. The finance committee is responsible for the following
duties, among others:
-- initiating, reviewing, modifying and approving management
recommendations regarding our budget and business plan, financing and
capital structure strategies, and other investment decisions;
-- approving certain capital expenditures; and
-- approving the incurrence of certain levels of indebtedness.
The finance committee is currently constituted by Mr. William J. Elsner, Mr.
Michael Greeley, Mr. Steven C. Halstedt, Mr. Scott Perper and Mr. Bernard
Schotters.
DIRECTOR COMPENSATION
During our 1999 fiscal year, one of our former directors received cash
compensation of $6,000 and options to purchase 25,000 shares of our common stock
at $3.00 per share for services provided to us as a director. During our 1999
fiscal year, Fred A. Vierra, Bernard W. Schotters, II and Luis M. Gonzalez
Lanuza received options to purchase 725,000, 50,000 and 225,000, respectively,
shares of our common stock at a price, in each case, of $3.00 per share for the
services they provided to us as directors.
Currently, we do not have arrangements with any of our directors regarding
compensation for services they provide to us as directors. However, our
directors are eligible to receive options under our 1998 Stock Option Plan, as
amended.
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EXECUTIVE COMPENSATION
The following table sets forth certain summary information for the fiscal
year ending December 31, 1999, concerning the compensation awarded to, earned by
or paid to (i) VeloCom's Chief Executive Officer and (ii) VeloCom's four most
highly compensated executive officers (other than the Chief Executive Officer)
who were serving as executive officers of VeloCom as of December 31, 1999 and
(iii) up to two additional individuals for whom disclosure would have been
provided but for the fact that such individual was not serving as an executive
officer of VeloCom at the end of the last completed fiscal year.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (#) COMPENSATION
--------------------------- ---- -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
David J. Leonard.................... 1999 $300,000 $30,000 -- 125,000 $ --
President and CEO
Barry L. Rowan...................... 1999 106,587 27,500 -- 300,000 49,156*
Chief Financial Officer
John Gowen.......................... 1999 200,000 27,500 -- 50,000 --
Chief Business Development Officer
Gregory P. Sadler................... 1999 150,000 27,500 -- 75,000 --
Vice President, Finance
R. Dwayne House..................... 1999 150,000 27,500 -- 225,000 --
Vice President, Operations
</TABLE>
- ------------
* Represents payments for moving expenses.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of the following named
executive officers: David J. Leonard, Barry L. Rowan, John Gowen, Gregory P.
Sadler and R. Dwayne House. The following are summaries of the material
provisions of the employment agreements, which have been filed as exhibits to
the registration statement of which this prospectus is a part.
The agreements with David J. Leonard, Barry L. Rowan, John Gowen, Gregory
P. Sadler and R. Dwayne House each provide for an indefinite employment term.
The agreements provide annual base salaries of not less than $300,000, $225,000,
$200,000, $150,000 and $150,000, respectively. Each of the agreements also
entitles the executive to receive stock options pursuant to the 1998 Stock
Option Plan.
Under the terms of each of their respective agreements, we have the right
to terminate the agreement in the event of a change in control of VeloCom, as
defined in each of the executives' agreements, by paying an executive 300% in
the case of David J. Leonard, or 200% in the case of Barry L. Rowan, John Gowen,
Gregory P. Sadler and R. Dwayne House, of the executive's annual salary at the
rate in effect at the time of termination. Each executive also has the right to
terminate their employment agreement by written notice to us in the event that
there is a change in control. In that case, we are required to pay the executive
300% in the case of David J. Leonard, or 200% in the case of Barry L. Rowan,
John Gowen, Gregory P. Sadler and R. Dwayne House, of the executive's annual
salary at the rate effective immediately prior to the change in control. The
payment by us to an executive pursuant to these provisions will be reduced, if
necessary, to an amount that does not create an "excess parachute payment"
pursuant to Section 280G of the Internal Revenue Code of 1986, as amended.
If an executive's employment is terminated by the Board of Directors of
VeloCom following a change of control, as defined in each of the executive's
agreements for any reason other than for cause and if the executive or VeloCom
had not previously terminated such executive's employment agreement, or if the
executive voluntarily terminates employment following a change in position with
VeloCom if the new position is not a comparable position to their former
position and if the executive or VeloCom had not previously terminated the
executive's employment agreement, then VeloCom will pay the executive the
following
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termination benefits provided that the executive does not voluntarily accept the
change in position and notifies us of their non-acceptance:
-- pay an amount equal to 36 months in the case of David J. Leonard, or
24 months in the case of Barry L. Rowan, John Gowen, Gregory P.
Sadler and R. Dwayne House, of the executive's salary at the rate in
effect at the time of termination; and
-- continue to provide, or reimburse the executive for the cost of
maintaining, for a twelve-month period from the date of termination,
health, disability and life insurance coverage as in effect
immediately prior to the termination date, such coverage to terminate
as soon as the executive becomes covered under comparable insurance
plans of a new employer.
As a condition to receiving the termination benefits, the executive must sign a
general release of claims. The executive is not required to mitigate the amount
of any payment provided in their employment agreement by seeking other
employment and no payment will be offset or reduced by the amount of any
compensation or benefits provided to the executive in any subsequent employment.
Each executive is also subject to customary non-competition,
non-solicitation of employees and confidentiality provisions.
1998 STOCK OPTION PLAN (AS AMENDED AND RESTATED EFFECTIVE OCTOBER 15, 1999)
VeloCom has adopted the VeloCom Inc. 1998 Stock Option Plan (as amended and
restated effective October 15, 1999) to provide an opportunity for stock
ownership to selected employees, directors and consultants of VeloCom and its
subsidiaries through stock options and stock appreciation rights. VeloCom
reserved 12,000,000 shares of VeloCom common stock for issuance under the option
plan. The option plan is administered by the Board of Directors of VeloCom or a
committee thereof, which is authorized to, among other things, select the
employees, directors and consultants who will receive grants and determine the
exercise price and vesting schedule of the options or stock appreciation rights.
Payment for shares upon the exercise of an option can be in cash, check or
shares of common stock in accordance with the terms of the plan. The option plan
terminates on September 30, 2008 but, in general, the Board of Directors may
suspend, amend or terminate the plan at any time, provided that no participants'
rights are diminished or impaired as a result of such suspension, amendment or
termination.
All outstanding options granted prior to October 15, 1999 will vest
automatically upon a change in control (as defined in the plan). The vesting of
options granted after October 15, 1999 will be determined in the relevant option
agreement. Upon the termination of an option holder's employment, all unvested
options will immediately terminate and vested options will generally remain
exercisable for a period of three months after the date of termination (one year
in the case of the founder of the company and one year in the case of death or
disability). VeloCom is permitted to provide that an option holder can elect to
exercise his or her option as to any part or all of the shares subject to such
option prior to the vesting of such option (and prior to such employee's
termination of employment). Any shares purchased upon the exercise of an
unvested portion of an option shall be subject to VeloCom's right of repurchase.
The grant of an option will create no tax consequences for the participant
or VeloCom. Upon exercise of an option, other than an incentive stock option,
the participant will generally recognize ordinary income equal to the difference
between the exercise price and the fair market value of the shares acquired on
the date of exercise and VeloCom generally will be entitled to a tax deduction
in the same amount. A participant generally will not recognize taxable income
upon exercising an incentive stock option and VeloCom will not be entitled to
any tax deduction with respect to an incentive stock option if the option holder
hold the shares for the applicable periods specified in the Internal Revenue
Code of 1986, as amended.
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OPTION GRANTS IN FISCAL YEAR 1999
The following table sets forth information regarding grants of options to
purchase stock of VeloCom to the named executive officers in fiscal year 1999.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
------------------------------------------------------------ AT ASSUMED
NUMBER PERCENT OF ANNUAL RATES OF
OF TOTAL OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE OF APPRECIATION FOR
UNDERLYING EMPLOYEES IN BASE PRICE OPTION TERM
OPTION FISCAL YEAR PER -------------------
NAME GRANTED(1) (%) SHARE($) EXPIRATION DATE 5% ($) 10% ($)
---- ---------- --------------- ----------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
David J. Leonard............ 125,000 4.1 3.00 May 21, 2009 235,835 597,653
Barry L. Rowan.............. 300,000 9.8 3.00 July 12, 2009 566,005 1,434,368
John Gowen.................. 50,000 1.6 3.00 May 21, 2009 94,334 239,061
Gregory P. Sadler........... 75,000 2.5 3.00 May 21, 2009 141,501 358,592
R. Dwayne House............. 150,000 4.9 2.25 January 4, 2009 212,252 537,888
75,000 2.5 3.00 May 21, 2009 141,501 358,592
</TABLE>
- ------------
(1) The options generally will vest over a three to four year period from the
date of grant. The above options were granted on May 21, 1999 except for the
options to Mr. House that expire on January 4, 2009, which were granted on
January 4, 1999.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1999 AND YEAR-END OPTION VALUES
The following table sets forth, on an aggregate basis, certain information
with respect to the value of unexercised options held by the named executive
officers at the end of fiscal 1999 and the value of unexercised in-the-money
options, that is, options that had a positive spread between the exercise price
and the fair market value of the common stock, as of December 31, 1999. No
options were exercised during the 1999 fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END($)
NAME (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
---- --------------------------- ---------------------------------
<S> <C> <C>
David J. Leonard............... 397,917/227,083 1,739,583/1,135,417
Barry L. Rowan................. 200,000/100,000 600,000/ 300,000
John Gowen..................... 223,958/ 1,042 803,125/ 3,125
Gregory P. Sadler.............. 214,583/ 10,417 756,250/ 31,250
R. Dwayne House................ 213,021/ 11,979 751,563/ 35,937
</TABLE>
Of the exercisable amounts listed for David J. Leonard, Barry L. Rowan,
John Gowen, Gregory P. Sadler and R. Dwayne House, 124,479, 125,000, 130,208,
120,833 and 128,646, respectively, if exercised would be subject to forfeiture
if not fully vested.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Nicolas Kauser, a member of the compensation committee of our Board of
Directors, has served as our Chief Technology Officer since September 1998. No
other member of the compensation committee has been an officer or employee of
VeloCom at any time. None of our executive officers serves as a member of the
board of directors or compensation committee of any other company that has one
or more executive officers serving as a member of our Board of Directors or
compensation committee.
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PRINCIPAL STOCKHOLDERS
PRINCIPAL STOCKHOLDERS
The following table and the accompanying notes show certain information
regarding the beneficial ownership of our common stock as of April 30, 2000 by:
-- each person who was known by us to own beneficially more than five
percent of our common stock;
-- each director;
-- each named executive officer; and
-- all directors and named executive officers as a group.
The information in the table below has been calculated in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended. Except as
otherwise indicated, all persons listed in the table have sole voting and
investment power with respect to all shares of our common stock shown as
beneficially owned by them, subject to community property laws where applicable.
The information in the table below assumes conversion into shares of common
stock of all outstanding shares of our Series A, Series B and Series C preferred
stock upon the closing of this offering, has been adjusted to reflect the sale
of shares being offered hereby and assumes no exercise of the underwriters'
over-allotment option.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF COMMON
STOCK BENEFICIALLY STOCK BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THIS
THIS OFFERING OFFERING
-------------------- --------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
--------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
5% STOCKHOLDER:
SLI Wireless S.A.(2).............................. 14,587,376 19.8% 14,587,376 %
Telecom Partners II, L.P. and affiliates(3)....... 11,272,441 15.3% 11,272,441 %
Formus Communications--Latin America Holdings,
LLC(4).......................................... 10,374,469 14.1% 10,374,469 %
Centennial Fund V, L.P.(5)........................ 5,369,231 7.6% 5,369,231 %
Crescendo World Fund, L.L.C. and affiliates(6).... 6,688,694 9.1% 6,688,694 %
El Paso Energy Communications Company(7).......... 5,000,000 6.8% 5,000,000 %
DIRECTORS AND EXECUTIVE OFFICERS:
Fred A. Vierra(8)................................. 504,198 * 504,198 *
Luis Gonzalez Lanuza(9)........................... 275,000 * 275,000 *
Bernard W. Schotters(10).......................... 325,000 * 325,000 *
David J. Leonard(11).............................. 886,188 1.3% 886,188 *
Nicolas Kauser(12)................................ 493,260 * 493,260 *
Steven C. Halstedt(13)............................ -- * -- *
William Elsner(14)................................ -- * -- *
Barry L. Rowan(15)................................ 483,333 * 483,333 *
John Gowen(16).................................... 361,667 * 361,667 *
Michael S. Quinn(17).............................. 280,417 * 280,417 *
Billi R. McCullough(18)........................... 82,354 * 82,354 *
Gregory P. Sadler(19)............................. 363,836 * 363,836 *
R. Dwayne House(20)............................... 361,989 * 361,989 *
Henry Peraza(21).................................. 151,250 * 151,250 *
Bradley T. Johnson(22)............................ 232,083 * 232,083 *
David C. Tomizuka(23)............................. 116,406 * 116,406 *
Cristiano Amon(24)................................ 105,730 * 105,730 *
All Directors and Executive Officers as a Group
(17 persons).................................... 5,022,711 6.77% 5,022,711 *
</TABLE>
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- ------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each person named in the table
is VeloCom Inc., 6400 South Fiddlers Green Cr., Suite 710, Englewood,
Colorado, 80111.
(2) The address for SLI Wireless S.A. is Bouchard 547 Piso 14, Buenos Aires,
1106, Argentina.
(3) Represents shares of common stock, Series A preferred stock and Series B
preferred stock owned by investment funds affiliated with Telecom Partners
II, L.P., including:
- 1,500,000 shares of common stock, 5,605,775 shares of Series A preferred
stock and 833,333 shares of Series B preferred stock owned by Telecom
Partners II, L.P.
- 3,333,333 shares of Series B preferred stock owned by Telecom Partners
III, L.P.
Telecom Partners II, L.P. and the funds affiliated with it have financial
investments in Formus. Telecom Partners II, L.P. and the funds affiliated
with it disclaim beneficial ownership of shares in VeloCom held by Formus.
The address for Telecom Partners II, L.P. and its affiliates is 4600 South
Syracuse, Suite 1000, Denver, Colorado, 80237.
(4) The address for Formus Communications-Latin America Holdings, LLC is 720 S.
Colorado Boulevard, Suite 600 North, Denver, Colorado 80246.
(5) Represents 932,600 shares of common stock, 4,186,631 shares of Series A
preferred stock and 250,000 shares of Series B preferred stock owned by
Centennial Fund V, L.P. Centennial Holdings V, L.P. is the sole general
partner of Centennial Fund V, and, accordingly, Centennial Holdings V may
be deemed to possess indirect beneficial ownership of the VeloCom
securities directly beneficially held by Centennial Fund V. Centennial
Holdings V has five individual general partners, but none of the individual
general partners, acting alone, has voting or investment power with respect
to the VeloCom securities beneficially held by Centennial Holdings V, and,
accordingly, such individuals disclaim beneficial ownership of such
securities.
Centennial Holdings V is also the sole general partner of Centennial
Entrepreneurs Fund V, L.P., which directly owns 28,940 shares of common
stock and 129,918 shares of Series A preferred stock. Accordingly,
Centennial Holdings V may be deemed to possess indirect beneficial ownership
of the VeloCom securities directly beneficially held by Centennial
Entrepreneurs Fund V.
Each of the five general partners of Centennial Holdings V is also a general
partner of Centennial Holdings VI, L.P., which in turn is the sole general
partner of each of Centennial Fund VI, L.P. and Centennial Entrepreneurs
Fund VI, L.P. and the managing member of CSP VI Management LLC. Centennial
Fund VI directly owns 1,244,319 shares of Series B preferred stock.
Centennial Entrepreneurs Fund VI directly owns 32,745 shares of Series B
preferred stock. Centennial Strategic Partners VI, L.P., of which CSP VI
Management is the sole general partner, directly owns 65,490 shares of
Series B preferred stock. Accordingly, Centennial Holdings VI may be deemed
to possess indirect beneficial ownership of the VeloCom securities directly
beneficially held by Centennial Fund VI, Centennial Entrepreneurs Fund VI
and Centennial Strategic Partners VI. None of the individual general
partners of Centennial Holdings VI, acting alone, has voting or investment
power with respect to the VeloCom securities beneficially held by Centennial
Holdings VI, and, accordingly, such individuals disclaim beneficial
ownership of such securities.
Each of the five general partners of Centennial Holdings V is also a
managing member of Centennial Holdings I, L.L.C., which directly owns
38,460 shares of common stock, 172,655 shares of Series A preferred stock
and 36,506 shares of Series B preferred stock. However, none of the
individual managing members, acting alone, has voting or investment power
with respect to the VeloCom securities beneficially held by Centennial
Holdings I, and, accordingly, such individuals disclaim beneficial
ownership of such securities.
Centennial Fund V, L.P., Centennial Entrepreneurs Fund V, L.P., Centennial
Fund VI, L.P., Centennial Entrepreneurs Fund VI, L.P., Centennial Holdings
I, LLC and Centennial Strategic
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Partners VI, L.P. each have financial investments in Formus. Each of the
above mentioned funds disclaims beneficial ownership of shares in VeloCom
held by Formus.
The principal business address of Centennial Fund V and each of the
Centennial entities described above is 1428 Fifteenth Street, Denver,
Colorado 80202-1318.
(6) Represents shares of common stock, Series A preferred stock and Series B
preferred stock owned by investment funds affiliated with Crescendo World
Fund, L.L.C., including:
- 477,150 shares of common stock, 742,234 shares of Series A preferred
stock and 159,050 shares of Series B preferred stock owned by Crescendo
World Fund, L.L.C.
- 3,972,332 shares of Series A preferred stock and 1,190,115 shares of
Series B preferred stock owned by Crescendo III, L.P.
- 22,850 shares of common stock, 57,460 shares of Series A preferred stock
and 7,617 shares of Series B preferred stock owned by Eagle Ventures WF,
LLC.
- 24,539 shares of Series B preferred stock owned by Crescendo III, GbR.
- 35,347 shares of Series B preferred stock owned by Crescendo III
Executive Fund, L.P.
The address for Crescendo World Fund, L.L.C. and its affiliates is 480
Cowper Street, Suite 300, Palo Alto, California, 94301.
(7) The address for El Paso Energy Communications Company is 1001 Louisiana
Street, Houston, Texas, 77002.
(8) Includes 325,000 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(9) Includes 275,000 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(10) Includes 150,000 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(11) Includes 740,625 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(12) Includes 347,396 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(13) Mr. Halstedt is one of the five general partners of Centennial Holdings V,
L.P. and Centennial Holdings VI, L.P. and one of the five managing members
of Centennial Holdings I, LLC. However, neither Mr. Halstedt nor any other
general partner of either Centennial Holdings V or Centennial Holdings VI,
or any managing member of Centennial Holdings I, acting alone, has voting
or investment power with respect to the VeloCom securities directly or
indirectly (through ownership of securities in Formus) beneficially held by
Centennial Fund V, Centennial Fund VI, Centennial Entrepreneurs Fund V,
Centennial Entrepreneurs Fund VI, Centennial Holdings I, or Centennial
Strategic Partners VI, and, as a result, Mr. Halstedt disclaims beneficial
ownership of the VeloCom securities directly or indirectly beneficially
owned by such funds. The principal business address of Mr. Halstedt and
each of the Centennial entities described above is 1428 Fifteenth Street,
Denver, Colorado 80202-1318.
(14) Mr. Elsner is a managing member of Telecom Management II, L.L.C. and
Telecom Management III, L.L.C. Telecom Management II, L.L.C. is the general
partner of Telecom Partners II, L.P. and Telecom Management III, L.L.C. is
the general partner of Telecom Partners III, L.P. As a member of the
general partner of these funds, Mr. Elsner has an indirect interest in the
shares of VeloCom stock owned by these funds. Mr. Elsner also owns shares
in Formus, both directly through individual ownership and indirectly
through his interest in Telecom Management II, L.L.C. and Telecom
Management III, L.L.C., which own shares in Formus. Formus, in turn, has an
ownership interest in VeloCom. Mr. Elsner disclaims beneficial ownership of
shares in VeloCom not received pursuant to the partnership agreements of
the Telecom funds.
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(15) Includes 391,667 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(16) Includes 336,667 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(17) Includes 255,417 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(18) Includes 71,354 shares of common stock issuable under options granted under
our 1998 stock option plan, which are exercisable within 60 days after the
date for which information is given in the table.
(19) Includes 326,120 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(20) Includes 327,682 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(21) Includes 151,250 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(22) Includes 202,083 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
(23) Includes 91,406 shares of common stock issuable under options granted under
our 1998 stock option plan, which are exercisable within 60 days after the
date for which information is given in the table.
(24) Includes 105,730 shares of common stock issuable under options granted
under our 1998 stock option plan, which are exercisable within 60 days
after the date for which information is given in the table.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CAPITAL STOCK TRANSACTIONS
COMMON STOCK
On January 6, 1999, we sold to the following of our directors and officers
at $1.00 per share:
-- 75,000 shares of common stock to David J. Leonard;
-- 25,000 shares of common stock to Gregory P. Sadler; and
-- 100,000 shares of common stock to Nicolas Kauser.
On February 12, 1999, we sold to the following of our directors and
officers at $2.25 per share:
-- 25,000 shares of common stock to David J. Leonard; and
-- 25,000 shares of common stock to R. Dwayne House.
On May 8, 1999, we sold 25,000 shares of common stock at $2.25 per share to
Bradley Johnson, one of our officers.
On June 15, 1999, we sold to the following of our directors and officers at
$3.00 per share:
-- 18,615 shares of common stock to David J. Leonard;
-- 25,000 shares of common stock to Michael S. Quinn; and
-- 50,000 shares of common stock to Bernard W. Schotters, II.
On June 18, 1999, we sold 83,333 shares of common stock at $3.00 per share
to Barry L. Rowan, one of our officers.
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On September 29, 1999, we sold 25,000 shares of common stock at $3.00 per
share to David C. Tomizuka, one of our officers.
SERIES A PREFERRED STOCK
We entered into two Series A Preferred Stock Purchase Agreements dated
January 26, 1999 and May 7, 1999, respectively, for the sale to certain of our
shareholders and officers and directors of an aggregate of 15,000,000 shares of
Series A preferred stock at $3.00 per share for gross proceeds of approximately
$45.0 million. Pursuant to these purchase agreements, we sold to the following
holders of 5% or more of our shares:
-- 5,605,775 shares of Series A preferred stock to Telecom Partners II,
L.P. and affiliates;
-- 4,489,204 shares of Series A preferred stock to Centennial Fund V,
L.P. and affiliates; and
-- 4,772,026 shares of Series A preferred stock to Crescendo World Fund
L.L.C. and affiliates.
In addition, we sold to the following of our directors and officers:
-- 37,531 shares of Series A preferred stock to Fred A. Vierra;
-- 37,531 shares of Series A preferred stock to Nicholas Kauser;
-- 18,615 shares of Series A preferred stock to David Leonard;
-- 9,383 shares of Series A preferred stock to Gregory P. Sadler; and
-- 9,307 shares of Series A preferred stock to R. Dwayne House.
SERIES B AND SERIES B-1 PREFERRED STOCK
On December 6, 1999, we entered into a Series B Preferred Stock Purchase
Agreement for the sale to certain of our shareholders and officers and directors
of 24,219,853 shares of Series B preferred stock at $6.00 per share for gross
proceeds of $142.5 million. Under this purchase agreement, the sale will occur
in four closings:
-- the first closing occurred on December 6, 1999 for total gross
proceeds of $45.9 million for the sale of 7,657,073 shares of Series B
preferred stock;
-- the second closing occurred on January 7, 2000 for total gross
proceeds of $29.3 million for the sale of 4,890,354 shares of the
Series B preferred stock;
-- the third closing is scheduled to occur on June 30, 2000 for total
gross proceeds of $35.0 million for the sale of 5,836,219 shares of
Series B preferred stock; and
-- the fourth closing is scheduled to occur on September 29, 2000 for
total gross proceeds of $35.0 million for the sale of 5,836,207 shares
of Series B preferred stock.
In addition, on January 7, 2000, we entered into a Follow-On Series B/B-1
Preferred Stock Purchase Agreement for the sale of 15,479,059 shares of Series B
preferred stock at $6.00 per share for gross proceeds of $104.7 million and
1,967,754 shares of Series B-1 preferred stock at $6.00 per share for gross
proceeds of $52.3 million. Under this purchase agreement, the sale will occur in
three closings:
-- the first closing occurred on January 7, 2000 for total gross proceeds
of $52.3 million for the sale of 6,755,651 shares of Series B
preferred stock and 1,967,754 shares of Series B-1 preferred stock;
and
-- the second and third closings are scheduled to occur on June 30, 2000
and September 29, 2000, respectively, each closing for the sale of
4,361,704 shares of Series B preferred stock (a portion of which can
be designated Series B-1 preferred stock), for total gross proceeds of
$26.2 million.
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We may, at our option, request payment for the remaining balance of these
shareholders' absolute commitments on five business days' notice under the
Series B Preferred Stock Purchase Agreement and the Follow-On Series B/B-1
Preferred Stock Purchase Agreement.
Pursuant to these purchase agreements, as of April 30, 2000, we sold to the
following holders of 5% or more of our shares:
-- 4,166,666 shares of Series B preferred stock to Telecom Partners II,
L.P. and affiliates;
-- 1,629,060 shares of Series B preferred stock to Centennial Fund V,
L.P. and affiliates; and
-- 1,416,668 shares of Series B preferred stock to Crescendo World Fund,
L.L.C. and affiliates.
In addition, we sold to the following of our directors and officers:
-- 41,667 shares of Series B preferred stock to Fred A. Vierra;
-- 8,333 shares of Series B preferred stock to Nicholas Kauser;
-- 8,333 shares of Series B preferred stock to David Leonard;
-- 8,333 shares of Series B preferred stock to Barry Rowan; and
-- 3,333 shares of Series B preferred stock to Gregory P. Sadler.
SERIES C PREFERRED STOCK
On April 20, 2000, we entered into a Series C Preferred Stock Purchase
Agreement for the sale to El Paso Energy Communications Company (El Paso Energy)
of 5,102,000 shares of Series C preferred stock for $10.00 per share for total
gross proceeds of $51.0 million. As of April 30, 2000, El Paso Energy had
purchased 5,000,000 shares of Series C preferred stock. El Paso Energy is a
holder of 5% or more of our shares.
In addition, we sold to the following of our officers:
-- 11,000 shares of Series C preferred stock to Billi R. McCullough and
-- 2,500 shares of Series C preferred stock to Bradley Johnson.
TRANSACTIONS WITH FORMUS AND SLI WIRELESS
On August 20, 1999, we entered into an agreement with SLI Wireless, S.A.
(SLI), pursuant to which we purchased SLI's interests in Vesper and the
companies that subsequently formed VeloCom Argentina. SLI also paid
approximately $13.8 million to us. In exchange, we issued to SLI 4,330,709
shares of our common stock and 7,840,000 shares of Series A preferred stock. SLI
is a holder of more than 5% of our shares.
In addition, we also entered into an agreement with Formus Communications,
Inc. (Formus) on August 20, 1999, pursuant to which we purchased Formus'
interests in the companies that subsequently formed VeloCom Argentina, as well
as license holding companies in Colombia and Peru. Formus also paid to us
approximately $20.8 million. In exchange, we issued to Formus 1,574,803 shares
of our common stock and 7,886,333 shares of Series A preferred stock. Formus is
a holder of more than 5% of our shares.
TRANSACTIONS WITH TELECOM PARTNERS II, L.P.
From January 1999 through September 1999, VeloCom Inc. sub-leased office
space from Telecom Partners II, L.P. Total lease payments during this period
amounted to $71,570.
THIRD AMENDED AND RESTATED INVESTORS AGREEMENT
On January 7, 2000, we entered into the Third Amended and Restated
Investors Agreement with the purchasers of our preferred stock. This investors
agreement, as amended on February 11, 2000 and April 20,
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2000, gives to the holders of our preferred stock, together with certain holders
of our common stock, certain rights that will terminate upon the conversion of
the preferred stock at the close of this offering; demand and piggyback
registration rights, described below under "Description of Capital Stock--Shares
Eligible for Future Sale", will survive this offering.
FORMUS TECHNICAL SERVICES AGREEMENT
On September 27, 1999, we entered into a Technical Services Agreement with
Formus, a holder of more than five percent of our common stock. Under this
agreement, Formus is to provide to us, from time to time at our request certain
services and consultants drawing upon Formus's expertise and experience with the
LMDS and broadband wireless access spectrum and the construction, deployment,
maintenance and operation of related networks. For the three-year term of the
agreement, we will pay to Formus a retainer of $20,000 per month, and reimburse
it for costs incurred in providing requested services and consultants plus
overhead recovery costs of 15% of those costs.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The following summary information reflects changes that will be made to our
certificate of incorporation and bylaws upon the closing of this offering and is
qualified in its entirety by the provisions of our amended and restated
certificate of incorporation and amended and restated bylaws, which we have
filed as exhibits to the registration statement of which this prospectus is a
part. See "Where You Can Find More Information."
Our authorized capital stock currently consists of 120,421,577 shares of
common stock, with a par value of $0.0001 per share, and 89,296,577 shares of
preferred stock, with a par value of $0.0001 per share. Of the preferred stock,
31,000,000 shares have been designated Series A Preferred Stock, 42,666,667
shares as Series B Preferred Stock, 6,479,910 shares as Series B-1 Preferred
Stock, 5,150,000 shares as Series C Preferred Stock and 4,000,000 shares
undesignated. As of April 30, 2000, VeloCom had outstanding 11,283,826 shares of
common stock, 30,706,333 shares of Series A Preferred Stock, 20,136,411 shares
of Series B Preferred Stock, 1,967,754 shares of Series B-1 Preferred Stock and
5,102,000 shares of Series C Preferred Stock. As of April 30, 2000, options to
purchase 6,277,833 shares of common stock had been issued pursuant to VeloCom's
1998 Stock Option Plan, all of which were unexercised. As of April 30, 2000,
warrants to purchase 125,000 shares of common stock had been issued, all of
which were unexercised.
Assuming that the common stock offered pursuant to this prospectus is
offered at a minimum price of $ per share, at the completion of this
offering, each share of preferred stock, with the exception of the Series B-1
Preferred Stock, will automatically convert into one share of voting common
stock, and each share of Series B-1 Preferred Stock will automatically convert
into one share of non-voting common stock. Following the offering, based on the
number of shares of common stock and preferred stock outstanding as of April 30,
2000, our authorized capital stock will consist of shares of voting
common stock, par value $0.0001 per share, of which shares of voting
common stock will be issued and outstanding, and 6,979,910 shares of non-voting
common stock, par value $0.0001 per share, none of which shares of non-voting
common stock will be issued and outstanding and convertible into one share of
voting common stock at the holder's option.
Prior to this offering, there has been no public market for our common
stock. See "Risk Factors--There Is No Prior Public Market For Our Common Stock
And Our Stock Price May Be Volatile."
COMMON STOCK
Voting Rights. The authorized common stock is divided into 113,941,667
shares of voting common stock and 6,479,910 shares of non-voting common stock.
The holders of voting common stock are entitled to one vote for each share held
of record on all matters submitted to a vote of stockholders. Except as
otherwise
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required by law, non-voting common stock is not entitled to vote on any matter
on which our stockholders are entitled to vote.
Dividends. Subject to preferences that may be applicable to any
outstanding preferred stock, the holders of common stock are entitled to receive
ratably the dividends, if any, that may be declared from time to time by the
board of directors out of funds legally available for such dividends. We have
never declared a dividend and do not anticipate doing so in the foreseeable
future.
Other Rights. In the event of a liquidation, dissolution or winding up of
VeloCom, subject to the prior rights of the preferred stock, the holders of
common stock are entitled to share ratably in any remaining assets after payment
of liabilities. The common stock has no preemptive or other subscription rights
and is not subject to any future calls or assessments. There are no conversion
rights or redemption or sinking fund provisions applicable to shares of common
stock. All of the outstanding shares of common stock are fully paid and
nonassessable.
Transfer Agent and Registrar. The transfer agent and registrar for our
common stock will be .
PREFERRED STOCK
Upon the consummation of this offering, all of our preferred stock
outstanding immediately prior to this offering will be converted into shares of
our common stock. Following the closing of this offering, the board of directors
will be authorized, without further stockholder approval, to determine the
designation, preferences, limitations and relative rights with respect to any of
the 4,000,000 shares of authorized but undesignated preferred stock. As of the
close of this offering, no shares of preferred stock will be outstanding.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS
Some of the provisions of our amended and restated certificate of
incorporation and amended and restated bylaws summarized below that will become
effective upon the closing of this offering may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider in its best interest, including an
attempt that might result in the receipt of a premium over the market price for
the shares held by the stockholder.
Classified Board of Directors. Our Board of Directors will be divided into
three classes. The directors in Class I will hold office until the first annual
meeting of stockholders following the closing of this offering, the directors in
Class II will hold office until the second annual meeting of stockholders
following this offering and the directors in Class III will hold office until
the third annual meeting of stockholders following the closing of this offering.
After each such election, the directors in that class will serve for terms of
three years. The classification system of electing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us and may maintain the incumbency of our Board of Directors,
since this classification system generally increases the difficulty of replacing
a majority of our directors.
Board of Director Vacancies. Any vacancy on the board of directors may be
filled by a vote of a majority of the directors then in office. Directors are
removable only for cause upon the affirmative vote of the holders of not less
than 80% of the shares then entitled to vote on an election of directors, voting
together as a single class.
Stockholder Action. Our stockholders will not be permitted to take action
by written consent, but only at duly called annual or special meetings of
stockholders. In addition, special meetings of stockholders may be called only
by the Chairman of the Board of Directors, the Chief Executive Officer or by a
majority of the Board of Directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Stockholders seeking to bring business before an annual meeting of
stockholders, or to nominate candidates for election as directors at an annual
meeting of stockholders, must deliver a written notice to our principal
executive offices within a prescribed time period. Our amended and restated
bylaws also set forth specific requirements as to
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the form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for the election of directors at an annual meeting of
stockholders.
Amendments. The approval of the holders of not less than 80% of the shares
then entitled to vote on an election of directors, voting together as a single
class, is required to adopt any charter provision inconsistent with, or to amend
or repeal the provisions of our amended and restated certificate of
incorporation classifying the Board of Directors; governing the removal of
directors; establishing the minimum and maximum number of members of the Board
of Directors; eliminating the ability of stockholders to act by written consent
and authorizing that our by-laws may establish procedures for regulating the
submission by stockholders of nominations and proposals for consideration at
meetings of our stockholders. In addition, our amended and restated certificate
of incorporation provides that the approval of the Board of Directors or the
affirmative vote of the holders of not less than 80% of the shares then entitled
to vote for the election of directors, voting together as a single class, is
required to alter, amend or repeal the above provisions of our amended and
restated certificate of incorporation or to adopt any provision of the amended
and restated certificate of incorporation inconsistent with such provisions or
to alter, amend or repeal certain provisions of our by-laws or to adopt any
provision of the by-laws inconsistent with such provisions.
Delaware Anti-Takeover Statute. Following the closing of this offering, we
will be subject to Section 203 of the Delaware General Corporate Law, or the
DGCL. Section 203 of the DGCL prohibits a publicly held Delaware corporation
from engaging in a business combination with a stockholder acquiring more than
15% of the outstanding voting shares of a corporation, known as an interested
stockholder, for a period of three years after the time a stockholder became an
interested stockholder unless certain conditions are satisfied. The prohibitions
in Section 203 of the DGCL do not apply if the following occur:
-- prior to the time the stockholder became an interested stockholder,
our board of directors approved either the business combination or
the transaction which resulted in the stockholder becoming an
interested stockholder;
-- upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of our company
outstanding at the time the transaction commenced;
-- at or subsequent to the time the stockholder became an interested
stockholder, the business combination is approved by our board of
directors and authorized by the affirmative vote of at least 66 2/3%
of the outstanding voting stock that is not owned by the interested
stockholder.
Under Section 203 of the DGCL, a "business combination" includes the
following:
-- any merger or consolidation of our company with the interested
stockholder;
-- any sale, lease, exchange or other disposition, except
proportionately as a stockholder of our company, to or with the
interested stockholder of assets of our company having an aggregate
market value equal to 10% or more of either the aggregate market
value of all the assets of our company or the aggregate market value
of all the outstanding stock of our company;
-- certain transactions resulting in the issuance or transfer by our
company of our stock to the interested stockholder;
-- certain transactions involving our company which have the effect of
increasing the proportionate share of the stock of any class or
series of our company which is owned by the interested stockholder;
and
-- certain transactions in which the interested stockholder receives
financial benefits provided by us.
Under Section 203 of the DGCL, an "interested stockholder" generally is one
of the following:
-- any person that owns 15% or more of the outstanding voting stock of
our company;
-- any person that is an affiliate or associate of our company and was
the owner of 15% or more of the outstanding voting stock of our
company at any time within the three-year period prior to the date on
which it is sought to be determined whether that person is an
interested stockholder; or
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<PAGE> 77
-- the affiliates or associates of that person.
If any person acquires 15% or more of our outstanding stock, that person
will be subject to the provisions of Section 203 of the DGCL.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering we will have shares of common
stock outstanding. Of this amount, the shares offered hereby will be available
for immediate sale in the public market as of the date hereof. An additional
6,277,833 shares of our common stock are issuable upon the exercise of
outstanding options at exercise prices of $1.00 to $10.00. Of this amount,
4,960,768 options are presently exercisable (3,392,716 of which contain early
exercise provisions and would, if exercised, be subject to forfeiture if not
fully vested). Furthermore, 125,000 shares of our common stock are issuable upon
the exercise of outstanding warrants at an exercise price of $8.10.
In addition, after this offering we believe that we will have greater
flexibility in consummating acquisitions and/or strategic alliances and may use
shares of our common stock as an alternative form of consideration in such
transactions.
We, along with our directors and executive officers and our existing
stockholders owning 5% or more of the outstanding shares of common stock, have
agreed pursuant to the underwriting agreement and other agreements that we will
not sell any common stock without the prior consent of Morgan Stanley & Co.
Incorporated for a period of 180 days from the date of this prospectus.
Approximately additional shares will be available for sale following
the expiration of the 180-day lockup period.
The outstanding shares of common stock not issued in connection with this
offering are available for sale in the public market, subject to the 180-day
lockup period and compliance with the requirements of Rule 144. In general,
under Rule 144 as currently in effect, a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period, a number of shares that does not exceed
the greater of:
-- 1% of the then outstanding shares of common stock; or
-- the average weekly trading volume during the four calendar weeks
preceding the sale, subject to the filing of a Form 144 with respect
to the sale.
A person (or persons whose shares are aggregated) who is not deemed to have
been our affiliate at any time during the 90 days immediately preceding the sale
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 foregoing
volume limitations. Persons deemed to be affiliates must always sell pursuant to
the volume limitations under Rule 144, even after the applicable holding periods
have been satisfied. We are unable to estimate the number of shares that will be
sold under Rule 144 since this will depend on the market price for our common
stock, the personal circumstances of the sellers and other factors.
We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of common stock reserved for issuance under our stock
option plan, thus permitting the resale of these shares by nonaffiliates in the
public market without restriction under the Securities Act. We intend to
register these shares on Form S-8.
Pursuant to the Investors Agreement, 89,583,825 shares of our common stock
(after giving effect to the conversion of all of our outstanding preferred stock
into shares of our common stock upon completion of this offering) will be
entitled to certain registration rights. These shares of common stock that will
be entitled to registration rights are referred to as the registrable
securities. Subject to certain conditions and limitations, if VeloCom proposes
to register any of its securities under the Securities Act, either for its own
account or for the account of other security holders, VeloCom is required to
include the registrable securities in such registration. In addition, subject to
certain conditions and limitations, the holders of the registrable securities
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<PAGE> 78
may also require VeloCom to file a registration statement under the Securities
Act with respect to all or part of such registrable securities; provided that:
-- no demand registration may be requested until six months after the
effective date of the registration statement filed by us under the
Securities Act with respect to this offering; and
-- These holders are entitled to no more than four registrations
utilizing form S-1 or any similar form, referred to as a long-form
registration.
All registration expenses incurred in connection with up to two long-form
registrations, and all other registrations other than a long-form registration,
will be borne by VeloCom. The holders of registrable securities that participate
in a registration will pay underwriting discounts and selling commissions
incurred in connection with any such registrations.
Sales of a substantial number of shares of common stock after this offering
(or the perception that they might occur) could adversely affect the market
price of our common stock and could impair our ability to raise capital through
the sale of additional equity securities. See "Risks Factors--Shares of Our
Common Stock Becoming Available for Sale Could Adversely Affect the Market Price
of Our Common Stock and May Impair the Ability to Raise Capital Through the Sale
of Additional Stock."
CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion is a summary of certain material United States
federal income and estate tax consequences that may be relevant to you if you
invest in our common stock and are a non-U.S. holder. You will be a non-U.S.
holder if you are not a "United States person" for United States federal income
tax purposes. For this purpose, a "United States person" is a citizen or
resident of the United States, a corporation, partnership, or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, an estate the income of which is subject to United States
federal income taxation regardless of its source, or a trust if (i) a U.S. court
is able to exercise primary supervision over the trust's administration and (ii)
one or more United States persons have the authority to control all of the
trust's substantial decisions.
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 our common
stock and does not consider all of the specific facts and circumstances that may
be relevant to a particular non-U.S. holder's tax position.
This summary is based on laws, regulations, rulings, and decisions now in
effect, all of which may change. Any change could apply retroactively and could
affect the continued validity of this summary.
You should consult your own tax advisors about the tax consequences of the
ownership and disposition of our common stock, including the relevance to your
particular situation of the considerations discussed below, as well as the
relevance to your particular situation of any tax consequences that may arise
under the laws of any state, municipality, foreign country, or other taxing
jurisdiction.
DIVIDENDS
Dividends, if any, paid to you in respect of our common stock will
ordinarily be subject to withholding of United States federal income tax at a 30
percent rate, or in some cases at a lower rate under an applicable income tax
treaty that provides for a reduced rate of withholding. If, however, the
dividends are effectively connected with your conduct of a trade or business
within the United States and, in some cases, attributable to your U.S. permanent
establishment under an applicable income tax treaty, then the dividends will be
exempt from withholding tax and instead will be subject to United States federal
income tax on a net income basis (including a branch profits tax in the event
that you are a corporation and certain other conditions are met).
In order to establish a reduced rate of withholding under an applicable
income tax treaty, you will be required to provide a properly completed Form
1001 or Form W-8BEN (or other applicable form) certifying to your qualification
for the reduced rate. In order to establish an exemption from withholding based
on
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<PAGE> 79
dividends being effectively connected with your conduct of a trade or business
within the United States, you will be required to provide a properly completed
Form 4224 or Form W-8ECI (or other applicable form) certifying to the exemption.
GAIN ON DISPOSITION OF COMMON STOCK
You generally will not be subject to United States federal income tax in
respect of gain realized on a disposition of our common stock, provided that (a)
the gain is not effectively connected with your conduct of a trade or business
within the United States or, in some cases, attributable to your U.S. permanent
establishment under an applicable income tax treaty, and (b) if you are an
individual who holds our common stock as a capital asset, you are present in the
United States for less than 183 days in the taxable year of the sale and certain
other conditions are met.
FEDERAL ESTATE TAXES
Regardless of whether an individual is a non-U.S. holder, any shares of our
common stock owned or treated as being owned by such individual at the time of
death will be included in such individual's gross estate for United States
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
U.S. information reporting requirements and backup withholding tax will not
apply to dividends, if any, paid to you in respect of our common stock at an
address outside the United States, except that with respect to payments made
after December 31, 2000, you will be entitled to this exemption only if you
provide a properly completed Form W-8BEN (or satisfy certain documentary
evidence requirements for establishing that you are a non-United States person)
or otherwise establish an exemption. Information reporting and backup
withholding also generally will not apply to a payment of the proceeds of a sale
of our common stock effected outside the United States by a foreign office of a
foreign broker. However, information reporting requirements (but not backup
withholding) will apply to a payment to you of the proceeds of a sale of our
common stock effected outside the United States by a foreign office of a broker
if the broker (i) is a United States person, (ii) derives 50 percent or more of
its gross income for certain periods from the conduct of a trade or business in
the United States, (iii) is a "controlled foreign corporation" as to the United
States, or (iv) with respect to payments made after December 31, 2000, is a
foreign partnership that, at any time during its taxable year is 50 percent or
more (by income or capital interest) owned by United States persons or is
engaged in the conduct of a U.S. trade or business, unless in any such case the
broker has documentary evidence in its records that you are a non-U.S. holder
and certain conditions are met, or you otherwise establish an exemption. Payment
to you by a United States office of a broker of the proceeds of a sale of our
common stock will be subject to both backup withholding and information
reporting unless you certify to your non-United States status under penalties of
perjury or otherwise establish an exemption.
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<PAGE> 80
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation
and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as
representatives, have severally agreed to purchase, and VeloCom has agreed to
sell to them, severally, the number of shares indicated below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Credit Suisse First Boston Corporation......................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Total.............................................
----------
</TABLE>
The underwriters and the representatives are collectively referred to as
the "underwriters" and the "representatives", respectively. The underwriters are
offering the shares of common stock subject to their acceptance of the shares
from VeloCom and subject to prior sale. The underwriting agreement provides that
the obligations of the several underwriters to pay for and accept delivery of
the shares of common stock offered by this prospectus are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus if any such shares are taken.
However, the underwriters are not required to take or pay for the shares covered
by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to certain dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives.
VeloCom has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to an aggregate of
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering
overallotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is exercised,
each underwriter will become obligated, subject to certain conditions, to
purchase about the same percentage of the additional shares of common stock as
the number listed next to the underwriter's name in the preceding table bears to
the total number of shares of common stock listed next to the names of all
underwriters in the preceding table. If the underwriters' option is exercised in
full, the total price to the public would be $ , the total underwriters'
discounts and commissions would be $ and total proceeds to VeloCom
would be $ .
The underwriters have informed VeloCom that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
We have filed an application for our common stock to be quoted on the
NASDAQ National Market under the trading symbol "VELO."
Each of VeloCom and the directors, executive officers and certain other
stockholders of VeloCom has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not,
during the period ending 180 days after the date of this prospectus:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose
of
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<PAGE> 81
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
-- enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of
the common stock;
-- whether any transaction described above is to be settled by delivery
of common stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to, among other
things:
-- the sale of shares to the underwriters;
-- the issuance by VeloCom of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security outstanding
on the date of this prospectus of which the underwriters have been
advised in writing; or
-- transactions by any person other VeloCom relating to the shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
VeloCom and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
DIRECTED SHARE PROGRAM PROSPECTUS DISCLOSURE
At the request of VeloCom, the underwriters have reserved for sale, at the
initial offering price, up to shares offered hereby for directors,
officers, employees, business associates, and related persons of VeloCom. The
number of shares of common stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered hereby.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between VeloCom and the representatives. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
VeloCom and its industry in general, certain financial operating information of
VeloCom in recent periods, and the price-earnings ratios, price-sales ratios,
market prices of securities and certain financial and operating information of
companies engaged in activities similar to those of VeloCom. The estimated
initial public offering price range set forth on the cover page of this
preliminary prospectus is subject to change as a result of market conditions and
other factors.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon by
Cleary, Gottlieb, Steen & Hamilton, New York, New York, counsel to VeloCom.
Certain legal matters will be passed upon for the underwriters by Shearman &
Sterling, New York, New York.
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<PAGE> 82
EXPERTS
The consolidated financial statements of VeloCom Inc. and subsidiaries as
of December 31, 1998 and 1999, and for the periods from April 29, 1998
(inception) through December 31, 1998 and 1999, and for the year ended December
31, 1999, included in this prospectus and elsewhere in the registration
statement, have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
The combined consolidated financial statements of Vesper Holding S.A. and
subsidiary and Vesper Holding Sao Paulo S.A. and subsidiaries as of December 31,
1999, and for the period from inception (January 18, 1999 for Vesper Holding
S.A. and May 1, 1999 for Vesper Holding Sao Paulo S.A.) through December 31,
1999, included in this prospectus and elsewhere in the registration statement,
have been audited by Arthur Andersen S/C, independent public accountants, as set
forth in their report with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in giving said report.
The combined financial statements of Telelatina Management Company LLC
Sucursal Argentina, Telelatina S.A., Smartel S.A. and Formus S.A. as of
September 30, 1999 and December 31, 1998, and the related combined statements of
income and cash flows for the periods mentioned in footnote 2.II. to the
combined financial statements ended September 30, 1999, December 31, 1998 and
1997, included in this prospectus and elsewhere in the registration statement,
have been audited by Pistrelli, Diaz Y Asociados (member firm of Arthur
Andersen), independent public accountants, as set forth in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules to the
registration statement. For further information with respect to us and the
common stock offered hereby, reference is made to the registration statement and
the exhibits and the schedules filed as part of the registration statement.
Statements contained in this prospectus concerning the contents of any contract
or any other document to which this prospectus refers are not necessarily
complete. Each such statement is qualified in all respects to any underlying
contract or document filed as an exhibit to the registration statement.
The registration statement, including exhibits and schedules thereto can be
inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at: Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549; Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of the registration
statement, including exhibits and schedules thereto, also can be obtained from
the Public Reference Section of the Securities and Exchange Commission, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the registration statement is publicly available through the
Securities and Exchange Commission's web site. The address of such site is
http://www.sec.gov.
As a result of the offering, we will become subject to the full
informational requirements of the Securities Exchange Act of 1934, as amended.
We will fulfill our obligations with respect to such requirements by filing
periodic reports and other information with the Securities and Exchange
Commission.
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<PAGE> 83
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
VELOCOM INC. AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-3
Consolidated Statements of Operations for the periods from
April 29, 1998 (inception) to December 31, 1998 and
1999 and for the year ended December 31, 1999.......... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the period from April 29, 1998 to December 31, 1998
and for the year ended December 31, 1999............... F-5
Consolidated Statement of Mandatorily Redeemable,
Convertible Preferred Stock for the year ended December
31, 1999............................................... F-6
Consolidated Statements of Cash Flows for the periods from
April 29, 1998 (inception) to December 31, 1998 and
1999 and for the year ended December 31, 1999.......... F-7
Notes to Consolidated Financial Statements................ F-8
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
Report of Independent Public Accountants.................. F-25
Combined Consolidated Balance Sheet as of December 31,
1999................................................... F-26
Combined Consolidated Statement of Operations and
Comprehensive Loss from dates of inception to December
31, 1999............................................... F-27
Combined Consolidated Statement of Changes in
Shareholders' Equity from dates of inception to
December 31, 1999...................................... F-28
Combined Consolidated Statement of Cash Flows from dates
of inception to December 31, 1999...................... F-29
Notes to the Combined Consolidated Financial Statements... F-30
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A., SMARTEL S.A. AND FORMUS S.A.
Report of Independent Public Accountants.................. F-39
Combined Balance Sheets as of September 30, 1999 and
December 31, 1998...................................... F-40
Combined Income Statements for the periods ended September
30, 1999, December 31, 1998 and 1997................... F-41
Combined Statements of Cash Flows for the periods ended
September 30, 1999, December 31, 1998 and 1997......... F-42
Notes to the Combined Financial Statements................ F-43
</TABLE>
F-1
<PAGE> 84
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VeloCom Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of VeloCom
Inc. (a Delaware corporation in the development stage) and subsidiaries as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the periods from
April 29, 1998 (inception) through December 31, 1998 and 1999, and for the year
ended December 31, 1999 and the statement of mandatorily redeemable, convertible
preferred stock for the year ended December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VeloCom Inc. and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for the periods from April 29, 1998 (inception)
through December 31, 1998 and 1999, and for the year ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado
April 21, 2000
F-2
<PAGE> 85
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, PRO FORMA
----------------- DECEMBER 31,
1998 1999 1999
------ -------- ------------------
(UNAUDITED NOTE 2)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $2,340 $ 25,000
Restricted cash........................................... -- 1,913
Net assets held for sale.................................. -- 7,828
Receivable from affiliate(s).............................. 395 1,063
Other receivables......................................... -- 581
------ --------
Total current assets............................... 2,735 36,385
INVESTMENT IN AFFILIATES.................................... -- 69,101
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$1 and $296, respectively................................. 45 9,552
SPECTRUM LICENSES........................................... -- 35,814
OTHER NONCURRENT ASSETS..................................... -- 6,685
------ --------
Total assets....................................... $2,780 $157,537
====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 463 $ 11,068
Accrued liabilities....................................... 6 1,600
------ --------
Total current liabilities.......................... 469 12,668
------ --------
LONG TERM LIABILITIES:
Deferred tax liability.................................... -- 12,535
------ --------
CONVERTIBLE PREFERRED STOCK, mandatorily redeemable, $.0001
par value:
Series A, $3.00 per share redemption value, 31,000,000
shares authorized; none (1998), 30,706,333 (1999) and
none (unaudited pro forma 1999) shares issued and
outstanding.......................................... -- 92,103 $ --
Series B, $6.00 per share redemption value, 41,666,667
shares authorized; none (1998), 7,657,073 (1999) and
none (unaudited pro forma 1999) shares issued and
outstanding.......................................... -- 45,194 --
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock; undesignated, 4,000,000 shares
authorized; zero shares issued and outstanding.......... -- -- --
Common stock, $.0001 par value, 106,666,667 shares
authorized; 3,155,000 (1998), 11,283,826 (1999) and
49,647,232 (unaudited pro forma 1999) shares issued and
outstanding............................................. -- 1 5
Additional paid-in capital................................ 3,155 27,040 164,333
Other cumulative comprehensive income (loss).............. -- 214 214
Deficit accumulated during development stage.............. (844) (32,218) (32,218)
------ -------- --------
Total stockholders' equity (deficit)............... 2,311 (4,963) $132,334
------ -------- ========
Total liabilities and stockholders' equity
(deficit)........................................ $2,780 $157,537
====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 86
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE FROM
APRIL 29, 1998 FOR THE APRIL 29, 1998
(INCEPTION) TO YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 1999
-------------- ------------ ---------------
<S> <C> <C> <C>
OPERATING COSTS AND EXPENSES:
General and administrative........................ $ 914 $ 8,657 $ 9,571
---------- ----------- ----------
Operating loss.................................... (914) (8,657) (9,571)
OTHER INCOME (EXPENSE):
Interest income................................... 70 1,074 1,144
Interest expense.................................. -- (87) (87)
Other............................................. -- 17 17
---------- ----------- ----------
Net loss before other items....................... (844) (7,653) (8,497)
---------- ----------- ----------
SHARE IN RESULTS OF AFFILIATES...................... -- (23,721) (23,721)
---------- ----------- ----------
Net loss.......................................... (844) (31,374) (32,218)
ACCRETION OF MANDATORILY REDEEMABLE PREFERRED STOCK
TO REDEMPTION
VALUE............................................. -- (26) (26)
---------- ----------- ----------
Net loss attributable to common stock............. $ (844) $ (31,400) $ (32,244)
========== =========== ==========
Basic and diluted net loss per common share....... $ (0.34) $ (5.69) $ (7.48)
========== =========== ==========
Basic and diluted weighted-average number of
common shares outstanding...................... 2,463,404 5,517,332 4,312,419
========== =========== ==========
Pro forma basic and diluted net loss per common
share (unaudited) (Note 2)..................... $ (1.46)
===========
Pro forma basic and diluted weighted-average
number of common shares outstanding (unaudited)
(Note 2)....................................... 21,555,644
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 87
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
OTHER DEFICIT
CUMULATIVE ACCUMULATED
COMMON STOCK ADDITIONAL COMPREHENSIVE DURING THE TOTAL
-------------------- PAID-IN INCOME DEVELOPMENT COMPREHENSIVE
SHARES AMOUNTS CAPITAL (LOSS) STAGE INCOME (LOSS) TOTAL
---------- ------- ---------- ------------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
April 29, 1998 (Inception)..... -- $-- $ -- $ -- $ -- $ -- $ --
Common stock issued for cash
at $1.00 per share on May
5, 1998.................... 200,000 -- 200 -- -- -- 200
Common stock issued for cash
at $1.00 per share on June
30, 1998................... 2,955,000 -- 2,955 -- -- -- 2,955
Net loss..................... -- -- -- -- (844) (844) (844)
---------- --- ------- ---- -------- -------- --------
BALANCES, December 31,
1998......................... 3,155,000 -- 3,155 -- (844) (844) 2,311
========
Common stock issued for cash
at $1.00 per share on
January 6, 1999............ 200,000 -- 200 -- -- -- 200
Common stock issued for cash
at $2.25 per share on
February 12, 1999.......... 75,000 -- 169 -- -- -- 169
Common stock issued for cash
at $2.25 per share on May
8, 1999.................... 25,000 -- 56 -- -- -- 56
Common stock issued for cash
at $3.00 per share on June
15, 1999................... 123,615 -- 371 -- -- -- 371
Common stock issued for
services on June 15,
1999....................... 18,138 -- 54 -- -- -- 54
Common stock issued for cash
at $3.00 per share on June
18, 1999................... 83,333 -- 250 -- -- -- 250
Common stock issued for cash
and contributed assets
valued at $3.00 per share
on September 27, 1999...... 7,578,740 1 22,736 -- -- -- 22,737
Common stock issued for cash
at $3.00 per share on
September 29, 1999......... 25,000 -- 75 -- -- -- 75
Accretion of mandatorily
redeemable preferred
stock...................... -- -- (26) -- -- -- (26)
Change in cumulative
translation adjustment..... -- -- -- 214 -- 214 214
Net loss..................... -- -- -- -- (31,374) (31,374) (31,374)
---------- --- ------- ---- -------- -------- --------
BALANCES, December 31,
1999......................... 11,283,826 $ 1 $27,040 $214 $(32,218) $(31,160) $ (4,963)
========== === ======= ==== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 88
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE, CONVERTIBLE
PREFERRED STOCK
(AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES B
-------------------- -------------------
SHARES AMOUNTS SHARES AMOUNTS
---------- ------- --------- -------
<S> <C> <C> <C> <C>
Balances, December 31, 1998........................ -- $ -- -- $ --
Preferred stock issued for cash at $3.00 per
share on January 26, 1999, net................ 2,333,334 6,982 -- --
Preferred stock issued for cash at $3.00 per
share on March 15, 1999....................... 7,666,666 23,000 -- --
Preferred stock issued for cash at $3.00 per
share on May 7, 1999.......................... 4,998,138 14,994 -- --
Preferred stock issued for services at $3.00 per
share on May 7, 1999.......................... 1,862 5 -- --
Preferred stock issued for cash and contributed
assets valued at $3.00 per share on September
27, 1999...................................... 15,706,333 47,119 -- --
Preferred stock issued for cash at $6.00 per
share on December 6, 1999, net................ -- -- 7,657,073 45,171
Accretion of mandatorily redeemable, convertible
preferred stock to redemption value........... -- 3 -- 23
---------- ------- --------- -------
Balances, December 31, 1999........................ 30,706,333 $92,103 7,657,073 $45,194
========== ======= ========= =======
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-6
<PAGE> 89
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE FROM
APRIL 29, 1998 FOR THE APRIL 29, 1998
(INCEPTION) TO YEAR ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 1999
-------------- ------------ ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................. $ (844) $(31,374) $(32,218)
Adjustments to reconcile net loss to net cash used in
operating activities --
Share in results of affiliated companies........... -- 23,721 23,721
Depreciation and amortization...................... 1 347 348
Issuance of common and preferred stock for
services......................................... -- 59 59
Changes in operating assets and liabilities --
Increase in receivable from affiliate............ (395) (668) (1,063)
Increase in other assets......................... -- (4,273) (4,273)
Increase in accounts payable, accrued liabilities
and other..................................... 469 4,590 5,059
------ -------- --------
Net cash used in operating activities......... (769) (7,598) (8,367)
------ -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment.................... (46) (1,916) (1,962)
Investments in affiliates............................. -- (79,881) (79,881)
Acquisition of affiliates, net of purchase money note
payable, other liabilities assumed and cash
acquired........................................... -- (1,627) (1,627)
Restricted cash deposited............................. -- (1,913) (1,913)
Payment of purchase money note payable (see Note 1)... -- (10,345) (10,345)
------ -------- --------
Net cash used in investing activities......... (46) (95,682) (95,728)
------ -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and preferred
stock, net......................................... 3,155 125,940 129,095
------ -------- --------
Net cash provided by financing activities..... 3,155 125,940 129,095
------ -------- --------
NET CHANGE IN CASH AND
CASH EQUIVALENTS...................................... 2,340 22,660 25,000
CASH AND CASH EQUIVALENTS, beginning of year............ -- 2,340 --
------ -------- --------
CASH AND CASH EQUIVALENTS, end of year.................. $2,340 $ 25,000 $ 25,000
====== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................ $ -- $ 87 $ 87
====== ======== ========
Cash paid for taxes................................... $ -- $ -- $ --
====== ======== ========
Non-cash financing and investing activities --
Issuance of common stock and Series A preferred
stock for acquisition of affiliates.............. $ -- $ 35,184 $ 35,184
====== ======== ========
Issuance of purchase money note payable for
acquisition of affiliates........................ $ -- $ 10,345 $ 10,345
====== ======== ========
Other liabilities and deferred income tax
obligation assumed in acquisition of
affiliates....................................... $ -- $ 20,145 $ 20,145
====== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 90
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND OWNERSHIP
GENERAL
VeloCom Inc. and subsidiaries (collectively, the "Company", and formerly
known as WLL International, Inc.) is a Delaware corporation incorporated in
April 1998 with the goal of becoming a leading facilities-based provider of
integrated communications services to businesses and residential customers in
major Latin American markets. As principal operations have not yet commenced,
the Company's financial statements are presented on the basis of a company in
the development stage. The effect on the Company's financial statements is to
report cumulative results of operations and cash flows since inception (April
29, 1998).
The Company formed two joint ventures which applied for and won, in a
public auction, two Brazilian competitive local exchange carrier licenses, one
for the northeast region of Brazil (which comprises 16 states, including Rio de
Janeiro) and one for the Sao Paulo, Brazil region (the "Brazilian Mirror
Licenses"). The Company, after the transactions noted below, is the largest
shareholder of Vesper Holding S.A. ("Vesper Northeast") with a 49.4% economic
ownership interest and a 50% voting interest. Vesper Northeast owns a 99.9%
interest in Vesper S.A., which is the entity that was awarded the mirror license
for the northeast region of Brazil on February 4, 1999. The Company, after the
transactions noted below, is the largest shareholder of Vesper Holding Sao Paulo
S.A. ("Vesper Sao Paulo") with a 49.4% economic ownership interest and a 50%
voting interest. Vesper Sao Paulo owns a 99.9% interest in Vesper Sao Paulo
S.A., which is the entity that was awarded the mirror license for the Sao Paulo
region on May 5, 1999. Vesper Northeast and Vesper Sao Paulo, together, are
referred to as "Vesper". The licenses grant a three-year exclusive use of
wireless local loop at 1.9 GHz (20 MHz) and at 3.4 GHz (50 MHz) for a 20-year
renewable period, provided that all license conditions are satisfied. The
licenses also grant a duopoly with the incumbent local service provider until
December 31, 2001. Vesper Northeast and Vesper Sao Paulo implemented part of the
necessary infrastructure to provide switched fixed telephone services and
launched operations in January 2000 in certain areas of each region.
ACQUISITIONS OF SHARES IN SUBSIDIARIES AND AFFILIATES
On September 27, 1999, the Company completed a number of acquisitions. As a
result of these transactions, the Company increased its ownership interest to
49.4% in both Vesper Northeast and Vesper Sao Paulo, purchased a 100% interest
in a group of commonly managed companies now known as VeloCom Argentina and also
acquired a number of other licenses and license applications in the various
countries noted below. The following table details the sellers (as defined in
the paragraphs following the table), the ownership percentage of the assets
acquired and the purchase price allocation. The purchase price allocation is
based upon currently available information and upon certain assumptions that the
Company believes are reasonable under current circumstances. However, the
resolution of certain existing pre-acquisition contingencies could result in an
adjustment of the final purchase price allocation.
<TABLE>
<CAPTION>
VESPER VELOCOM COLOMBIA AND
NORTHEAST VESPER SAO PAULO ARGENTINA PERU OTHER (1)
--------- ---------------- --------- ------------ ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SLI.............................. 12.5% 12.8% Various -- 10.0-100%
Formus........................... -- -- Various 100% 100%
Taquari.......................... 2.5% 1.3%(2) -- -- --
PCN/INEPAR....................... -- -- Various -- 15.0-35.0%
------ ---- ------- ------- ----------
Total ownership interest
acquired....................... 15.0% 14.1% 100% 100% Various
====== ==== ======= ======= ==========
Purchase price allocation........ $7,730 $4,998 $46,901 $ 7,672 $ --
====== ====== ======= ======= ==========
</TABLE>
F-8
<PAGE> 91
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) The Company acquired license holding companies and companies with pending
license applications in a number of countries listed below to which no value
was attributed.
(2) The Company acquired a right to purchase a 1.3% interest in Vesper Sao Paulo
which was immediately exercised.
The detail of the net assets acquired, excluding cash acquired of $0.7
million, of the acquisitions noted above is as follows (amounts in thousands):
<TABLE>
<S> <C>
Net assets held for sale................................. 7,672
Property and equipment................................... 7,886
Investment in affiliates................................. 12,728
Licenses................................................. 35,814
Other assets............................................. 3,201
Liabilities assumed...................................... (7,610)
Purchase money note payable.............................. (10,345)
Deferred tax liability................................... (12,535)
--------
Net assets acquired(1)................................... $ 36,811
========
</TABLE>
- ---------------
(1) Includes a net cash payment totaling approximately $1.6 million and the
issuance of common and preferred stock valued at approximately $35.2
million.
The Company and SLI Wireless S.A. ("SLI") executed an agreement whereby the
Company acquired from SLI (a) a 12.5% interest and 12.8% interest in Vesper
Northeast and Vesper Sao Paulo, respectively, (b) a 100% interest in and a 50%
interest in two Argentine license holding companies, (c) a 55% interest in a
Delaware operating company (operating in Argentina) (Telelatina Management
Company LLC "TMC") and (d) a 10% indirect interest in a Colombian license
holding company. In addition, SLI paid approximately $13.8 million to the
Company. In consideration for these assets and cash, the Company issued to SLI
4,330,709 shares of common stock and 7,840,000 shares of Series A preferred
stock.
The Company and Formus Communications Inc. ("Formus") executed an agreement
whereby the Company acquired (a) license holding companies in Argentina,
Colombia and Peru, (b) holding companies with pending license applications in
Chile, Venezuela and Bolivia and (c) an approximate 30% interest in TMC. In
addition, Formus paid approximately $20.8 million to the Company. In
consideration for these assets and cash, the Company issued to an affiliate of
Formus 1,574,803 shares of common stock and 7,866,333 shares of Series A
preferred stock.
The Company and Taquari Participacoes S.A. ("Taquari") executed an
agreement whereby the Company acquired (a) a 2.5% interest in Vesper Northeast
and the right to purchase 1.3% of the outstanding shares in Vesper Sao Paulo. In
addition, Taquari was to have contributed cash of approximately $3.3 million
which was forgiven in exchange for the forgiveness of a note payable owed by the
Company in the same amount discussed below. In consideration for these assets
and cash, the Company issued to Taquari and an affiliate 1,673,228 shares of
common stock.
The Company acquired from PCN do Brasil ("PCN") and Inepar S/A Industria e
Construcoes ("INEPAR") (a) Inepar's 15% interest in an Argentine license holding
company, (b) PCN's 15% interest in TMC, (c) PCN's 35% interest in an Argentine
license holding company and (d) PCN's 15% indirect interest in a Colombian
license holding company. In consideration for these assets, the Company paid to
INEPAR approximately $0.7 million and paid to PCN approximately $1.7 million. In
addition, the Company issued approximately $13.6 million worth of 7% secured
promissory notes, approximately $3.3 million were
F-9
<PAGE> 92
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
immediately forgiven in exchange for the cash to be contributed by Taquari noted
above and the remainder were paid on November 10, 1999.
The following pro forma information for the year ended December 31, 1999
gives effect to the acquisition of VeloCom Argentina and the acquisition of the
additional interest in Vesper Northeast and Vesper Sao Paulo as if each had
occurred on January 1, 1999. The pro forma financial information does not
purport to represent what the Company's results of operations would actually
have been if such transactions had in fact occurred on such date. The pro forma
results presented below are based upon currently available information and upon
certain assumptions that management believes are current circumstances.
<TABLE>
<S> <C>
Pro forma net loss applicable to common stockholders
(amount in thousands).................................. $ (43,639)
Pro forma net loss per share............................. $ (1.44)
</TABLE>
VeloCom Argentina holds near nationwide non-exclusive licenses for data
transmission, video conferencing, value-added services and for a portion of
Argentina, transportation of broadcasting signals. VeloCom Argentina launched
Internet access services in March 2000.
The Company's 85% owned subsidiary in Uruguay, Odecar S.A., was awarded
LMDS spectrum in December 1999 for use in providing commercial data transmission
service.
DEVELOPMENT STAGE ISSUES/LIQUIDITY AND CAPITAL RESOURCES
The Company is in the development stage and has generated no revenues to
date. The Company has incurred cumulative net losses totaling approximately
$32.2 million through December 31, 1999. As a result of its development stage
activities, the Company has experienced significant operating losses and
negative cash flows from operations. The Company expects to continue to generate
negative cash flows from operations in each market while it emphasizes
development, construction, and expansion of its business and until the Company
establishes a sufficient revenue generating customer base in each market. The
Company also expects to experience increasing operating losses and negative cash
flows from operations as it expands its operations and enters new markets, even
if and after it achieves positive cash flow from operations in its initial
markets.
The following table is a summary of all of the gross proceeds from the
common and preferred stock that the Company has sold for cash and assets or has
commitments to sell (see Notes 7 and 11) (amounts in thousands):
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
COMMON PREFERRED PREFERRED PREFERRED
STOCK STOCK STOCK STOCK TOTAL
------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Issued and paid in full as of December 31,
1999.......................................... $27,067 $92,119 $ 45,942 $ -- $165,128
Funded subsequent to December 31, 1999.......... 86,684 51,020 137,704
Absolute commitment to be funded prior to
September 30, 2000............................ -- -- 122,375 -- 122,375
------- ------- -------- ------- --------
Total................................. $27,067 $92,119 $255,001 $51,020 $425,207
======= ======= ======== ======= ========
</TABLE>
The Company has used, and expects to continue to use, these funds in the
build out of its operating subsidiaries and affiliates and to fund corporate
overhead and development. The Company's current business plan contemplates
substantial additional investment in its affiliates and subsidiaries during 2000
to fund their operations. If the Company does not fund the Vesper entities, it
is subject to dilution and loss of voting rights. The Company has agreed in
connection with credit facilities signed by Vesper Northeast and Vesper Sao
F-10
<PAGE> 93
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Paulo (see Note 4) to make specified equity contributions to Vesper Northeast
and Vesper Sao Paulo. Based on the Company's current cash position and existing
preferred stock purchase commitments, the Company believes it can fund its
operations and make all required contributions to its affiliates and
subsidiaries through at least December 31, 2000. However, the Company will need
to raise additional funds in order to finance its future contemplated funding
requirements to its affiliates and subsidiaries.
The Company's ultimate success could be affected by the problems, expenses
and delays encountered in connection with the formation of any new business and
by the competitive environment in which the Company intends to operate. Delays
or failure in receiving required regulatory approvals or the enactment of new
regulations or regulatory requirements may have a material adverse effect upon
the Company. Although management believes that the Company will be able to
successfully mitigate these risks, there is no assurance that the Company will
be able to do so or that the Company will ever operate profitably.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation. As
of December 31, 1999, the Company held a 49.4% interest in Vesper Northeast and
Vesper Sao Paulo, which are accounted for under the equity method of accounting.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 revenue and expenses during
the reporting period. Actual results could differ from those estimates.
CREDIT RISK AND CONCENTRATION OF OPERATIONS
Financial instruments that potentially subject the Company to a
concentration of credit risk consist primarily of cash and cash equivalents.
The Company has total assets in Latin America of approximately $127.6
million, of which approximately $69.1 million is an investment in two companies
in Brazil, $49.0 million of which is invested in Argentina and the remainder is
invested in Colombia, Uruguay, Peru and Chile as of December 31, 1999. The
Company is exposed to credit risk resulting from adverse general economic
conditions which may affect these countries and Latin America in general. The
Company has not entered into any foreign currency forward contracts, hedges or
options.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
short-term, highly liquid investments with original maturities of three months
or less which are readily convertible into cash and are not subject to
significant risk from fluctuations in interest rates.
RESTRICTED CASH
Restricted cash as of December 31, 1999 includes $0.3 million on deposit
with a financial institution as a guarantee for performance bonds for certain
construction and operational obligations related to the spectrum
F-11
<PAGE> 94
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
awarded in Uruguay. In addition, approximately $1.6 million has been escrowed in
connection with the acquisition of a Brazilian Internet company that closed in
March 2000 (see Note 11).
RECEIVABLE FROM AFFILIATES
The Company incurs costs on behalf of its affiliates such as salaries and
benefits of the Company's employees, travel and professional services. These
costs include an administrative fee of 15%. The Company is in the process of
finalizing a technical services agreement with its affiliates in Brazil in order
to formalize the arrangement.
INVESTMENTS IN AFFILIATES
For those investments in companies in which the Company's ownership
interest is 20% to 50%, and the Company exerts significant influence through
board representation and management authority, the equity method of accounting
is used. Under this method, the investment, originally recorded at cost, is
adjusted to recognize the Company's proportionate share of net earnings or
losses of the affiliates, limited to the extent of the Company's investment. The
Company may recognize an impairment on its equity method investments if there is
a loss in value of an investment which is other than a temporary decline.
Evidence of a loss in value might include, but would not necessarily be limited
to, absence of an ability to recover the carrying amount of the investment or
inability of the investee to sustain an earnings capacity which would justify
the carrying amount of the investment. As of December 31, 1999, the Company held
a 49.4% interest in Vesper Northeast, which holds a 99.9% interest in Vesper
S.A., the operating company. Additionally, the Company held a 49.4% interest in
Vesper Sao Paulo, which holds a 99.9% interest in Vesper Sao Paulo S.A., the
operating company. The operating companies were awarded licenses to operate
fixed switched telephony services in the northeast and Sao Paulo regions of
Brazil. Investments in affiliates are as follows (amounts in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------------
INVESTMENTS IN EQUITY IN LOSSES CUMULATIVE
AFFILIATED OF AFFILIATED TRANSLATION
COMPANIES(1) COMPANIES ADJUSTMENT TOTAL
-------------- ---------------- ----------- -------
<S> <C> <C> <C> <C>
Total Vesper............................ $92,609 $(23,721) $213 $69,101
======= ======== ==== =======
</TABLE>
- ---------------
(1) Includes investments in Vesper Northeast ($7.7 million) and Vesper Sao Paulo
($5.0 million) recorded by the Company in connection with the transactions
described in Note 1.
As of December 31, 1999, the Company had $5.9 million in excess cost over
the net tangible assets of Vesper. The excess cost relates to the value of
licenses and will be amortized over approximately 20 years commencing with the
activation of the networks in Brazil in January 2000.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Maintenance and repair
expenditures are expensed as incurred, and expenditures for improvements which
increase the expected useful lives of the assets are capitalized. Depreciation
expense is computed using the straight-line method over the useful lives of the
respective assets when such assets are placed in service. The economic lives of
property and equipment at acquisition are as follows:
<TABLE>
<S> <C>
Telecommunications equipment............................ 1-10 years
Furniture and office equipment.......................... 5-10 years
Computer equipment and software......................... 3-5 years
Leasehold improvements.................................. 3 years
</TABLE>
F-12
<PAGE> 95
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPECTRUM LICENSES
Direct and certain indirect costs of obtaining licenses, including the fair
market value of licenses obtained in acquisitions, are capitalized and will be
amortized using the straight-line method over approximately 20 years when
operations are launched.
LONG-LIVED ASSETS
Long-lived assets to be held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company continually
evaluates the recoverability of its long-lived assets based on estimated future
cash flows from and the estimated liquidation value of such long-lived assets,
and provides for impairment if such undiscounted cash flows are insufficient to
recover the carrying amount of the long-lived asset. If impaired, the long-lived
asset is written down to its estimated fair value.
START-UP COSTS
The Company has expensed all start-up and organization costs.
MANDATORILY REDEEMABLE, CONVERTIBLE PREFERRED STOCK
The Company's mandatorily redeemable, convertible preferred stock is
recorded at its issuance price less offering costs. The carrying value is
increased to the redemption value (see Note 7) by a charge to stockholders'
equity (deficit) ratably over the period from issue date to redemption date.
INCOME TAXES
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of assets, liabilities
and carryovers. The Company recognizes deferred tax assets for the expected
future effects of all deductible temporary differences, loss carryovers and tax
credit carryovers. Net deferred tax assets are then reduced, if deemed
necessary, by a valuation allowance if management believes it is more likely
than not that some or all of the net deferred tax assets will not be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents and other current amounts receivable and
payable approximate the carrying amount due to their short-term nature.
FOREIGN OPERATIONS AND FOREIGN EXCHANGE RATE RISK
The functional currency of the Company's foreign subsidiaries and equity
investees is the applicable local currency. Assets and liabilities of foreign
subsidiaries for which the functional currency is the local currency are
translated at exchange rates in effect at period-end, and the statements of
operations are translated at the average exchange rates during the period.
Exchange rate fluctuations on translating foreign currency financial statements
into U.S. dollars that result in unrealized gains or losses are referred to as
translation adjustments. Cumulative translation adjustments are recorded as a
separate component of stockholders' equity (deficit) and are included in Other
Cumulative Comprehensive Income.
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and
F-13
<PAGE> 96
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
losses which are reflected in income as unrealized (based on period-end
translations) or realized upon settlement of the transactions.
The Company's foreign subsidiaries can have payables and debt that are
denominated in a currency other than their own functional currency. The Company
has not historically hedged foreign currency denominated transactions for
receivables or payables related to current operations. If the Company enters
into hedging transactions, there can be no assurance that any such hedging
transactions would be successful and that the exchange rate fluctuations would
not have a material adverse effect on the Company. Accordingly, the Company may
experience economic loss and a negative impact on earnings and equity with
respect to its holdings solely as a result of foreign currency exchange rate
fluctuations, which include foreign currency devaluations against the U.S.
dollar.
STOCK OPTIONS
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Accordingly, the Company does not
recognize compensation cost for options granted to employees whose exercise
price is equal to or exceeds the fair value of the underlying stock as of the
grant date and which qualify for fixed plan treatment. The Company currently has
no performance based stock incentive plans.
NEW ACCOUNTING PRINCIPLES
The FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which requires that companies recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. Under SFAS 133, accounting for
changes in fair value of a derivative depends on its intended use and
designation. SFAS 133 is effective for fiscal years beginning after June 15,
2000. The Company is currently assessing the effect of this new standard but
believes it will not have a material impact on its consolidated results of
operations.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Views on Selected Revenue Recognition
Issues" ("SAB 101"), which provides the staff's view in applying generally
accepted accounting principles to selected revenue recognition issues. SAB 101
is effective the second quarter of 2000. The Company is currently assessing the
types of transactions which may be affected by this bulletin. Accordingly, the
impact of SAB 101 on future operating results has not yet been determined.
UNAUDITED PRO FORMA INFORMATION
The Company is contemplating an initial public offering ("IPO") of its
common stock. If such an offering is consummated, all of the convertible
preferred stock outstanding as of the closing date will be converted into shares
of common stock if certain conditions are met (see Note 7). The pro forma
stockholders' equity in the balance sheet as of December 31, 1999 reflects the
conversion of all outstanding preferred stock to common stock. The pro forma
basic and diluted net loss per share and the basic and diluted weighted-average
number of common shares outstanding, as reflected in the accompanying statements
of operations, assumes such preferred stock had been converted to common stock
on the date it was issued during 1999.
BASIC AND DILUTED NET LOSS PER SHARE
"Basic net loss per share" is determined by dividing net loss attributable
to common stockholders by the weighted-average number of common shares
outstanding during each period. "Diluted net loss per share" includes the
effects of potentially issuable common stock, but only if dilutive. The
Company's stock option
F-14
<PAGE> 97
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plan and convertible securities are excluded from the Company's diluted net loss
per share for all periods presented, because their effect would be
anti-dilutive.
(3) NET ASSETS HELD FOR SALE
As discussed in Note 1, the Company acquired license holding companies in
Colombia and Peru in September 1999 as a condition to increasing its ownership
interest in the Vesper companies and acquiring VeloCom Argentina. Since the
Company's business plan did not contemplate operations in Colombia or Peru at
the date of acquisition, management made the decision to dispose of these
assets. The Company completed a sale of the license holding companies in
Colombia and Peru in April 2000 (see Note 11). The Company did not recognize any
gain or loss on this disposition.
(4) INVESTMENT IN AFFILIATES (CONDENSED FINANCIAL INFORMATION)
The Company formed two joint ventures which applied for and won, in a
public auction, two licenses in Brazil to provide fixed switched telephony
services, one for the northeast region of Brazil and one for the Sao Paulo
region of Brazil. Combined condensed financial statements as of December 31,
1999 and for the period from inception to December 31, 1999 for Vesper are as
follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-----------------
<S> <C>
Current assets....................................... $158,610
Non-current assets................................... 603,585
--------
Total assets............................... $762,195
========
Current liabilities.................................. $191,630
Non-current liabilities.............................. 442,607
Stockholders' equity................................. 127,958
--------
Total liabilities and stockholders'
equity................................... $762,195
========
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION TO
DECEMBER 31,
1999
-----------------
<S> <C>
Revenue.............................................. $ --
General and administrative expense................... (67,517)
Foreign currency transaction gain.................... 10,642
Interest income, net................................. 1,163
--------
Net (Loss)................................. $(55,712)
========
</TABLE>
VESPER NORTHEAST:
In December 1999, Vesper Northeast entered into a series of agreements with
Nortel, Qualcomm, Ericsson and Harris Corporation (Harris) to issue up to $997.0
million in aggregate principal amount of long-term capital market notes, of
which $270.0 million in principal amount were outstanding as of December 31,
1999. Of the total principal amount issuable, however, $415.0 million (subject
to certain adjustments) will not be issuable until the occurrence of certain
events, including the assumption by third party lenders of all or a portion of
the original lenders' obligations to purchase unissued notes, the assignment or
transfer by the original lenders of outstanding notes, the repayment by Vesper
Northeast of outstanding notes or the exchange, at the option of Nortel,
Qualcomm, Ericsson or Harris, of all or any portion of the outstanding notes for
subordinated debt securities of Vesper Northeast. Moreover, the lenders'
obligations to purchase any notes
F-15
<PAGE> 98
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are conditioned on the satisfaction of certain conditions, including compliance
with specific financial maintenance and operating covenants and the receipt by
Vesper Northeast of approval from the Central Bank of Brazil with respect to the
issuance of the notes. Vesper Northeast will use a portion of the financing to
pay interest and fees and the balance to purchase from Nortel, Qualcomm,
Ericsson and Harris equipment and services for Vesper's network in the northeast
region and to pay related costs.
Subject to mandatory or optional partial repurchase under certain
circumstances, the notes mature on July 1, 2012. The lenders have the option,
however, in their sole discretion, to require that all, but not less than all,
of the notes be repurchased on July 1, 2004 for a repurchase price equal to the
aggregate outstanding principal amount of the notes plus any accrued and unpaid
interest thereon. Interest on the notes is payable quarterly in arrears
commencing March 2000 at LIBOR plus 6% per annum. Up to $135.0 million of the
loan arrangement can be used to finance the payment of interest and fees. The
arrangement is also subject to various fees throughout the term of the
agreements.
To secure the repayment or repurchase of notes as required under this
financing, Vesper Northeast has granted to the lenders a first priority security
interest in equipment, infrastructure and other assets and property related to
Vesper's network in the northeast region. Any non-equity financing made by the
Company to Vesper Northeast will be subordinated in right of payment to the
notes and the proceeds of that financing will be pledged to the lenders as
further security for Vesper Northeast's obligations and as security for the
Company's contribution obligations described in the next sentence. The Company
and the other Vesper Northeast shareholders also have agreed, on Vesper
Northeast's failure to comply with certain financial covenants and at the
request of the lenders, to make equity contributions to Vesper Northeast in the
aggregate amount of up to $300.0 million (with the Company's share being up to
$148.2 million) of which approximately $117.3 million (including approximately
$57.9 million from the Company) has already been contributed as of December 31,
1999.
VESPER SAO PAULO
On December 27, 1999 Vesper Sao Paulo entered into credit agreements
providing the Company with $781.5 million of long-term vendor financing
(available in three separate tranches), of which $145.0 million has been
utilized as of December 31, 1999. Amounts outstanding bear interest, at the
option of the Company, at LIBOR plus 6% or a compounded rate of 5.5% plus the
higher of prime rate and the Federal Funds effective rate. Interest is payable
on a quarterly basis. A portion of the financing is available for interest and
fees under the financing, and the balance is available to purchase from one of
the lender equipment and services for Vesper's network in the Sao Paulo region
and to pay related costs. The lenders are not obligated to make loans unless
certain conditions are satisfied, including compliance with specified financial
maintenance and operating covenants. The financing is subject to various fees
throughout the term of the agreement.
Subject to mandatory or optional prepayment under certain circumstances,
principal amounts borrowed under two of the tranches will be repayable on a
semi-annual basis commencing June 2003, with an effective final maturity date of
December 27, 2004, and principal amounts borrowed under the third tranche will
be repayable in full on December 27, 2004.
To secure repayment of disbursements under the financing, Vesper Sao Paulo
has granted a lender a first priority security interest over equipment,
infrastructure and other assets related to Vesper's network in the Sao Paulo
region to be acquired with the proceeds of the financing. The Company and the
other Vesper Sao Paulo shareholders have agreed, on Vesper Sao Paulo's failure
to comply with certain financial covenants and at the request of the lenders, to
make equity contributions in the aggregate amount of $385.0 million (with the
Company's share being up to $190.2 million) of which approximately $65.7 million
(including approximately $32.5 million from the Company) has been contributed as
of December 31, 1999.
F-16
<PAGE> 99
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the provisions of the purchase agreements, Vesper is committed to
acquire, over four years, a minimum of $1,070.0 million ($600.0 million from
Vesper Northeast and $470.0 million from Vesper Sao Paulo) of equipment and
services.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
<S> <C> <C>
Telecommunications equipment................................ $-- $7,213
Leasehold improvements...................................... -- 1,746
Furniture and office equipment.............................. 20 361
Computer equipment and software............................. 26 528
--- ------
46 9,848
Less -- accumulated depreciation............................ (1) (296)
--- ------
$45 $9,552
=== ======
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
RECOVERY OF INVESTMENTS
Since its inception, the Company's efforts have been primarily directed
towards raising capital and developing and operating its competitive voice, data
and Internet communications networks. The Company has made a significant
investment in Brazil in pre-operating entities accounted for under the equity
method whose primary assets are network facilities under construction and
spectrum licenses. The ability of the Company's affiliates to recover the
Company's current investments and to generate positive cash flow and operating
profits is contingent upon a number of factors including, among others,
acceptance of, and customer demand for, the services currently offered and
expected to be offered, ability to raise additional capital necessary to grow
the business and the ability to manage the expansion and development
effectively.
RECOVERABILITY OF LICENSES
The terms of the Company's affiliates license agreements contain provisions
whereby the operating company must achieve certain levels of network build out.
If such commitments are not met, the Company's affiliates could be subject to
fines and, in certain circumstances, the revocation of the applicable licenses.
Compliance with the terms of these licenses and certain regulatory
requirements can be difficult to meet. In addition, there can be no assurance
that in the future all regulatory requirements will be met or that the Company's
affiliates will not lose any applicable licenses as a result of their failure to
meet such requirements.
F-17
<PAGE> 100
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LEASE COMMITMENTS
The Company leases its office facilities, site facilities and certain
office furniture under non-cancelable operating leases. Future minimum rental
payments under such leases are as follows as of December 31, 1999 (amounts in
thousands):
<TABLE>
<S> <C>
2000........................................................ $1,745
2001........................................................ 1,041
2002........................................................ 459
2003........................................................ 301
2004........................................................ 176
------
$3,722
======
</TABLE>
The Company is a party to a technical services agreement with Formus, which
is a shareholder of the Company. The agreement was entered into after completion
of the transactions described in Note 1 when the Company acquired certain Latin
American assets of Formus. The agreement allows for the Company to use Formus
employees with certain technical experience, know-how and knowledge relating to
the assets acquired. The agreement is for a term of three years and a minimum of
$20,000 is paid per month by the Company.
Under the Shareholder Agreements with Vesper Northeast and Vesper Sao
Paulo, the shareholders agreed to fund their proportionate share (VeloCom's
share is 49.4%) of the first stage funding of $340.0 million and $385.0 million,
respectively. If a partner fails to meet its pro rata share of this first stage
funding, they will be subject to dilution and loss of voting rights. The Company
has also agreed to make specified equity contributions in connection with the
credit facilities signed by Vesper Northeast and Vesper Sao Paulo (see Note 4).
However, the Company's ultimate equity contribution obligation is subject to
change based on changes in Vesper's business plan or other factors outside the
Company's control.
LITIGATION
In the normal course of business, the Company is subject to, and may become
a party to, litigation. The Company is currently not party to any litigation.
(7) CAPITAL STOCK
COMMON STOCK
As of December 31, 1999, the Company had authorized 106,666,667 shares of
common stock and had issued a total of 11,283,826 shares of common stock,
resulting in consideration to the Company of approximately $27.1 million. The
initial common stock par value was $.01 per share. Effective December 3, 1999,
the Company changed the par value to $0.0001. Each share of common stock
constitutes one vote at any annual or special meeting, or action by written
consent. Subsequent to year end, the Company authorized a series of non-voting
common stock (see Note 11).
PREFERRED STOCK
The Company may issue from time to time shares of preferred stock in one or
more series with designations, rights, preferences and limitations established
by the Company's Board of Directors. The Company is authorized to issue
76,666,667 shares of $0.0001 par value of preferred stock as of December 31,
1999. The par value on the preferred stock was initially $0.01 per share.
Effective December 3, 1999, the Company changed the par value to $0.0001.
F-18
<PAGE> 101
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1999, the Company completed private placements of Series A
mandatorily redeemable preferred stock ("Series A preferred stock"). Total gross
proceeds to the Company as a result of these private placements were
approximately $45.0 million. In addition, the Company issued Series A preferred
stock in connection with the transactions described in Note 1 for cash and other
assets acquired totaling approximately $47.1 million (see Note 1). The Series A
preferred stock votes with, and in the same manner as, the shares of voting
common stock of the Company, not as a special class except in respect of certain
matters.
On December 6, 1999, the Company entered into a Series B Preferred Stock
Purchase Agreement for the sale of 24,219,853 shares of Series B mandatorily
redeemable preferred stock ("Series B preferred stock") at $6.00 per share for
gross proceeds of $145.2 million. Under the purchase agreement, the sale is to
occur in four closings. The first closing occurred on December 6, 1999 for total
gross proceeds to the Company of $45.9 million for the sale of 7,657,073 shares
of the Series B preferred stock. The second closing was January 7, 2000 for
total gross proceeds to the Company of $29.3 million for the sale of 4,890,354
shares of the Series B preferred stock. The third closing is scheduled for June
30, 2000 for total gross proceeds to the Company of $35.0 million for the sale
of 5,836,219 shares of the Series B preferred stock. The fourth closing is
scheduled for September 29, 2000 for total gross proceeds to the Company of
$35.0 million for the sale of 5,836,207 shares of the Series B preferred stock.
The Company may, at its option, request payment from these shareholders for the
remaining balance of their absolute commitment on five business days notice. In
addition, subsequent to year end, the Company sold and received absolute
commitments for additional sales of Series B preferred stock and sold shares of
Series C preferred stock (see Note 11).
Holders of preferred stock are entitled to dividends in amounts determined
by the Board of Directors. No distributions may be made to holders of common
stock until all dividends declared, if any, on the preferred stock have been
paid.
In the event of liquidation of the Company, holders of the Series B
preferred stock have a preference of $6.00 per share plus all declared but
unpaid dividends, if any, over all other stock. Holders of Series A preferred
stock have a preference of $3.00 per share plus all declared but unpaid
dividends, if any, over holders of common stock.
Each share of Series A preferred stock and Series B preferred stock is
convertible, at the option of the holder, into shares of the Company's common
stock at the rate of one share of common stock for each share of Series A
preferred stock and one share of common stock for each share of Series B
preferred stock. This conversion rate is subject to adjustment based on a
formula to prevent dilution. Each share of Series A preferred stock and Series B
preferred stock is automatically convertible into common stock immediately prior
to the closing of a public offering of at least $50.0 million in proceeds and at
$15.00 per share.
The Company is obligated to redeem: (1) 33 1/3% of the then-outstanding
shares of Series A preferred stock and the Series B preferred stock on January
26, 2005, (2) 50% of the then-outstanding shares of Series A preferred stock and
Series B preferred stock on January 26, 2006, and (3) all remaining shares of
Series A preferred stock and Series B preferred stock on January 26, 2007. The
redemption price for the Series A preferred stock is $3.00 per share as of
December 31, 1999. The redemption price for the Series B preferred stock is
$6.00 per share as of December 31, 1999.
(8) STOCK OPTIONS
The Company maintains a stock option plan (the "Plan") which provides for
the grant of stock options, restricted stock awards and other stock grants to
directors, employees, and consultants to purchase common stock of the Company.
The Plan allows for 12,000,000 options available for grant. Under the Plan,
stock options are granted at an exercise price not less than the fair market
value of the common stock on the date of the grant, as determined by the
Company's Board of Directors.
F-19
<PAGE> 102
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of stock option transactions:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at April 29, 1998............................. -- $ --
Granted................................................. 1,110,000 1.37
Exercised............................................... -- --
Forfeited............................................... -- --
--------- -----
Outstanding at December 31, 1998.......................... 1,110,000 1.37
Granted................................................. 3,067,500 3.01
Exercised............................................... -- --
Forfeited............................................... (2,500) 3.00
--------- -----
Outstanding at December 31, 1999.......................... 4,175,000 $2.57
========= =====
</TABLE>
At December 31, 1999, there were 7,825,000 options available for grant
under the Plan. Outstanding options typically vest over four years and expire
ten years from the date of grant. The weighted-average grant date fair value
during 1998 and 1999 is $0.22 and $0.59 per option, respectively. All options
granted during 1998 and 1999 were granted with an exercise price equal to the
fair value of common stock.
The following table summarizes information about exercisable stock options
at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE OPTIONS
EXERCISE PRICE EXERCISABLE
---------------- -----------
<S> <C> <C>
December 31, 1998......................................... $1.15 56,927
===== =======
December 31, 1999......................................... $1.96 541,188
===== =======
</TABLE>
The status of total stock options outstanding and exercisable under the
Plan as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING EXERCISABLE
- -------------------------------------------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PRICE OF SHARES PRICE
------------------------ --------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$1.00....................... 780,000 8.75 $1.00 245,052 $1.00
$2.25-$3.00................. 3,240,000 9.61 $2.79 287,594 $2.66
$6.00....................... 155,000 9.80 $6.00 8,542 $6.00
--------- ---- ----- ------- -----
4,175,000 9.46 $2.57 541,188 $1.96
========= ==== ===== ======= =====
</TABLE>
F-20
<PAGE> 103
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair values of employee options are estimated on the date of grant using
the Black-Scholes single-option pricing model. The fair value of each option
granted to employees was estimated on the date of grant using the following
weighted-average assumptions:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Estimated dividends...................................... None None
Risk-free interest rate.................................. 4.25%-4.56% 4.25%-6.08%
Expected life............................................ 4 years 4 years
Expected volatility...................................... 0% 0%
</TABLE>
The Company applies APB 25 in accounting for its stock compensation plan,
and accordingly no compensation expense has been recognized in the financial
statements for options granted to employees at or above fair value.
Had the Company recognized compensation cost for options granted to
employees based on the fair value of the options granted as of the grant date as
prescribed by Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), net loss attributable to common
stock would have increased to the pro forma amounts indicated below (amounts in
thousands except per share data):
<TABLE>
<CAPTION>
CUMULATIVE FROM
APRIL 29, 1998 APRIL 29, 1998
(INCEPTION) TO FOR THE YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 1999
-------------------- -------------------- --------------------
BASIC AND BASIC AND BASIC AND
DILUTED DILUTED DILUTED
NET LOSS NET LOSS NET LOSS
NET LOSS PER SHARE NET LOSS PER SHARE NET LOSS PER SHARE
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
As reported.............. $(844) $(.34) $(31,400) $(5.69) $(32,244) $(7.48)
Pro forma................ $(854) $(.35) $(31,598) $(5.72) $(32,452) $(7.53)
</TABLE>
(9) INCOME TAXES
In general a U.S. corporation may claim a foreign tax credit against its
federal income tax expense for foreign income taxes paid or accrued. Because the
Company must calculate its foreign tax credit separately for dividends received
from each foreign corporation in which the Company owns 10.0% to 50.0% of the
voting stock, and because of certain other limitations, the Company's ability to
claim a foreign tax credit may be limited, particularly with respect to
dividends paid out of earnings subject to a high rate of foreign income tax.
Generally, the Company's ability to claim a foreign tax credit is limited
to the amount of U.S. taxes the Company pays with respect to its foreign source
income. In calculating its foreign source income, the Company is required to
allocate interest expense and overhead incurred in the U.S. between its U.S. and
foreign activities. Accordingly, to the extent U.S. borrowings are used to
finance equity contributions to its foreign subsidiaries, the Company's ability
to claim a foreign tax credit may be significantly reduced. These limitations
and the inability of the Company to offset losses in one foreign jurisdiction
against income earned in another foreign jurisdiction could result in a higher
effective tax rate on the Company's earnings.
The Company is subject to U.S. federal and state income taxes but has
incurred no liability for such taxes due to losses it has incurred since
inception. At December 31, 1999, the Company had net operating loss
carryforwards for U.S. federal income tax purposes of approximately $2.7
million, which will expire through the year 2014. These carryforwards are
available to offset future taxable income. In addition, the Company had foreign
net operating loss carryforwards of approximately $5.2 million.
F-21
<PAGE> 104
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(amounts in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1999
------ ---------
<S> <C> <C>
Deferred Tax Assets:
Company's U.S. tax net operating loss carryforwards....... $ 89 $ 983
Net operating loss carryforwards from consolidated foreign
subsidiaries........................................... 169 1,825
Other..................................................... 12 21
----- --------
270 2,829
Less: valuation allowance.............................. (270) (2,829)
----- --------
Net deferred tax assets................................ -- --
Deferred Tax Liabilities:
Telecommunications licenses............................... -- (12,535)
----- --------
Net deferred tax liabilities........................... $ -- $(12,535)
===== ========
</TABLE>
The gross deferred tax assets as of December 31, 1998 and 1999 have been
reduced by valuation allowances because management believes it is currently more
likely than not that such benefits will not be realized.
On September 27, 1999, a net deferred tax liability of $12.5 million was
recorded in connection with the acquisition of the Company's interest in VeloCom
Argentina (see Note 1). This net deferred tax liability resulted from the
temporary difference between the book and tax basis of the value of VeloCom
Argentina's license.
The reconciliation of income taxes computed at the U.S. federal statutory
rate to the income tax provision (benefit) is as follows (amounts in thousands):
<TABLE>
<CAPTION>
APRIL 29, 1998 FOR THE YEAR
(INCEPTION) TO ENDED
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- ---------------
<S> <C> <C>
Expected income tax benefit at the U.S. federal statutory
rate of 35%............................................... $(270) $(10,981)
Tax effect of permanent and other differences:
State benefit, net of federal benefit..................... -- (969)
Non-deductible expenses................................... -- 377
Share in results of affiliated companies.................. -- 9,014
Increase in valuation allowance........................... 270 2,559
----- --------
Total income tax benefit.................................. $ -- $ --
===== ========
</TABLE>
The Company and its subsidiaries maintain a presence in many countries.
Many of these countries maintain tax regimes that differ significantly from the
system of income taxation used in the U.S., such as a value added tax system.
The Company has accounted for the effect of foreign taxes based on what is
reasonably expected to apply to the Company and subsidiaries based on tax laws
currently in effect and/or reasonable interpretations of these laws. Because
some foreign jurisdictions do not have systems of taxation that are as well
established as the system of income taxation used in the U.S. or tax regimes
used in other major industrialized countries, it may be difficult to anticipate
how foreign jurisdictions will tax current and future operations of the Company
and its subsidiaries.
F-22
<PAGE> 105
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) SEGMENT INFORMATION
SFAS No. 131 established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in financial reports issued to shareholders. In accordance
with the provisions of SFAS No. 131, the Company has determined that its
reportable segments are its strategic business units in various countries in
Latin America and the corporate unit which oversees all operations.
The Company believes that proportionate financial data for its investment
in Vesper facilitates the understanding and assessment of its results.
Therefore, "EBITDA" (defined below) and "Net Loss" for the Vesper segment is
presented on a proportionate basis. Proportionate results reflect the relative
weight of the Company's ownership in Vesper together with the consolidated
results of its subsidiaries. In addition, the Company believes earnings before
interest, taxes, depreciation, amortization and other ("EBITDA") is an important
indicator of the operating performance of its businesses. The computation of
"EBITDA" also excludes share in losses of affiliates. Adjustments made to
"EBITDA" and "Net Loss" to arrive at proportionate results are reversed in the
row labeled "Eliminations and Adjustments," in conformance with SFAS No. 131 so
that in total, "EBITDA" and "Net Loss" reflect consolidated results. The balance
sheet data reflects consolidated results. Segment financial information is as
follows as of and for the year ended December 31, 1999 (1998 is not included as
it is not considered meaningful because the Company only existed as the
corporate group with no operations) (amounts in thousands):
<TABLE>
<CAPTION>
EBITDA* NET LOSS TOTAL ASSETS
-------- -------- ------------
<S> <C> <C> <C>
Vesper.............................................. $(33,353) $(27,522) $ --
VeloCom Argentina................................... (2,009) (2,294) 48,879
Corporate and Other................................. (6,310) (5,358) 108,658
Eliminations and Adjustments........................ 33,362 3,800 --
-------- -------- --------
Total............................................... $ (8,310) $(31,374) $157,537
======== ======== ========
</TABLE>
- ---------------
* EBITDA should not be considered an alternative to operating or net income as
an indicator of performance of the Company's businesses, or as an alternative
to cash flows from operating activities as a measure of liquidity, in each
case determined in accordance with GAAP.
(11) SUBSEQUENT EVENTS
On January 7, 2000, the Company entered into a Follow-On Series B/B-1
Preferred Stock Purchase Agreement for the sale of 15,479,059 shares of Series B
preferred stock (a portion of which can be designated Series B-1 preferred
stock) at $6.00 per share and 1,967,754 of Series B-1 preferred stock at $6.00
per share. The total gross proceeds committed to the Company is $104.7 million,
the payment of which is expected to be received in three closings. The first
closing was January 7, 2000 at which time the Company issued 6,755,651 shares of
Series B preferred stock and 1,967,754 shares of Series B-1 preferred stock for
total gross proceeds of $52.3 million. The second closing is scheduled for June
30, 2000 and the third closing is scheduled for September 29, 2000 and each
closing will be for the sale of 4,361,704 shares of Series B preferred stock (a
portion of which can be designated Series B-1 preferred stock) for total gross
proceeds of $26.2 million. The commitment to buy the shares is an absolute
commitment and can be called by the Company at any time prior to the scheduled
closings with five business days notice. The Series B-1 preferred stock is
identical in rights to the Series B preferred stock as discussed in Note 7
except for voting and conversion rights. The Series B-1 preferred stock is
non-voting and converts into non-voting common stock at the option of the
holder. On January 8, 2000 the Company completed a Supplemental Series B
Preferred Stock Agreement for the sale of 833,333 shares of the Series B
preferred stock for $5.0 million.
F-23
<PAGE> 106
VELOCOM INC. AND SUBSIDIARIES
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the supplemental Series B preferred stock offering, the
Company entered into an agreement with a third party to provide marketing
assistance in exchange for a warrant to purchase 125,000 shares of the Company's
common stock at an exercise price of $8.10 per share. The warrant vests upon
achievement of various performance based milestones. The Company will account
for the issuance of this warrant under the provisions of Emerging Issues Task
Force "EITF" Issue No. 96-18, "Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services" (EITF 96-18). The accounting for the warrant will depend on the
achievement of certain performance criteria and will be recorded at fair value
using the Black-Scholes option pricing model when it becomes probable the
performance based milestones will be met in accordance with EITF 96-18.
On March 17, 2000, the Company and two other parties completed an
acquisition of BR Homeshopping Internet S.A. ("BRHS"), an operating company that
provides Internet access service in Brazil. The Company's ownership percentage
is 45%. The total purchase price was Brazilian Reais (R$) 25.0 million ($14.4
million using the exchange rate in effect on March 17, 2000), of which the
Company's portion was R$11.3 million ($6.5 million using the exchange rate in
effect on March 17, 2000). Of the purchase price, 50% was paid at closing, R$5.6
million ($3.2 million) in cash, and 50% will be paid eight months from closing.
The Company will account for this acquisition using the equity method of
accounting.
On April 10, 2000, the Company completed a sale of certain of its Colombian
and Peruvian license holding companies that it had previously acquired in the
transactions described in Note 1. The purchase price was $8.3 million of which
$7.8 million was received at closing and $0.5 million was placed in escrow for
release in 90 days. The current carrying value of such assets held for sale
approximates the anticipated selling price. Accordingly, the Company will not
recognize any gain or loss on such disposition.
On April 20, 2000, the Company completed a sale of 5,102,000 shares of its
Series C preferred stock for $10.00 per share for total gross cash proceeds of
$51.0 million. The Series C preferred stock is identical in rights to the Series
B preferred stock as discussed in Note 7.
F-24
<PAGE> 107
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Vesper Holding S.A. and Vesper Holding Sao Paulo S.A.:
We have audited the accompanying combined consolidated balance sheets of
VESPER HOLDING S.A. (a Brazilian corporation in the development stage) and
subsidiary and VESPER HOLDING SAO PAULO S.A. (a Brazilian corporation in the
development stage) and subsidiaries as of December 31, 1999, and the related
statements of operations, changes in shareholders' equity and cash flows from
the date of inception (January 18, 1999 for Vesper Holding S.A. and May 1, 1999
for Vesper Holding Sao Paulo S.A.) to December 31, 1999. These financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined consolidated financial position of Vesper
Holding S.A. and subsidiary and Vesper Holding Sao Paulo S.A. and subsidiaries
as of December 31, 1999, and the consolidated results of their operations and
their cash flows for the period from the date of inception (January 18, 1999 for
Vesper Holding S.A. and May 1, 1999 for Vesper Holding Sao Paulo S.A.) to
December 31, 1999, in conformity with generally accepted accounting principles
in the United States of America.
ARTHUR ANDERSEN S/C
Rio de Janeiro, Brazil
March 30, 2000
F-25
<PAGE> 108
VESPER HOLDING S.A. AND
VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<S> <C>
ASSETS
CURRENT:
Cash and cash equivalents................................. 94,588
Recoverable taxes......................................... 43,465
Prepaid and other assets.................................. 20,557
-------
Total current..................................... 158,610
-------
NONCURRENT ASSETS:.......................................... 9,019
-------
PERMANENT:
Property and equipment, net............................... 500,923
Licenses.................................................. 83,957
Other noncurrent assets................................... 9,686
-------
Total permanent................................... 594,566
-------
Total assets...................................... 762,195
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT:
Suppliers................................................. 86,856
Accounts payable and accrued expenses..................... 33,732
Accounts payable to related parties....................... 71,042
-------
Total current..................................... 191,630
-------
NONCURRENT LIABILITIES:
Loans and financing....................................... 414,605
Other noncurrent liabilities.............................. 28,002
-------
Total noncurrent liabilities...................... 442,607
-------
SHAREHOLDERS' EQUITY
Capital stock -- paid-in.................................. 182,992
Capital reserve........................................... 242
Accumulated deficit during development stage.............. (55,712)
Accumulated other comprehensive income
Cumulative translation adjustment...................... 436
-------
Total shareholders' equity........................ 127,958
-------
Total liabilities and shareholders' equity........ 762,195
=======
</TABLE>
The accompanying notes are an integral part of this combined consolidated
balance sheet.
F-26
<PAGE> 109
VESPER HOLDING S.A. AND
VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
FROM DATES OF INCEPTION (JANUARY 18, 1999 FOR VESPER HOLDING S.A.
AND MAY 1, 1999 FOR VESPER HOLDING SAO PAULO) TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<S> <C>
OPERATING EXPENSES:
General and administrative expenses....................... (67,517)
-------
LOSS FROM OPERATIONS........................................ (67,517)
-------
OTHER INCOME (EXPENSE)
Foreign currency transaction gain......................... 10,642
Interest income, net...................................... 1,163
-------
NET LOSS.................................................... (55,712)
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment................... 436
-------
COMPREHENSIVE LOSS.......................................... (55,276)
=======
</TABLE>
The accompanying notes are an integral part of this combined consolidated
statement.
F-27
<PAGE> 110
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FROM DATES OF INCEPTION (JANUARY 18, 1999 FOR VESPER HOLDING S.A.
AND MAY 1, 1999 FOR VESPER HOLDING SAO PAULO) TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
CAPITAL OTHER
----------------------------------- COMPREHENSIVE
ACCUMULATED INCOME
CAPITAL DEFICIT DURING CUMULATIVE
STOCK -- CAPITAL DEVELOPMENT TRANSLATION
PAID--IN RESERVE STAGE ADJUSTMENT TOTAL
-------- ------- -------------- ------------- -------
<S> <C> <C> <C> <C> <C>
Contribution from shareholders........... 182,992 242 -- -- 183,234
Cumulative translation adjustment........ -- -- -- 436 436
Loss for the period...................... -- -- (55,712) -- (55,712)
------- --- ------- --- -------
BALANCE AS OF DECEMBER 31, 1999.......... 182,992 242 (55,712) 436 127,958
======= === ======= === =======
</TABLE>
The accompanying notes are an integral part of this combined consolidated
statement.
F-28
<PAGE> 111
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM DATES OF INCEPTION (JANUARY 18, 1999 FOR VESPER
HOLDING S.A. AND MAY 1, 1999 FOR VESPER HOLDING SAO PAULO) TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss.................................................. (55,712)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation........................................... 120
Foreign currency transaction gain...................... (10,642)
Increase in assets and liabilities --
Recoverable taxes......................................... (42,975)
Prepaid and other assets.................................. (29,588)
Non current assets........................................ (9,746)
Suppliers................................................. 14,862
Accounts payable and accrued expenses..................... 6,175
Accounts payable to related parties....................... 45,610
--------
Net cash used in operating activities............. (81,896)
--------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of licenses................................... (29,066)
Additions to property and equipment....................... (399,136)
--------
Net cash used in investing activities............. (428,202)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Contributions from shareholders........................... 183,234
Non current liabilities................................... 420,428
--------
Net cash provided by financing activities......... 603,662
--------
CUMULATIVE TRANSLATION ADJUSTMENT........................... 1,024
INCREASE IN CASH AND CASH EQUIVALENTS....................... 94,588
--------
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD.... --
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD.......... 94,588
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... --
Cash paid during the year for tax......................... --
========
Financial charges capitalized on eligible assets --
Property and equipment.................................... --
License................................................... 10,927
Liabilities assumed in connection with assets acquisition --
Property and equipment.................................... 103,225
License................................................... 49,823
</TABLE>
The accompanying notes are an integral part of this combined consolidated
statement.
F-29
<PAGE> 112
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM DATES OF INCEPTION (JANUARY 18, 1999 FOR VESPER HOLDING S.A.
AND MAY 1, 1999 FOR VESPER HOLDING SAO PAULO) TO DECEMBER 31, 1999
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS, UNLESS OTHERWISE INDICATED)
1. OPERATIONS
Vesper Holding S.A. ("Vesper Northeast") and Vesper Holding Sao Paulo S.A.
("Vesper Sao Paulo") (together, the "Companies") were formed by VeloCom Inc.
("VeloCom"), Bell Canada International Inc. ("BCI") and Qualcomm Incorporated
("Qualcomm") to act as holding companies and to establish the operating
companies Vesper S.A. (formerly Canbra Telefonica S.A.) and Vesper Sao Paulo
S.A. (formerly Megatel S.A.), to submit a bid for the authorization (the
"License") for commercial operation of switched fixed telephone services in
Region I (Rio de Janeiro and the North and Northeast regions (the "Northeast
Region"), comprised of 16 states of Brazil) and Region III (State of Sao Paulo)
respectively, pursuant to the bidding procedures.
Vesper Northeast and Vesper Sao Paulo were organized under the laws of
Brazil, as corporations, in September 1998 and May 1999 respectively (the first
having remained dormant from September 1998 to December 1998). The companies
were awarded their respective licenses in the public auctions held on January
18, 1999 and May 5, 1999 respectively. Scheduled commercial launch occurred in
January 2000 for Vesper Northeast and February 2000 for Vesper Sao Paulo.
The Companies are subject to the laws and regulations governing
telecommunication services in effect in Brazil.
The shareholders understand and agree that successive increases in funding,
in the form of equity capital, shareholder loans or other instruments, beyond
the initial equity contributions, will be needed to implement the project and to
commence operations, in particular, in order to meet the operating Companies
commitments to the Brazilian Government pursuant to the terms of license. The
shareholders have agreed that subsequent to the time that they have invested an
aggregate equity amount of US$340 million and US$385 million for Vesper
Northeast and Vesper Sao Paulo, respectively, they will use their commercially
reasonable efforts to obtain additional funding for the Companies in forms other
than equity contributions from their shareholders.
The Companies are in the development stage and have generated no revenues
to the balance sheet date. Since the dates of inception (January 18, 1999 for
Vesper Northeast and May 1, 1999 for Vesper Sao Paulo), the Companies have
incurred cumulative losses of approximately US$55 million (Vesper Northeast has
incurred cumulative losses totaling approximately US$37 million, and Vesper Sao
Paulo approximately US$18 million) and have generated negative cash flows
through December 31, 1999. The Companies expect to continue to generate negative
cash flows from operations while they focus on development, construction, and
expansion of their business and until the Companies establish sufficient revenue
generating customer basis in their markets. The Companies also expect to
experience increasing operating losses and negative cash flows from operations
as they expand their operations and enter new markets, even if and after they
achieve positive cash flows from operations in their initial markets.
Although management believes that the Companies will be able to
successfully mitigate these risks, there is no assurance that the Companies will
be able to do so or that the Companies will ever operate profitably.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Presentation
The combined consolidated financial statements are presented in U.S.
dollars and have been prepared in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP"),
F-30
<PAGE> 113
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which differ in certain respects from accounting principles generally accepted
in Brazil ("Brazilian GAAP"), which are applied by the Companies in their local
currency financial statements. As of December 31, 1999, the main differences
relate to start up costs and exchange loss on debt denominated in U.S. dollars,
which are expensed in the U.S. GAAP accounts and capitalized in the Brazilian
GAAP accounts.
b. Foreign Currency Translation Method
Since 1998 the Brazilian economy has been considered as
non-hyperinflationary as defined by Statement of Financial Accounting Standards
No. 52 "Foreign Currency Translation". Accordingly, the Companies' functional
currency is the Brazilian real, which is the currency of the country in which
they operate. The translation was performed in accordance with the standards set
forth in SFAS No. 52 as follows:
- Assets and liabilities at the exchange rate in effect at the balance
sheet date.
- The balances of the shareholders' equity (capital and accumulated
deficit) were translated from Brazilian reais to U.S. dollars using the
exchange rate at the date of each transaction. Any exchange differences
are recorded in a separate component of shareholders' equity (cumulative
translation adjustment).
- Transactions denominated in currencies other than the Brazilian real, are
recorded based on the exchange rate at the time such transactions arise.
Subsequent changes in exchange rate result in transaction gains and
losses, which are reflected in the statement of operations.
- Operations recorded to profit and loss were translated from Brazilian
reais into U.S. dollars using the monthly historical average exchange
rates.
- The net effect of the change of the exchange rate on the net assets is
recorded as cumulative translation adjustment.
c. Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
d. Principles of Combination and Consolidation
The combined financial statements include the accounts of Vesper Northeast
and subsidiary and Vesper Sao Paulo and subsidiaries.
The consolidated financial statements of Vesper Northeast include the
accounts of that company and its wholly owned subsidiary Vesper S.A. The
consolidated financial statements of Vesper Sao Paulo include the accounts of
that company and its wholly owned subsidiaries Vesper Sao Paulo S.A. and Vesper
Sao Paulo Cayman S.A.
All significant balances and transactions between such companies were
eliminated in the combination and consolidation.
e. Cash and Cash Equivalents
The Companies consider all highly liquid financial investments with
original maturity of three months or less to be cash equivalents.
F-31
<PAGE> 114
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
f. Prepaid Expenses
Prepaid expenses, such as insurance, up front fees and prepaid interest in
connection with the financing agreements, are capitalized and amortized over the
period of the financing agreements.
g. Property and Equipment
Property and equipment, including improvements that extend the useful
lives, are recorded at cost, while maintenance and repairs are charged to
operations as incurred. Depreciation is provided using the straight-line method
over estimated useful lives of up to 25 years for buildings, 3-20 years for
equipment, 5-10 years for furniture and fixtures and 5 years for hardware and
software. Leasehold improvements are amortized over the shorter of the
respective lives of the leases or the useful lives of the improvements.
Construction in progress includes labor, material, transmission and related
equipment, engineering, site development, capitalized interest, and other costs
relating to the construction and development of the switched fixed telephone
network. The Companies begin depreciating the cost of the network upon
commencement of commercial operations.
h. Intangible Assets -- Licenses
Intangible assets consist of the acquisition of the licenses and spectrum
under the term of authorization, which is recorded at cost. The spectrum was
allocated conditionally for 20 years, renewable for a like period. The spectrum
allocations are renewable provided that the licensees have complied with
applicable rules and policies and upon payment of an additional fee based on a
specific formula. The related cost of such licenses and spectrum are amortized
using the straight-line method over the initial term of the spectrum
allocations.
i. Long-lived Assets
Long-lived assets and identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairment is measured by
comparing the carrying value of the long-lived asset to the estimated
undiscounted future cash flows expected to result from use of the assets and
their eventual disposition.
j. Start-up Costs
Costs of start-up activities and organization costs are expensed as
incurred.
k. Income Taxes
The Companies account for income taxes using the asset and liability
method. Under this method, deferred income taxes are recorded for the temporary
differences between the financial reporting basis and tax basis of the
Companies' assets and liabilities. These deferred tax assets are then reduced by
a valuation allowance if management believes it is more likely than not that
some or all of the net deferred tax assets will not be realized.
l. New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments and for hedging activities by requiring that all derivatives be
recognized in the balance sheet and measured at fair value. SFAS 133 is
effective for fiscal years beginning after June 15,
F-32
<PAGE> 115
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000. The Companies are currently evaluating the potential impact of this
standard on their financial position and results of operations. However, no
material effects are expected to be generated.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin no. 101, "Views on Selected Revenue Recognition
Issues" ("SAB 101"), which sets forth the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. SAB 101
is effective for the second quarter of 2000. The Companies will assess the
effect of this new standard in the future when they have revenues.
3. RECOVERABLE TAXES
Recoverable taxes relate to ICMS (State VAT) generated on the acquisition
of property and equipment that will be used to offset State VAT applicable to
revenues.
4. PROPERTY AND EQUIPMENT, NET
<TABLE>
<CAPTION>
NET BOOK
VALUE
--------
<S> <C>
Land....................................................... 2,863
Buildings and improvements................................. 13,587
Equipment.................................................. 2,343
Furniture and fixtures..................................... 7,889
Vehicles................................................... 1,046
Leasehold improvements..................................... 499
Construction in progress................................... 472,696
-------
Total............................................ 500,923
=======
</TABLE>
5. INTANGIBLE -- LICENSES
<TABLE>
<S> <C>
Acquisition cost............................................ 72,666
Other expenses.............................................. 364
Financial charges capitalized............................... 10,927
------
Total............................................. 83,957
======
</TABLE>
Vesper Northeast acquired the license on February 4, 1999, for R$60 million
(equivalent to US$33,538, at the exchange rate prevailing on December 31, 1999),
of which R$24 million (equivalent to US$13,415) was paid on the date the
authorization term was signed and the remaining balance is payable in two
installments of R$18 million each, on February 4, 2000 and February 4, 2001.
This payable will be restated by Brazilian inflation, measured by the IGP-DI,
general price index, plus interest equivalent to 12% per year. The second
installment was recorded as a long-term liability.
Vesper Sao Paulo acquired the license on May 5, 1999, for R$70 million
(equivalent to US$39,128, at the exchange rate prevailing on December 31, 1999),
of which R$28 million (equivalent to US$15,651) was paid on the date the
authorization term was signed and the remaining balance is payable in two
installments of R$21 million each, on May 5, 2000 and May 5, 2001. This payable
will be restated by Brazilian inflation, measured by the IGP-DI, general price
index, plus interest equivalent to 12% per year.
F-33
<PAGE> 116
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. TRANSACTIONS WITH RELATED PARTIES
<TABLE>
<S> <C>
Bell Canada International................................... 9,447(a)
CGI Telecom International................................... 60,856(b)
VeloCom International....................................... 437(c)
Qualcomm International...................................... 302(c)
------
Total............................................. 71,042
======
</TABLE>
- ---------------
(a) In connection with the service agreement signed between the parties.
(b) In connection with the development and implementation of billing,
accounting and other system, software and IT services.
(c) Loans between the parties. Interest based on market rates.
Vesper Northeast and Vesper Sao Paulo entered into a "know-how transfer and
technical services agreement" with one of its shareholders, under which such
shareholder grants to the Companies a nonexclusive right and license to use the
know-how and technical data, information and expertise of such shareholder in
respect of high technology telecommunications engineering, information
technology and other matters related to the implementation, expansion,
enhancement, operation and maintenance of telecommunications operations and
services, including, but not limited to, processes, techniques, methods,
products, data and compositions. The Companies will pay royalty fees for such
agreement (see Note 10).
7. LOANS AND FINANCING
To fund the construction of the infrastructure, the Companies entered into
the following arrangement with a syndicate of banks and suppliers:
VESPER NORTHEAST:
In December 1999, Vesper Northeast entered into a series of agreements with
Nortel, Qualcomm, Ericsson and Harris Corporation (Harris) to issue up to
US$997.0 million in aggregate principal amount of long-term capital market
notes, of which US$270.0 million in principal amount were outstanding as of
December 31, 1999. Of the total principal amount issuable, however, US$415.0
million (subject to certain adjustments) will not be issuable until the
occurrence of certain events, including the assumption by third party lenders of
all or a portion of the original lenders' obligations to purchase unissued
notes, the assignment or transfer by the original lenders of outstanding notes,
the repayment by Vesper Northeast of outstanding notes or the exchange, at the
option of Nortel, Qualcomm, Ericsson or Harris, of all or any portion of the
outstanding notes for subordinated debt securities of Vesper Northeast.
Moreover, the lenders' obligations to purchase any notes are conditioned on the
satisfaction of certain conditions, including compliance with specific financial
maintenance and operating covenants and the receipt by Vesper Northeast of
approval from the Central Bank of Brazil with respect to the issuance of the
notes. Vesper Northeast will use a portion of the financing to pay interest and
fees and the balance to purchase from Nortel, Qualcomm, Ericsson and Harris
equipment and services for Vesper's network in the northeast region and to pay
related costs.
Subject to mandatory or optional partial repurchase under certain
circumstances, the notes mature on July 1, 2012. The lenders have the option,
however, in their sole discretion, to require that all, but not less than all,
of the notes be repurchased on July 1, 2004 for a repurchase price equal to the
aggregate outstanding principal amount of the notes plus any accrued and unpaid
interest thereon. Interest on the notes is payable quarterly in arrears
commencing March 2000 at LIBOR plus 6% per annum. Up to US$135.0 million of the
F-34
<PAGE> 117
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
loan arrangement can be used to finance the payment of interest and fees. The
arrangement is also subject to various fees throughout the term of the
agreements.
To secure the repayment or repurchase of notes as required under this
financing, Vesper Northeast has granted to the lenders a first priority security
interest in equipment, infrastructure and other assets and property related to
Vesper's network in the northeast region. Any non-equity financing made by
VeloCom to Vesper Northeast will be subordinated in right of payment to the
notes and the proceeds of that financing will be pledged to the lenders as
further security for Vesper Northeast's obligations and as security for
VeloCom's contribution obligations described in the next sentence. VeloCom and
the other Vesper Northeast shareholders also have agreed, on Vesper Northeast's
failure to comply with certain financial covenants and at the request of the
lenders, to make equity contributions to Vesper Northeast in the aggregate
amount of up to US$300.0 million (with VeloCom's share being up to US$148.2
million) of which approximately US$117.3 million (including approximately
US$57.9 million from VeloCom) has already been contributed as of December 31,
1999.
VESPER SAO PAULO
On December 27, 1999 Vesper Sao Paulo entered into credit agreements
providing the Company with US$781.5 million of long-term vendor financing
(available in three separate tranches), of which US$145.0 million has been
utilized as of December 31, 1999. Amounts outstanding bear interest, at the
option of the Company, at LIBOR plus 6% or a compounded rate of 5.5% plus the
higher of prime rate and the Federal Funds effective rate. Interest is payable
on a quarterly basis. A portion of the financing is available for interest and
fees under the financing, and the balance is available to purchase from one of
the lender equipment and services for Vesper's network in the Sao Paulo region
and to pay related costs. The lenders are not obligated to make loans unless
certain conditions are satisfied, including compliance with specified financial
maintenance and operating covenants. The financing is subject to various fees
throughout the term of the agreement.
Subject to mandatory or optional prepayment under certain circumstances,
principal amounts borrowed under two of the tranches will be repayable on a
semi-annual basis commencing June 2003, with an effective final maturity date of
December 27, 2004, and principal amounts borrowed under the third tranche will
be repayable in full on December 27, 2004.
To secure repayment of disbursements under the financing, Vesper Sao Paulo
has granted a lender a first priority security interest over equipment,
infrastructure and other assets related to Vesper's network in the Sao Paulo
region to be acquired with the proceeds of the financing. VeloCom and the other
Vesper Sao Paulo shareholders have agreed, on Vesper Sao Paulo's failure to
comply with certain financial covenants and at the request of the lenders, to
make equity contributions in the aggregate amount of US$385.0 million (with
VeloCom's share being up to US$190.2 million) of which approximately US$65.7
million (including approximately US$32.5 million from VeloCom) has been
contributed as of December 31, 1999.
8. CAPITAL
Vesper Northeast's authorized issued and fully paid in capital is
represented by 1,072,000 shares, with no par value (536,000 common shares and
536,000 preferred shares). Vesper Sao Paulo's authorized issued and fully paid
in capital is represented by 162,000 shares, with no par value (81,000 common
shares and 81,000 preferred shares).
As stated in the Companies' bylaws, the distribution of earnings, when
available, is the responsibility of the Board of Directors and there is a
minimum dividend equivalent to 25% of net earnings reported in the statutory
records unless otherwise agreed by the shareholders. Under Brazilian law,
dividends are paid based
F-35
<PAGE> 118
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the available retained earnings recorded in the statutory records. In
accordance with the corresponding tax law, dividends on earnings generated
subsequent to January 1, 1996 are exempt from withholding tax.
Preferred shares do not have voting rights, however, they are entitled to
dividends in cash 10% higher than those paid to common shares and have priority
in reimbursement of capital without premium in the event of the Companies'
liquidation.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Companies,
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Companies could realize
in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have an effect on the estimated fair value amounts.
The carrying amounts of the Companies' financial instruments at December 31,
1999 approximate fair value.
10. OFFICE FACILITIES, OTHER LEASES AND COMMITMENTS
Office Facilities and Leases
The Companies have operating leases for office space as well as tower sites
throughout the 17 states where there are operations. Rental expenses for office
space and other operating leases amounted to US$3.7 million (US$2.8 million for
Vesper Northeast and US$864 for Vesper Sao Paulo) during 1999.
The Companies also have lease agreements for computers for periods of 24
and 36 months, payable on a monthly basis. The amount due is denominated in US
dollars. Future minimum payments under operating leases as of December 31, 1999,
calculated using the exchange rate at December 31, 1999, of R$1.789 to US$1, are
approximately as follows:
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
2000........................................................ 3,634
2001........................................................ 3,894
2002........................................................ 1,593
2003........................................................ 674
</TABLE>
Know-how and Transfer of Technical Services Agreement
The Companies also have a royalty agreement with BCI, in connection with
the transfer of know-how and technology, under which the following royalty fees
are payable:
VESPER NORTHEAST
- An annual fixed fee payable during the five year period, commencing, with
respect to the calendar year during which service launch occurs, of US$2
million, annually for each of the first three years, and US$1 million,
annually for each of the last two years. The payment of annual
installments of the fixed fee shall be deferred until such time the
Company attains positive EBITDA (earnings before interest, taxes,
depreciation and amortization) for two consecutive quarters at which
point all deferred annual installments of the fixed fee shall become
immediately payable.
- Annual variable fees (additional fees) for a period of five years
commencing with respect to the first of the following to occur: (i) the
end of the calendar year 2001, or (ii) the fiscal year during which the
Company generates positive EBITDA for two consecutive quarters. The
additional fees will be
F-36
<PAGE> 119
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
calculated as a percentage (starting at 10% in the first year and
decreasing to 6% in the fifth year) of EBITDA in excess of the expected EBITDA
in the business plan up to a maximum of 1% of Company's gross revenues for
the year.
VESPER SAO PAULO
- An annual fixed fee payable during the eight years period, commencing,
with respect to the calendar year during which service launch occurs, of
US$2 million. The payment of annual installments of the fixed fee shall
be deferred until such time as the Company attains positive EBITDA
(earnings before interest, taxes, depreciation and amortization) for two
consecutive quarters at which point all deferred annual installments of
the fixed fee shall become immediately payable. Additionally, if the
senior secured term loan agreement (see Note 1) is refinanced in whole
through the proceeds of one or more financings, and if certain other
conditions are met, the payment of the above fixed fee maybe limited to
the first three calendar years commencing with the service launch year.
Furthermore, the agreement provides that if Vesper Northeast and Vesper
Sao Paulo are combined into a single entity or are operated as a single
entity, no fixed fee shall be payable under this agreement effective the
date of commencement of common operations.
- Annual variable fees (additional fees) for a period of seven years
commencing with respect to the first of the following to occur: (i) the
end of the calendar year 2001, or (ii) the fiscal year during which the
Company generates positive EBITDA for two consecutive quarters. The
additional fees will be calculated as a percentage (starting at 10% in
the first year, decreasing to 5% in the sixth year and maintained at 5%
in the seventh year) of EBITDA in excess of the expected EBITDA in the
business plan up to a maximum of 1% of Company's gross revenues for the
year. If the senior secured term loan agreement is refinanced as
mentioned above, no additional fees shall be payable; provided, however,
that notwithstanding any such refinancing of the senior secured term loan
agreement, BCI shall be entitled, at a minimum, to payment of the
additional fees only for years 1 through 5.
Purchase Commitment
Nortel, Ericsson and Lucent Technologies are the principal suppliers of
Vesper Northeast and Vesper Sao Paulo infrastructure equipment. The Companies
are committed to acquire, over four years, a minimum of US$1,070 million (US$600
million Vesper Northeast and US$470 million Vesper Sao Paulo) of equipment and
services.
Additionally, in connection with the construction of the infrastructure,
the Companies have other contracts in the final phase of negotiation totaling
approximately US$325.2 million (US$323 million Vesper Northeast and US$2.2
million Vesper Sao Paulo).
License Agreements
Compliance with the terms of the license and certain regulatory
requirements, including certain levels of network build out, can be difficult to
meet. There can be no assurance that in the future all regulatory requirements
will be met. If such commitments are not met, the Companies could be subject to
fines and, in certain circumstances, the revocation of the applicable license.
11. PENSION PLAN
The Companies do not maintain a private pension plan for their employees,
but contribute monthly, based on payroll, to the government pension, social
security, and severance indemnity plans as required by local labor legislation.
F-37
<PAGE> 120
VESPER HOLDING S.A. AND VESPER HOLDING SAO PAULO S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. CONTINGENCY
In the normal course of business, the Companies are subject to, and may
become a party to, litigation. Currently, the Companies are not involved in any
material litigation.
13. INCOME TAXES
Tax rates in Brazil for calendar year 1999 were 25% for federal income tax
and 12% for social contribution tax. Based on the provisions of current
legislation, beginning February 1, 2000 to December 31, 2002, social
contribution tax rate is reduced to 9% and beginning January 2003, reduced to
8%. Tax losses can be carried forward without expiration; however, utilization
is limited to 30% of annual taxable income. As of December 31, 1999 the
Companies have no tax loss carryforwards.
The Companies' net deferred tax assets as of December 31, 1999 are
comprised of the following:
<TABLE>
<S> <C>
Start-up costs deferred for tax purposes.................. 18,238
Less valuation allowance.................................. (18,238)
-------
Net deferred income tax asset............................. --
=======
</TABLE>
The Companies have recorded a valuation allowance equal to the net deferred
tax assets because they are in the development stage and it is currently more
likely than not that such benefit will not be realized. Any reductions in the
valuation allowance will reduce future provisions for income tax expense.
The difference between income tax credit provided in the financial
statements and the expected income tax benefit at statutory rates is reconciled
as follows:
<TABLE>
<S> <C>
Income tax at statutory rate (combined rate of 37%, for
1999)................................................... 20,606
Change in the combined tax rate from 2000 onwards......... (2,226)
Nondeductible expenses.................................... (142)
-------
18,238
Valuation allowance....................................... (18,238)
-------
Net deferred income tax asset............................. --
=======
</TABLE>
F-38
<PAGE> 121
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
VELOCOM ARGENTINA S.A. (See Note 13.a) and b)) and
to the Legal Representative for Argentina to
TELELATINA MANAGEMENT COMPANY LLC Sucursal Argentina
We have audited the accompanying combined balance sheets of the combined
companies identified in Note 1 to the combined financial statements (companies
in the development stage) as of September 30, 1999 and December 31, 1998, and
the related combined statements of income and cash flows for the periods
mentioned in Note 2.II. to the combined financial statements ended September 30,
1999, December 31, 1998 and 1997. These combined financial statements are the
responsibility of the Companies' Management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Argentina, which are in substantial agreement with those in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Companies' 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 accompanying combined financial statements referred to
above present fairly, in all material respects, the combined financial position
of the companies identified in Note 1 to the combined financial statements as of
September 30, 1999 and December 31, 1998 and the results of the combined
operations and cash flows for the periods mentioned in Note 2.II. to the
combined financial statements ended September 30, 1999, December 31, 1998 and
1997, in conformity with accounting principles generally accepted in the United
States of America.
PISTRELLI, DIAZ Y ASOCIADOS
(MEMBER FIRM OF ARTHUR ANDERSEN)
EDUARDO C. CODURI
Partner
Buenos Aires, Argentina
April 14, 2000
F-39
<PAGE> 122
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (NOTE 2.II.)
(STATED IN ARGENTINE PESOS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (Note 3.a)........................ 747,798 393,008
Other receivables (Note 3.b)................................ 116,041 80,250
---------- ----------
Total current assets........................................ 863,839 473,258
---------- ----------
NON CURRENT ASSETS
Other receivables (Note 3.b)................................ 2,731,070 800,448
Intercompany receivables (Note 4)........................... -- 14,572
Property and equipment, net (Note 3.c)...................... 7,885,772 2,111,414
Intangible assets (Note 3.d)................................ 353,741 6,689
---------- ----------
Total non current assets.................................... 10,970,583 2,933,123
---------- ----------
Total assets................................................ 11,834,422 3,406,381
========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (Note 3.e)......... 5,820,541 1,869,235
Taxes (Note 3.f)............................................ 79,115 37,937
Payroll and social security taxes (Note 3.g)................ 503,498 58,647
Intercompany loans (Note 4)................................. 123,177 70,392
Financial debts............................................. 74,783 --
Other liabilities (Note 3.h)................................ 1,009,633 448,309
---------- ----------
Total current liabilities................................... 7,610,747 2,484,520
---------- ----------
Total liabilities........................................... 7,610,747 2,484,520
---------- ----------
SHAREHOLDERS' EQUITY
Capital stock (Note 3.i).................................... 1,032,000 1,032,000
Branch operation account (Note 3.j)......................... 12,136,907 --
Irrevocable contributions (Note 3.k)........................ 2,242,327 2,613,635
Deficit accumulated during the development stage:
Accumulated losses........................................ (2,723,774) (145,679)
Net loss for the period................................... (8,463,785) (2,578,095)
---------- ----------
Total shareholders' equity.................................. 4,223,675 921,861
---------- ----------
Total liabilities and shareholders' equity.................. 11,834,422 3,406,381
========== ==========
</TABLE>
The accompanying Notes 1 to 13 are an integral part of these combined financial
statements.
F-40
<PAGE> 123
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED INCOME STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 1999, DECEMBER 31, 1998 AND 1997 (NOTE
2.II.)
(STATED IN ARGENTINE PESOS)
<TABLE>
<CAPTION>
CUMULATIVE FROM
INCEPTION OF EACH
COMPANY TO
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1999(1) 1998(2) 1997(3)
----------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING EXPENSES (Note 5)............. (9,493,301) (6,918,399) (2,432,201) (142,701)
AMORTIZATION AND DEPRECIATION........... (1,560,436) (1,486,685) (73,751) --
----------- ---------- ---------- --------
Total operating expenses...... (11,053,737) (8,405,084) (2,505,952) (142,701)
FINANCIAL EXPENSES...................... (63,271) (41,215) (20,426) (1,630)
OTHER INCOME (EXPENSES), net............ 12,140 33,000 (19,512) (1,348)
----------- ---------- ---------- --------
Loss before tax on minimum presumed
income................................ (11,104,868) (8,413,299) (2,545,890) (145,679)
TAX ON MINIMUM PRESUMED INCOME (Note
2.III.d).............................. (82,691) (50,486) (32,205) --
----------- ---------- ---------- --------
Net loss for the period................. (11,187,559) (8,463,785) (2,578,095) (145,679)
=========== ========== ========== ========
</TABLE>
- ---------------
(1) Includes Telelatina Management Company Sucursal Argentina for the period
from inception (February 5, 1999) to September 30, 1999 and Telelatina S.A.,
Smartel S.A. and Formus S.A. for the nine-month period ended September 30,
1999.
(2) Includes Smartel S.A. for the period from inception (March 12, 1998) to
December 31, 1998, Formus S.A. for the period from inception (May 7, 1998)
to December 31, 1998 and Telelatina S.A. for the fiscal year ended December
31, 1998.
(3) Includes Telelatina S.A. for the period from inception (August 1, 1997) to
December 31, 1997.
The accompanying Notes 1 to 13 are an integral part of these combined financial
statements.
F-41
<PAGE> 124
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED SEPTEMBER 30, 1999, DECEMBER 31, 1998 AND 1997 (NOTE
2.II.)
(STATED IN ARGENTINE PESOS)
<TABLE>
<CAPTION>
CUMULATIVE
FROM INCEPTION
OF EACH
COMPANY TO
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1999(1) 1998(2) 1997(3)
-------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss for the period................... (11,187,559) (8,463,785) (2,578,095) (145,679)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property and
equipment............................ 1,499,823 1,426,072 73,751 --
Amortization of intangible assets...... 60,613 60,613 -- --
Financial expenses..................... (1,630) -- -- (1,630)
Changes in assets and liabilities, net:
Other receivables...................... (2,838,111) (2,019,341) (738,712) (80,058)
Accounts payable and accrued
liabilities.......................... 1,095,628 963,570 132,058 --
Taxes.................................. 79,115 41,178 37,603 334
Payroll and social security taxes...... 503,498 444,851 58,647 --
Other liabilities...................... 1,132,810 614,109 471,041 47,660
------------ ---------- ---------- --------
Net cash used in operating
activities...................... (9,655,813) (6,932,733) (2,543,707) (179,373)
------------ ---------- ---------- --------
INVESTING ACTIVITIES
Increase in property and equipment........ (4,660,682) (4,212,694) (444,759) (3,229)
Increase in intangible assets............. (414,354) (407,665) (6,689) --
Decrease (increase) in investments........ -- -- 220,423 (220,423)
------------ ---------- ---------- --------
Net cash used in investment
activities...................... (5,075,036) (4,620,359) (231,025) (223,652)
------------ ---------- ---------- --------
FINANCING ACTIVITIES
Financial debts........................... 76,413 74,783 (291,353) 292,983
Paid-in capital........................... 1,023,000 67,500 855,500 100,000
Funds received from parent................ 12,136,907 12,136,907 -- --
Irrevocable contribution.................. 2,242,327 (371,308) 2,388,635 225,000
------------ ---------- ---------- --------
Net cash provided by financing activities... 15,478,647 11,907,882 2,952,782 617,983
------------ ---------- ---------- --------
Net increase in cash and cash equivalents... 747,798 354,790 178,050 214,958
Cash and cash equivalents at beginning of
period.................................... -- 393,008 214,958 --
------------ ---------- ---------- --------
Cash and cash equivalents at end of
period.................................... 747,798 747,798 393,008 214,958
============ ========== ========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest............................... 33,701 33,701 -- --
Cash paid during the period for TOMPI..... 16,420 16,420 -- --
------------ ---------- ---------- --------
50,121 50,121 -- --
============ ========== ========== ========
Liabilities assumed in connection with
property and equipment acquisition..... 4,724,913 2,987,736 1,737,177 --
</TABLE>
- ---------------
(1) Includes Telelatina Management Company Sucursal Argentina for the period
from inception (February 5, 1999) to September 30, 1999 and Telelatina S.A.,
Smartel S.A. and Formus S.A. for the nine-month period ended September 30,
1999.
(2) Includes Smartel S.A. for the period from inception (March 12, 1998) to
December 31, 1998, Formus S.A. for the period from inception (May 7, 1998)
to December 31, 1998 and Telelatina S.A. for the fiscal year ended December
31, 1998.
(3) Includes Telelatina S.A. for the period from inception (August 1, 1997) to
December 31, 1997.
The accompanying Notes 1 to 13 are an integral part of these combined financial
statements.
F-42
<PAGE> 125
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999, DECEMBER 31, 1998 AND 1997
(STATED IN ARGENTINE PESOS)
1. FORMATION, OPERATIONS AND ACTIVITIES OF TELELATINA MANAGEMENT
COMPANY LLC SUCURSAL ARGENTINA, TELELATINA S.A., SMARTEL S.A. AND
FORMUS S.A. ("VELOCOM ARGENTINA" OR "THE COMPANIES")
Telelatina S.A., Smartel S.A. and Formus S.A. were organized on August 1,
1997, March 12, 1998, and May 7, 1998, respectively, to be engaged, on their own
account or on account of third parties, in the installation and/or provision of
telecommunications services. Telelatina S.A., Smartel S.A. and Formus S.A. were
registered with Inspeccion General de Justicia ("IGJ") (the governmental
regulatory agency of corporations in Argentina) on August 18, 1997, March 19,
1998 and May 11, 1998, respectively.
Telelatina Management Company LLC Sucursal Argentina was organized on
February 5, 1999 and registered with the IGJ as a branch of Telelatina
Management Company LLC (organized in Dover, Delaware, United States of America)
on February 9, 1999, to be engaged, on its own account or on account of third
parties, in the installation and/or provision of telecommunications services.
During 1997 and 1998, Telelatina S.A. made investments in its network; such
network was transferred to Telelatina Management Company LLC Sucursal Argentina
and the investments in its network were continued during 1999 by such company in
order to concentrate in a single company all investments in property and
equipment and to lease the network to VeloCom Argentina S.A., as the successor
entity holding all licenses (see Note 13).
As of September 30, 1999, the principal operations of the Companies had not
yet commenced. For this reason, these combined financial statements are
presented on the basis of companies in the development stage. The effect on the
companies' combined financial statements is to report cumulative combined
results of operations and cash flows since inception of each company through
September 30, 1999. They started to render Internet services on March 13, 2000,
the date of their commercial launch, when there was a press conference and
service trial show. Such services are currently rendered by VeloCom Argentina
S.A. (see Note 13).
2. SIGNIFICANT ACCOUNTING POLICIES
I. PURPOSE OF THE FINANCIAL STATEMENTS
These combined financial statements have been prepared to be included by
VeloCom Inc. in its registration statement in connection with its initial public
offering.
II. BASIS OF PRESENTATION
These combined financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America. A
combined presentation has been utilized in the preparation of the accompanying
combined financial statements because the combining companies were under common
management control for the periods presented.
These combined financial statements are stated in Argentine pesos and do
not contain any translation of Argentine pesos amounts into US dollars because
the exchange rate between the Argentine peso and the US dollar has been on a
one-to-one basis during each period (see Note 10).
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities at
F-43
<PAGE> 126
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the date of the financial statements and expenses during the reporting period.
Actual loss could differ from those estimates.
The combined balance sheet as of September 30, 1999, includes the balance
sheets of Telelatina Management Company LLC Sucursal Argentina, Telelatina S.A.,
Formus S.A. and Smartel S.A., and as of December 31, 1998, includes the balance
sheets of Telelatina S.A., Formus S.A. and Smartel S.A.
The combined statement of income as of September 30, 1999, includes the
statements of income of Telelatina Management Company LLC Sucursal Argentina,
for the period from inception (February 5, 1999) to September 30, 1999, and of
Telelatina S.A., Formus S.A. and Smartel S.A. for the nine-month period ended
September 30, 1999.
The combined statement of income as of December 31, 1998, includes the
statements of income of Formus S.A. for the period from inception (May 7, 1998)
to December 31, 1998, Smartel S.A. for the period from inception (March 12,
1998) to December 31, 1998, and Telelatina S.A. for fiscal year ended December
31, 1998.
The statement of income as of December 31, 1997, includes the statement of
income of Telelatina S.A. for the period from inception (August 1, 1997) to
December 31, 1997.
III. ACCOUNTING POLICIES
The significant accounting policies used to prepare these combined
financial statements as of September 30, 1999 and December 31, 1998 and 1997
were as follows:
a) Cash and cash equivalents, receivables and liabilities:
Amounts in local currency are stated at nominal value, including financial
expense/income accrued through the end of the period, if applicable.
Amounts in foreign currency are stated at the selling or buying exchange
rate in effect at the end of the period, including accrued financial
income/expense, if applicable.
Cash and cash equivalents are defined as investments or bank deposits with
a maturity not exceeding three months.
b) Property and equipment, net:
This account has been valued at acquisition cost, less related accumulated
depreciation, calculated proportionally to the months of useful life estimated
by the Companies. The valuation of these assets, taken as a whole, does not
exceed their recoverable value taking into account the economic use they are
given.
As of September 30, 1999, the Companies' management decided to retire a
piece of equipment and related materials whose book value totaled 1,607,207 as a
result of the change in the technology used and based on their technical
department's reports. Such technical analysis determined that, out of the
abovementioned total, an amount of 420,543 relates to parts and materials that
can be reused, while the remaining amount of 1,186,664 was charged to the income
statement of such period under the caption "Amortization and depreciation" since
this portion of the equipment has been abandoned.
F-44
<PAGE> 127
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
c) Intangible assets:
Software licenses are stated at cost, less the related accumulated
amortization and are amortized over a period of two years.
d) Income tax:
Law No. 25,063, effective December 30, 1998, provided a Tax on Minimum
Presumed Income ("TOMPI") that will remain in effect for ten years. This tax is
supplementary to Income Tax and is an alternative minimum tax. The TOMPI is a
tax floor applicable to the potential income from certain productive assets and
calculated by applying a 1% rate to the value of such assets, so that the effect
of the Companies' tax obligations will be the higher of these two taxes.
However, should TOMPI be higher than Income Tax in any given tax year, such
excess may be considered as a prepayment on account of any excess of Income Tax
over TOMPI that may arise in any of the four subsequent tax years.
In any year in which accumulated tax loss carryforwards ("NOL") are offset,
the tax benefit (arrived at by applying the rate effective at the time to the
NOL applied) will have actual effect if the income tax determined (net of such
offsetting) is equal to or larger than the TOMPI, but in such case will be
reduced by any excess of the latter over income tax.
As of September 30, 1999, the amount for the TOMPI totaled 50,486. At this
date, such amount was charged in the statement of income because the Companies
do not have a history of earnings to establish that it is more likely than not
that the deferred tax asset will be realized. For the same reason, as of
December 31, 1998 the amount of 32,205 paid in TOMPI was charged to the
statement of income.
The Companies account for income taxes under the liability method in
accordance with SFAS No. 109 "Accounting for income taxes". Under this method,
deferred tax assets and liabilities are established for temporary differences
between the financial reporting basis and the tax basis of the Companies' assets
and liabilities at enacted tax rates expected to be in effect when such amounts
are realized. Deferred tax assets are recognized for all temporary items and an
offsetting valuation reserve is only recorded if it is determined to be more
likely than not that the asset will not be realized. As of September 30, 1999
the Companies recognized an offsetting valuation reserve on the total amount of
the deferred tax assets.
e) Statement of income accounts:
- Accounts accumulating monetary transactions have been booked at nominal
value.
- Charges for consumption of nonmonetary assets valued at cost have been
computed based on the recorded amounts of such assets.
F-45
<PAGE> 128
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. BALANCE SHEET ACCOUNTS
The significant accounts of the combined financial statements as of
September 30, 1999 and December 31, 1998 were as follows:
a) Cash and cash equivalents
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Cash........................................................ 5,000 2,555
Bank deposits............................................... 742,798 390,453
--------- -------
747,798 393,008
========= =======
</TABLE>
b) Other receivables
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Current
Miscellaneous prepayments and advances...................... 20,471 3,750
Prepaid expenses............................................ 47,329 --
Turnover tax -- Credit...................................... 24,021 --
Shareholders................................................ 9,000 76,500
Others...................................................... 15,220 --
--------- -------
116,041 80,250
========= =======
Non current
VAT credit.................................................. 2,503,410 739,885
Guarantee deposits in US dollars............................ 227,660 --
Turnover tax -- Credit...................................... -- 17,733
Others...................................................... -- 42,830
--------- -------
2,731,070 800,448
========= =======
</TABLE>
F-46
<PAGE> 129
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
c) Property and equipment, net
<TABLE>
<CAPTION>
NET BOOK VALUE
----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Improvement to rented buildings............................. 1,713,767 298,446
Sites....................................................... 2,852,215 --
Materials................................................... 1,856,372 364,253
Equipment................................................... 326,613 1,183,526
Office equipment............................................ 440,536 32,381
Furniture and fixture....................................... 103,227 107,366
Facilities.................................................. 256,893 100,843
Automobiles................................................. 18,251 21,818
Antennas.................................................... 2,631 2,781
Tools....................................................... 315,267 --
--------- ---------
7,885,772 2,111,414
========= =========
</TABLE>
d) Intangible assets
<TABLE>
<CAPTION>
NET BOOK VALUE
----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Software licenses........................................... 353,741 6,689
======= =====
</TABLE>
e) Accounts payable and accrued liabilities
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Vendors..................................................... 1,504,762 1,785,292
Accrued liabilities in pesos................................ 390,788 --
Accrued liabilities in US dollars........................... 3,924,991 --
Vendors of property and equipment in transit................ -- 83,943
--------- ---------
5,820,541 1,869,235
========= =========
</TABLE>
f) Taxes
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
TOMPI reserve net of withholdings and prepayments........... 46,895 31,018
Withholding on third parties to be deposited with the
Administracion Federal de Ingresos Publicos ("AFIP"- the
federal agency responsible for collecting federal
taxes).................................................... 3,354 293
Withholding on employees to be deposited with the AFIP...... 28,866 6,626
------ ------
79,115 37,937
====== ======
</TABLE>
F-47
<PAGE> 130
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
g) Payroll and social security taxes
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Accrued vacation payment.................................... 133,863 19,537
Accrued annual statutory bonus.............................. 71,680 --
Compensation payable........................................ 181,398 --
Social security taxes payable............................... 110,672 39,110
Others...................................................... 5,885 --
--------- -------
503,498 58,647
========= =======
</TABLE>
h) Other liabilities
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Accrued expenses............................................ 100,248 9,143
Miscellaneous accrual....................................... 10,400 --
Accrual for fee payable to the Comision Nacional de
Comunicaciones............................................ 898,985 439,166
--------- -------
1,009,633 448,309
========= =======
</TABLE>
i) Capital stock
<TABLE>
<CAPTION>
TELELATINA SMARTEL FORMUS
S.A. S.A. S.A. TOTAL
---------- ------- ------ ---------
<S> <C> <C> <C> <C>
Amount as of January 1, 1998.......................... 100,000 -- -- 100,000
Increase during year 1998............................. 900,000 20,000 12,000 932,000
--------- ------ ------ ---------
Amount as of December 31, 1998 and September 30,
1999................................................ 1,000,000 20,000 12,000 1,032,000
========= ====== ====== =========
</TABLE>
j) Branch operation account
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Funds received by Telelatina Management Company LLC Sucursal
Argentina from its Head Office for the period from
inception (February 5, 1999).............................. 12,136,907
==========
</TABLE>
k) Irrevocable contributions
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999(1) 1998(1)
------------- ------------
<S> <C> <C>
Amount at beginning of period............................. 2,613,635 225,000
Increase.................................................. 452,146 2,388,635
Decrease.................................................. (823,454)(2) --
--------- ---------
Amount at the end of period............................... 2,242,327 2,613,635
========= =========
</TABLE>
- ---------------
(1) Correspond to irrevocable contributions made by Telelatina S.A.'s
shareholders.
F-48
<PAGE> 131
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(2) Includes 67,500 involving a capital contribution paid in which was
previously subscribed by Telelatina S.A. shareholders and 755,954 involving
the return in cash of the contributions previously made by such
shareholders.
4. ACCOUNTS AND TRANSACTIONS WITH RELATED COMPANIES
The balances as of September 30, 1999 and December 31, 1998 with related
parties were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Non current assets -- Intercompany receivables:
Sociedad Latinoamericana de Inversiones S.A. .......... 14,572
======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Current liabilities -- Intercompany loans:
Formus Communications Inc. ................................. 123,177 70,392
======= ======
</TABLE>
The transactions for the periods ended September 30, 1999 and December 31,
1998 and 1997 with related parties were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
Sociedad Latinoamericana de Servicios S.A.
Interest................................................ 17,787
======
</TABLE>
5. OPERATING EXPENSES
Operating expenses consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Salaries and social security taxes............... 3,270,298 528,863 --
Rentals.......................................... 912,322 236,247 5,500
Legal fees....................................... 281,619 201,815 24,095
Accounting fees.................................. 30,152 16,470 2,222
Market research fees............................. 360,680 395,831 --
Personnel-recruiting fees........................ 151,893 173,586 --
Technicians' fees................................ 449,020 267,707 --
Other fees....................................... 427,904 61,492 59,608
Services......................................... 220,232 55,277 525
Insurance........................................ 54,752 23,940 --
Travel expenses.................................. 108,243 27,281 306
Comision Nacional de Comunicaciones fee.......... 459,819 392,206 46,960
Others........................................... 191,465 51,486 3,485
--------- --------- -------
6,918,399 2,432,201 142,701
========= ========= =======
</TABLE>
F-49
<PAGE> 132
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. ACQUISITION OF EQUITY INTERESTS IN THE COMPANIES
On September 27, 1999, VeloCom Inc. executed a series of stock acquisition
agreements, whereby it acquired, directly and indirectly, 100% equity interests
in Telelatina S.A., Smartel S.A., Formus S.A., and Telelatina Management Company
LLC. The table below details the shareholders of the respective Companies prior
to the abovementioned agreements:
<TABLE>
<CAPTION>
TELELATINA
TELELATINA SMARTEL FORMUS MANAGEMENT
SHAREHOLDER S.A. S.A. S.A. COMPANY LLC(1)
- ----------- ---------- ------- ------ --------------
<S> <C> <C> <C> <C>
SLI Wireless S.A. ............................... 50% 100% -- 55%
Inepar Industria e Construcoes S.A. ............. 15% -- -- --
PCN Investments S.A. ............................ 35% -- -- 15%
Formus Communications Latin America LLC.......... -- -- 99.99% 30%
Maria Alejandra Santurio......................... -- -- 0.01% --
--- --- ------ ---
100% 100% 100.00% 100%
=== === ====== ===
</TABLE>
VeloCom Inc. acquired from PCN do Brasil S.A. a 100% equity interest in PCN
Investments S.A. and thus acquired an indirect equity interest in Telelatina
S.A. and in Telelatina Management Company LLC, due to the holdings PCN
Investments S.A. has in such companies. Similarly, VeloCom Inc. acquired an
indirect equity interest in Formus S.A. and Telelatina Management Company LLC by
purchasing a 100% equity interest in Formus Communications Latin America LLC.
VeloCom Inc. acquired the remaining equity interests directly from the
respective former shareholders.
Due to the above, the shareholdings in the Companies as of September 30,
1999, were as follows:
<TABLE>
<CAPTION>
TELELATINA
TELELATINA SMARTEL FORMUS MANAGEMENT
SHAREHOLDER S.A. S.A. S.A. COMPANY LLC(1)
- ----------- ---------- ------- ------ --------------
<S> <C> <C> <C> <C>
VeloCom Inc. .................................... 65% 100% 0.01% 55%
Formus Communications Latin America LLC (wholly
owned by VeloCom Inc.)......................... -- -- 99.99% 30%
PCN Investments S.A. (wholly owned by VeloCom
Inc.).......................................... 35% -- -- 15%
--- --- ------ ---
100% 100% 100.00% 100%
=== === ====== ===
</TABLE>
- ---------------
(1) Head Office of Telelatina Management Company Sucursal Argentina.
7. CAPITAL STOCK
As of September 30, 1999 Telelatina S.A. had subscribed, issued and paid-in
capital stock which totaled 1,000,000, Smartel S.A. had subscribed, issued and
paid-in capital stock which totaled 20,000 and Formus S.A. had subscribed and
issued capital stock which totaled 12,000 of which 9,000 has not been paid-in as
of the date of these combined financial statements. These amounts are registered
in full with the IGJ.
<TABLE>
<CAPTION>
SHARE CLASSES TELELATINA S.A. FORMUS S.A. SMARTEL S.A.
- ------------- ---------------- ------------ -------------
<S> <C> <C> <C>
Common, registered, nonendorsable, face value 1 per
share with one vote per share....................... 1,000,000 12,000 20,000
========= ====== ======
</TABLE>
F-50
<PAGE> 133
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. PAYABLE TO THE COMISION NACIONAL DE COMUNICACIONES
The Companies recorded contingent liabilities payable to the Comision
Nacional de Comunicaciones ("CNC") (Argentine Federal Communications Committee)
in the amount of 898,985, 439,166 and 46,960 as of September 30, 1999, December
31, 1998 and 1997, respectively. These liabilities result from
telecommunications services concession fees related to the licenses granted by
the CNC to Telelatina S.A., Smartel S.A. and Formus S.A. for the period as from
the date in which they were granted through September 30, 1999. The concession
fee was billed by the CNC to the Companies, which were subsequently advised
through Resolution No. 4/99 of the Department of Communications dated December
29, 1999, of the suspension of the regulation requiring such fee to be paid
until a specific telecommunications services tax, fee and rate system is
established to be applied to license holding companies. As of the date of
issuance of the current combined financial statements, the new regulation had
not been established.
Although the Companies' management and their legal counsel are not in a
position to estimate the definitive amount which could result from the new
resolution, management believes it is probable that the Companies will have to
pay the amounts accrued to date.
9. LICENSES FOR RENDERING TELECOMMUNICATION SERVICES
Telelatina S.A., Formus S.A. and Smartel S.A. hold licenses to render
services of data transmission, value-added services and videoconferencing in
different cities of Argentina (the more significant cities being Buenos Aires,
Rosario, Cordoba, Mendoza and Tucuman). Such licenses were granted by the
Secretaria de Comunicaciones (the Department of Communications in Argentina) to
Teletatina S.A., Smartel S.A. and Formus S.A. on September 4, 1997, May 7, 1998
and September 3, 1998, respectively.
The licenses mentioned above are perpetual but remain effective as long as
installation and operation obligations provided in the grant of such licenses
are complied with. In order to guarantee the commitments assumed, the Companies
granted performance bonds at the request of the CNC. To the date of issuance of
these combined financial statements, the Companies granted performance bonds
amounting to 1,500,000 and issued by local insurance companies in favor of the
CNC. Performance bonds shall be returned after proving that the system was
brought into operation in each performance area.
With respect to the Telelatina S.A. license, through resolution of the CNC,
the installation and operation obligations established in the grant of such
license were extended by approving a new compliance schedule. The first maturity
date under such schedule is June 30, 2000, by which time Telelatina S.A. must be
ready to start providing its services in the City of Buenos Aires; the last
maturity date is May 14, 2009, by which date Telelatina S.A. must be ready to
start providing services in the City of Gualeguaychu. The abovementioned
schedule includes, among others, the cities of Rosario, Cordoba, Mendoza and
Tucuman where Telelatina S.A. must be ready to start rendering the service by
March 23, September 21, December 21, 2001 and March 22, 2002, respectively.
The installation and operation obligations related to the Formus S.A.
license were extended through resolution of the CNC, establishing September 2000
as maturity date, by which time Formus S.A. must be ready to start rendering its
services in all the cities affected by this license and set forth in the
abovementioned chart.
Finally, the installation and operation obligations related to the Smartel
S.A. license have been extended through resolution of the CNC, extending the
maturity date to June 2000, by which time Smartel S.A. must be ready to start
rendering its services in all the cities affected by this license and set forth
in the abovementioned chart.
F-51
<PAGE> 134
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
If the Companies fail to meet their commitments, related to the
installation and operation obligation in the cities covered by the respective
licenses by the dates agreed upon, the CNC may withdraw the licenses to operate
in the cities where the noncompliance was verified.
In the opinion of the Companies' Management, the obligations incurred in
connection with licenses obtained will be complied with.
10. EXCHANGE RATE
From April 1, 1991 through the date of these combined financial statements
the exchange rate has been Argentine pesos 1 per 1 U.S. Dollar.
11. FOREIGN CURRENCY ASSETS AND LIABILITIES
The significant assets and liabilities denominated in foreign currency as
of September 30, 1999 were as follows:
<TABLE>
<CAPTION>
FOREIGN BOOK
CURRENCY EXCHANGE AMOUNT IN
AND AMOUNT RATE ARGENTINE PESOS
--------------------- -------- ---------------
<S> <C> <C> <C> <C>
Non-current assets
Other receivables.................... US Dollar 227,660 1.00 227,660
=========
Current liabilities
Accrued liabilities.................. US Dollar 3,924,991 1.00 3,924,991
=========
</TABLE>
12. COMMITMENTS
As of the date of these combined financial statements the Companies have
entered into various agreements mainly related to the provision of services,
acquisitions of equipment and rents, which amount to approximately 5,500,000.
13. SUBSEQUENT EVENTS
a) Merger of Formus S.A., Telelatina S.A. and Smartel S.A.
Taking into account that the Companies perform similar and supplementary
activities in the telecommunications area and belong to the same group, the
Directors of Formus S.A., Telelatina S.A. and Smartel S.A. agreed to perform a
corporate reorganization and subscribed a "Pre-Merger Commitment" under the
terms and for the purposes mentioned in section 82 of Law No. 19,550 on November
8, 1999.
The main terms and conditions of the subscribed agreement provide that:
1. Formus S.A., as surviving company, incorporated Telelatina S.A. and
Smartel S.A. as merged companies, which will be dissolved without being
liquidated.
2. The merger was performed as of September 30, 1999.
3. The merger had administrative effects as from October 1, 1999. As
from such date, Telelatina S.A.'s and Smartel S.A.'s operations and the
results thereof were assumed by Formus S.A.
F-52
<PAGE> 135
TELELATINA MANAGEMENT COMPANY LLC SUCURSAL ARGENTINA,
TELELATINA S.A.,
SMARTEL S.A. AND FORMUS S.A.
(COMPANIES IN THE DEVELOPMENT STAGE)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
On February 23, 2000, the definitive merger agreement was executed and on
March 9, 2000, it was filed with the IGJ for approval. As of the issuance date
of these combined financial statements, such approval is pending.
b) Changes in the company's name
The Shareholders' Meeting of Formus S.A. held on October 26, 1999, decided
to change the Company's name to VeloCom MergeCo S.A. Subsequently, and as a
consequence of its merger with Telelatina S.A. and Smartel S.A., the
Shareholders' Meeting of VeloCom MergeCo S.A. held on November 12, 1999, decided
to further change the Company's name to "Telelatina S.A.". Registration of this
change is pending approval. Lastly, the Shareholders' Meeting held on January
12, 2000, decided to change the Company's name to "VeloCom Argentina S.A.", and
this change is pending registration with the IGJ.
F-53
<PAGE> 136
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 common stock being registered, other than
underwriting discounts and commissions.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 79,200
----------
National Association of Securities Dealers, Inc. filing
fee....................................................... $ 30,500
----------
Nasdaq national market application fee...................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky qualification fees and expenses.................... *
Printing and engraving expenses............................. *
Registrar and transfer agent's fee.......................... *
Miscellaneous expenses...................................... *
----------
Total............................................. $ *
==========
</TABLE>
- ------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. The
Registrant's Third Amended and Restated Certificate of Incorporation provides
that the Registrant shall indemnify all persons whom it may indemnify to the
fullest extent permitted under Section 145. Section 145 and the Registrant's
Bylaws empower the Registrant to purchase and maintain insurance that protects
its officers, directors, employees and agents against liabilities incurred in
connection with their service in such positions. The Registrant currently
maintains director and officer liability insurance.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification by the underwriters of the
Registrant and its officers and directors, and by the Registrant of the
underwriters, for certain liabilities arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities issued or sold by the
Registrant since April 29, 1998, the date of the Registrant's inception. During
that time, the Registrant has issued unregistered securities in the transactions
described below. Securities issued in such transactions were offered and sold in
reliance upon the exemption from registration under Section 4(2) of the
Securities Act, relating to offers of securities by an issuer not involving any
public offering, or under Rule 701 under the Securities Act, relating to
transactions pursuant to compensatory benefit plans and contracts relating to
compensation. The offers and sales of securities described below were made
without an underwriter and the certificates representing the securities bear a
restrictive legend permitting the transfer of the securities only upon their
registration under, or pursuant to an exemption from the registration
requirements of, the Securities Act.
(1) From April 29, 1998 to the present, the Registrant has granted options
to certain of its employees, directors and certain related parties to purchase
an aggregate of 6,277,833 shares of its common stock pursuant to the
Registrant's 1998 Stock Option Plan, as amended.
(2) On May 5, 1998, the Registrant issued an aggregate of 400,000 shares of
common stock to Telecom Partners II, L.P. for an aggregate purchase price of
$400,000.
II-1
<PAGE> 137
(3) On June 30, 1998, the Registrant issued an aggregate of 3,432,150
shares of common stock to Telecom Partners II, L.P., Centennial Fund V, L.P. and
certain of its affiliates, Crescendo World Fund, L.L.C. and certain of the
Registrant's directors, for an aggregate purchase price of $3,432,150.
(4) On January 6, 1999, the Registrant issued an aggregate of 300,000
shares of common stock to certain of its officers and directors for an aggregate
purchase price of $300,000.
(5) On January 26, 1999, the Registrant entered into a Series A Preferred
Stock Purchase Agreement for the sale to certain of its stockholders of an
aggregate of 10,000,000 shares of Series A preferred stock for an aggregate
purchase price of $30,000,000.
(6) On February 12, 1999, the Registrant issued an aggregate of 75,000
shares of common stock to certain of its officers and REINCO Corp., for an
aggregate purchase price of $168,750.
(7) On May 7, 1999, the Registrant entered into a Second Series A Preferred
Stock Purchase Agreement for the sale to certain of its stockholders and certain
directors and officers of an aggregate of 5,000,000 shares of Series A preferred
stock for an aggregate purchase price of $15,000,000.
(8) On May 8, 1999, the Registrant issued an aggregate of 25,000 shares of
common stock to one of its officers for an aggregate purchase price of $56,250.
(9) On June 15, 1999, the Registrant issued an aggregate of 141,753 shares
of common stock to certain officers and directors, North River Ventures, Inc.
Pension Plan and certain other individuals, for an aggregate purchase price of
$425,259.
(10) On June 18, 1999, the Registrant issued an aggregate of 83,333 shares
of common stock to one of its officers for an aggregate purchase price of
$249,999.
(11) On September 27, 1999, the Registrant issued an aggregate of 4,330,709
shares of common stock and 7,840,000 shares of Series A preferred stock to SLI
Wireless S.A. in exchange for certain assets and approximately $13,800,000 in
cash.
(12) On September 27, 1999 the Registrant issued an aggregate of 1,574,803
shares of common stock and 7,866,333 shares of Series A preferred stock to
Formus Communications -- Latin America Holdings, LLC in exchange for certain
assets and approximately $20,800,000 in cash.
(13) On September 27, 1999, the Registrant issued an aggregate of 1,673,228
shares of common stock to Taquari Participacoes S.A. and certain of its
affiliates in exchange for certain assets and forgiveness of a note payable from
the Registrant to Taquari in a principal amount of $3,300,000.
(14) On September 27, 1999, the Registrant issued approximately $13,600,000
in aggregate principal amount of 7% secured promissory notes to PCN do Brasil
and Inepar S/A Industria e Construcoes in exchange for certain assets.
(15) On September 29, 1999, the Registrant issued an aggregate of 25,000
shares of common stock to one of its officers for an aggregate purchase price of
$75,000.
(16) On December 6, 1999, the Registrant entered into a Series B Preferred
Stock Purchase Agreement for the sale to certain of its stockholders and
officers and directors of an aggregate of 24,219,853 shares of Series B
preferred stock for an aggregate purchase price of $142,500,000.
(17) On January 7, 2000, the Registrant entered into a Follow-On Series
B/B-1 Preferred Stock Purchase Agreement for the sale to certain of its
stockholders and certain officers and directors of an aggregate of 15,479,059
shares of Series B preferred stock and 1,967,754 shares of Series B-1 preferred
stock for an aggregate purchase price of $157,000,000.
(18) On April 20, 2000, the Registrant entered into a Series C Preferred
Stock Purchase Agreement for the sale to one of its stockholders and certain of
its officers of an aggregate of 5,102,000 shares of Series C preferred stock for
an aggregate purchase price of $51,020,000.
II-2
<PAGE> 138
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Third Amended and Restated Certificate of Incorporation of
the Registrant.
3.2* Form of Fourth Amended and Restated Certificate of
Incorporation of the Registrant to become effective upon the
closing of the offering.
3.3 Bylaws of the Registrant.
3.4* Form of Amended and Restated Bylaws of the Registrant to
become effective upon the closing of the offering.
4.1* Third Amended and Restated Investors Agreement, dated as of
January 7, 2000, as amended February 11, 2000 and April 20,
2000, between the Registrant and certain holders of stock.
4.2* Form of Common Stock Certificate of the Registrant.
5.1* Opinion of Cleary, Gottlieb, Steen & Hamilton as to the
legality of the securities being registered (including
consent).
10.1* Common Agreement, dated as of December 27, 1999, among
Vesper Sao Paulo S.A., Vesper Holding Sao Paulo S.A., Vesper
Sao Paulo Cayman, the Administrative Agents and Citibank,
N.A., and Banco Citibank, S.A.
10.2* Credit Agreement, dated as of December 27, 1999, among
Vesper Sao Paulo S.A., Vesper Holding Sao Paulo S.A., Vesper
Sao Paulo Cayman and Societe Generale, New York Branch.
10.3* Common Terms Agreement, dated as of December 13, 1999, among
Vesper Holding S.A., Vesper S.A., ABN AMRO Bank N.V., Harris
Corporation, Other Pari Passu Facility Agents, and LaSalle
Bank National Association.
10.4* Secured Note Purchase Agreement, dated as of December 13,
1999, among Vesper S.A., Nortel Networks Corporation, the
Banks and Other Entities, ABN AMRO Bank N.V., and Nortel
Networks Corporation.
10.5* Secured Note Purchase Agreement, dated as of December 13,
1999, among Vesper S.A., ABN AMRO Bank N.V. and Qualcomm
Incorporated, the Banks and Other Entities.
10.6* Equipment Supply and Services Agreement, dated as of August
4, 1999, between Mirror S.A. and Ericsson Telecomunicacoes
S.A..
10.7* Equipment Supply and Services Agreement, dated as of July 9,
1999, between Mirror S.A. and Nortel Networks Corporation.
10.8* Equipment Supply and Services Agreement, dated as of
September 30, 1999, between Megatel do Brasil S.A. and
Lucent Technologies World Services Inc.
10.9* Technical Services Agreement, dated as of September 27,
1999, between the Registrant and Formus Communications, Inc.
10.10* Technical Services Agreement, Know-How Transfer and
Technical Services Agreement and Secondment Agreement, dated
as of July 30, 1999, between Bell Canada International Inc.
and Megatel do Brasil S.A.
In accordance with Instruction 2 to Item 601 of Regulation
S-K, the following agreement was not filed as an exhibit
because it is substantially identical in all material
respects to Exhibit 10.10: Technical Services Agreement,
Know-How Transfer and Technical Services Agreement and
Secondment Agreement, dated as of May 27, 1999, between Bell
Canada International Inc. and Mirror S.A.
</TABLE>
II-3
<PAGE> 139
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.11* Technical Services Agreement, dated May 2000, among the
Registrant, Vesper Sao Paulo S.A. and Vesper S.A.
10.12* Amended and Restated Shareholders Agreement of Vesper
Holding Sao Paulo S.A., dated May 2000, among the
Registrant, Qualcomm Incorporated and Bell Canada
International Inc.
In accordance with Instruction 2 to Item 601 of Regulation
S-K, the following agreement was not filed as an exhibit
because it is substantially identical in all material
respects to Exhibit 10.12: Amended and Restated Shareholders
Agreement of Vesper Holding S.A. dated May 2000, among the
Registrant, Qualcomm Incorporated and Bell Canada
International Inc.
10.13* BV Interativa Shareholders Agreement, dated as of March 22,
2000, among the Registrant, Qualcomm Incorporated and Bell
Canada International Inc.
10.14* 1998 Stock Option Plan of the Registrant, as amended and
restated effective October 15, 1999.
10.15* Employment Agreement by and between the Registrant and David
J. Leonard, effective as of October 1, 1998.
10.16* Employment Agreement by and between the Registrant and Barry
L. Rowan, effective as of July 12, 1999.
10.17* Employment Agreement by and between the Registrant and John
Gowen, effective as of November 9, 1998.
10.18* Employment Agreement by and between the Registrant and
Gregory P. Sadler, effective as of November 2, 1998.
10.19* Employment Agreement by and between the Registrant and R.
Dwayne House, effective as of January 4, 1999.
10.20* Series A Preferred Stock Purchase Agreements, dated as of
January 26, 1999 and May 7, 1999, between the Registrant and
certain holders of stock and directors and officers.
10.21* Series B Preferred Stock Purchase Agreement, dated as of
December 6, 1999, between the Registrant and certain holders
of stock and directors and officers.
10.22* Follow-On Series B/B-1 Preferred Stock Purchase Agreement,
dated as of January 7, 2000, between the Registrant and
certain holders of stock and directors and officers.
10.23* Amendment No. 1 Series B Preferred Stock Purchase Agreement,
dated as of December 31, 1999.
10.24* Series C Preferred Stock Purchase Agreement, dated as of
April 20, 2000, between the Registrant and El Paso Energy
Communications Company and certain officers.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Denver, Colorado.
23.2 Consent of Arthur Andersen S/C, Rio de Janeiro, Brazil.
23.3 Consent of Pistrelli, Diaz Y Asociados, Member Firm of
Arthur Andersen.
23.4* Consent of Cleary, Gottlieb, Steen & Hamilton (contained in
its opinion to be filed as Exhibit 5.1 hereto).
24.1 Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
II-4
<PAGE> 140
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) Insofar as indemnification for liabilities 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 of 1933 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.
(b) (1) That 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(h) under the Securities Act of 1933 shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
(2) That for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating 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.
(c) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser.
II-5
<PAGE> 141
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Englewood, State of
Colorado, on May 12, 2000.
VELOCOM INC.
By: /s/ BARRY L. ROWAN
----------------------------------
Name: Barry L. Rowan
Title: Chief Financial 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>
SIGNATURE TITLES DATE
--------- ------ ----
<C> <S> <C>
/s/ DAVID J. LEONARD Chief Executive Officer and May 12, 2000
- ----------------------------------------------------- Director (principal executive
David J. Leonard officer)
/s/ BARRY L. ROWAN Chief Financial Officer May 12, 2000
- ----------------------------------------------------- (principal financial officer
Barry L. Rowan and principal accounting
officer)
/s/ FRED A. VIERRA* Chairman of the Board of May 12, 2000
- ----------------------------------------------------- Directors
Fred A. Vierra
/s/ WILLIAM J. ELSNER* Director May 12, 2000
- -----------------------------------------------------
William J. Elsner
/s/ STEVEN C. HALSTEDT* Director May 12, 2000
- -----------------------------------------------------
Steven C. Halstedt
/s/ ANTHONY DAFFER* Director May 12, 2000
- -----------------------------------------------------
Anthony Daffer
/s/ BERNARD W. SCHOTTERS, II* Director May 12, 2000
- -----------------------------------------------------
Bernard W. Schotters, II
/s/ GUILLERMO LIBERMAN* Director May 12, 2000
- -----------------------------------------------------
Guillermo Liberman
/s/ LUIS GONZALEZ LANUZA* Director May 12, 2000
- -----------------------------------------------------
Luis Gonzalez Lanuza
/s/ BERNARD DVORAK* Director May 12, 2000
- -----------------------------------------------------
Bernard Dvorak
/s/ JACQUES GLIKSBERG* Director May 12, 2000
- -----------------------------------------------------
Jacques Gliksberg
</TABLE>
II-6
<PAGE> 142
<TABLE>
<CAPTION>
SIGNATURE TITLES DATE
--------- ------ ----
<C> <S> <C>
/s/ MICHAEL GREELEY* Director May 12, 2000
- -----------------------------------------------------
Michael Greeley
/s/ SCOTT PERPER* Director May 12, 2000
- -----------------------------------------------------
Scott Perper
/s/ WILLIAM SMITH* Director May 12, 2000
- -----------------------------------------------------
William Smith
*By: /s/ BARRY L. ROWAN
-------------------------------------------------
Barry L. Rowan, as Attorney-In-Fact
</TABLE>
II-7
<PAGE> 143
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Third Amended and Restated Certificate of Incorporation of
the Registrant.
3.2* Form of Fourth Amended and Restated Certificate of
Incorporation of the Registrant to become effective upon the
closing of the offering.
3.3 Bylaws of the Registrant.
3.4* Form of Amended and Restated Bylaws of the Registrant to
become effective upon the closing of the offering.
4.1* Third Amended and Restated Investors Agreement, dated as of
January 7, 2000, as amended February 11, 2000 and April 20,
2000, between the Registrant and certain holders of stock.
4.2* Form of Common Stock Certificate of the Registrant.
5.1* Opinion of Cleary, Gottlieb, Steen & Hamilton as to the
legality of the securities being registered (including
consent).
10.1* Common Agreement, dated as of December 27, 1999, among
Vesper Sao Paulo S.A., Vesper Holding Sao Paulo S.A., Vesper
Sao Paulo Cayman, the Administrative Agents and Citibank,
N.A., and Banco Citibank, S.A.
10.2* Credit Agreement, dated as of December 27, 1999, among
Vesper Sao Paulo S.A., Vesper Holding Sao Paulo S.A., Vesper
Sao Paulo Cayman and Societe Generale, New York Branch.
10.3* Common Terms Agreement, dated as of December 13, 1999, among
Vesper Holding S.A., Vesper S.A., ABN AMRO Bank N.V., Harris
Corporation, Other Pari Passu Facility Agents, and LaSalle
Bank National Association.
10.4* Secured Note Purchase Agreement, dated as of December 13,
1999, among Vesper S.A., Nortel Networks Corporation, the
Banks and Other Entities, ABN AMRO Bank N.V., and Nortel
Networks Corporation.
10.5* Secured Note Purchase Agreement, dated as of December 13,
1999, among Vesper S.A., ABN AMRO Bank N.V. and Qualcomm
Incorporated, the Banks and Other Entities.
10.6* Equipment Supply and Services Agreement, dated as of August
4, 1999, between Mirror S.A. and Ericsson Telecomunicacoes
S.A..
10.7* Equipment Supply and Services Agreement, dated as of July 9,
1999, between Mirror S.A. and Nortel Networks Corporation.
10.8* Equipment Supply and Services Agreement, dated as of
September 30, 1999, between Megatel do Brasil S.A. and
Lucent Technologies World Services Inc.
10.9* Technical Services Agreement, dated as of September 27,
1999, between the Registrant and Formus Communications, Inc.
10.10* Technical Services Agreement, Know-How Transfer and
Technical Services Agreement and Secondment Agreement, dated
as of July 30, 1999, between Bell Canada International Inc.
and Megatel do Brasil S.A.
In accordance with Instruction 2 to Item 601 of Regulation
S-K, the following agreement was not filed as an exhibit
because it is substantially identical in all material
respects to Exhibit 10.10: Technical Services Agreement,
Know-How Transfer and Technical Services Agreement and
Secondment Agreement, dated as of May 27, 1999, between Bell
Canada International Inc. and Mirror S.A.
</TABLE>
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.11* Technical Services Agreement, dated May 2000, among the
Registrant, Vesper Sao Paulo S.A. and Vesper S.A.
10.12* Amended and Restated Shareholders Agreement of Vesper
Holding Sao Paulo S.A., dated May 2000, among the
Registrant, Qualcomm Incorporated and Bell Canada
International Inc.
In accordance with Instruction 2 to Item 601 of Regulation
S-K, the following agreement was not filed as an exhibit
because it is substantially identical in all material
respects to Exhibit 10.12: Amended and Restated Shareholders
Agreement of Vesper Holding S.A. dated May 2000, among the
Registrant, Qualcomm Incorporated and Bell Canada
International Inc.
10.13* BV Interativa Shareholders Agreement, dated as of March 22,
2000, among the Registrant, Qualcomm Incorporated and Bell
Canada International Inc.
10.14* 1998 Stock Option Plan of the Registrant, as amended and
restated effective October 15, 1999.
10.15* Employment Agreement by and between the Registrant and David
J. Leonard, effective as of October 1, 1998.
10.16* Employment Agreement by and between the Registrant and Barry
L. Rowan, effective as of July 12, 1999.
10.17* Employment Agreement by and between the Registrant and John
Gowen, effective as of November 9, 1998.
10.18* Employment Agreement by and between the Registrant and
Gregory P. Sadler, effective as of November 2, 1998.
10.19* Employment Agreement by and between the Registrant and R.
Dwayne House, effective as of January 4, 1999.
10.20* Series A Preferred Stock Purchase Agreements, dated as of
January 26, 1999 and May 7, 1999, between the Registrant and
certain holders of stock and directors and officers.
10.21* Series B Preferred Stock Purchase Agreement, dated as of
December 6, 1999, between the Registrant and certain holders
of stock and directors and officers.
10.22* Follow-On Series B/B-1 Preferred Stock Purchase Agreement,
dated as of January 7, 2000, between the Registrant and
certain holders of stock and directors and officers.
10.23* Amendment No. 1 Series B Preferred Stock Purchase Agreement,
dated as of December 31, 1999.
10.24* Series C Preferred Stock Purchase Agreement, dated as of
April 20, 2000, between the Registrant and El Paso Energy
Communications Company and certain officers.
21.1* Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP, Denver, Colorado.
23.2 Consent of Arthur Andersen S/C, Rio de Janeiro, Brazil.
23.3 Consent of Pistrelli, Diaz Y Asociados, Member Firm of
Arthur Andersen.
23.4* Consent of Cleary, Gottlieb, Steen & Hamilton (contained in
its opinion to be filed as Exhibit 5.1 hereto).
24.1 Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
Exhibit 3.1
THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
VELOCOM INC.
(Pursuant to Section 242 and Section 245)
VELOCOM INC., originally filed in the state of Delaware as WLL
International, Inc., hereby certifies as follows:
1. The name of the corporation is VELOCOM INC. (the "Corporation"). The
date of filing of its original Certificate of Incorporation with the Secretary
of State of the State of Delaware was April 29, 1998; an Amended and Restated
Certificate of Incorporation was filed with the Delaware Secretary of State on
December 3, 1999; and a Second Amended and Restated Certificate of Incorporation
was filed with the Delaware Secretary of State on January 6, 2000.
2. This Third Amended and Restated Certificate of Incorporation
restates and amends the original Certificate of Incorporation, the Amended and
Restated Certificate of Incorporation, the Second Amended and Restated
Certificate of Incorporation and all amendments and certificates thereto.
3. This Third Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") has been duly adopted in accordance with Section
242 and Section 245 of the Delaware General Corporation Law.
ARTICLE ONE.
The name of this corporation is VELOCOM INC.
ARTICLE TWO.
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, Delaware
19805. The name of its registered agent at such address is Corporation Service
Company.
ARTICLE THREE.
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
1
<PAGE> 2
ARTICLE FOUR.
SECTION 4.1 AUTHORIZED CAPITAL.
(a) The Corporation shall be authorized to issue two classes of
stock to be designated respectively "Common Stock" and "Preferred Stock." The
aggregate number of shares which the Corporation shall have the authority to
issue is two hundred nine million seven hundred eighteen thousand one hundred
fifty four (209,718,154); the total number of shares of Common Stock shall be
one hundred twenty million four hundred twenty one thousand five hundred seventy
seven (120,421,577), with a par value of $.0001 per share, and the total number
of shares of Preferred Stock shall be eighty nine million two hundred ninety six
thousand five hundred seventy seven (89,296,577), with a par value of $.0001 per
share. Such Preferred Stock may be issued in series.
(b) Subject to the voting requirements set forth in Section
4.2(b)(iii), the Corporation's board of directors shall have the authority,
without stockholder action, to determine the preferences, limitations and
relative rights of any Preferred Stock (whether in a series or as a class),
including without limitation the following: (i) the designation of any series of
Preferred Stock; (ii) unlimited, special, conditional, or limited voting rights,
or no right to vote; except that no condition, limitation, or prohibition on
voting shall eliminate any right to vote provided by the Delaware General
Corporation Law; (iii) redemption rights; (iv) conversion rights, (v)
distribution or dividend rights, including the determination of whether such
rights are cumulative, non-cumulative or partially cumulative, and (vi)
preference rights over any other class or series of shares with respect to
distributions, including dividends and distributions upon the dissolution of the
Corporation.
(c) Common Stock shall be divided into one hundred thirteen
million nine hundred forty one thousand six hundred sixty seven (113,941,667)
shares of voting common stock (the "Voting Common Stock") and six million four
hundred seventy nine thousand nine hundred ten (6,479,910) shares of non-voting
Common Stock (the "Non-Voting Common Stock, and together, the "Common Stock").
Except as otherwise required by law, the Non-Voting Common Stock shall not be
entitled to vote on any matter on which the Stockholders of the Corporation
shall be entitled to vote; and shares of Non-Voting Common Stock shall not be
included in determining the number of shares voting or entitled to vote on any
such matters. Except for the difference in voting rights, both the Voting Common
Stock and the Non-Voting Common stock shall be identical in their rights.
SECTION 4.2 DESIGNATION OF PREFERRED STOCK.
Thirty one million (31,000,000) of the authorized shares of Preferred
Stock are hereby designated as "Series A Preferred Stock" (the "Series A
Preferred"); forty two million six hundred sixty six thousand six hundred sixty
seven (42,666,667) of the authorized shares of Preferred Stock are hereby
2
<PAGE> 3
designated as "Series B Preferred Stock" (the "Series B Preferred"); six million
four hundred seventy nine thousand nine hundred ten (6,479,910) of the
authorized shares of Preferred Stock are hereby designated as "Series B-1
Preferred Stock" (the "Series B-1 Preferred," and together with the Series B
Preferred, the "Series B/B-1 Preferred"); and five million one hundred fifty
thousand (5,150,000) of the authorized shares of Preferred Stock are hereby
designated as "Series C Preferred Stock" (the "Series C Preferred"). Except for
the differences in voting and conversion rights set forth herein, both the
Series B Preferred and the Series B-1 Preferred shall be identical in their
rights. The Series A Preferred, the Series B/B-1 Preferred and the Series C
Preferred are hereinafter collectively referred to as the "Series Preferred."
The rights, preferences, privileges, restrictions and other matters relating to
the Series Preferred are as follows:
(a) DIVIDEND RIGHTS.
(i) Declared Dividends. Holders of the Series Preferred, in
preference to the holders of Common Stock and any other stock of the Corporation
that is not by its terms expressly senior in right of payment to the Series
Preferred (collectively, "Junior Stock"), shall be entitled to receive
dividends, when and as declared by the board of directors, but only out of funds
that are legally available therefor. In addition, in the event that the
Corporation declares or pays any dividends upon the Common Stock (whether
payable in cash, securities or other property) other than dividends payable
solely in shares of Common Stock, the Corporation shall also declare and pay to
the holders of the Series Preferred at the same time that it declares and pays
such dividends to the holders of the Common Stock, the dividends which would
have been declared and paid with respect to the Common Stock issuable upon
conversion of the Series Preferred had all of the outstanding Series Preferred
been converted immediately prior to the record date for such dividend, or if no
record date is fixed, the date as of which the record holders of Common Stock
entitled to such dividends are to be determined. The Corporation shall not
declare dividends on one Series of Preferred Stock and not on each other Series
of Preferred Stock.
(ii) Preference. So long as any of the Series Preferred
remains outstanding, without the prior written consent of the holders of
sixty-six and two-thirds percent (66 2/3%) of the outstanding shares of the
Series Preferred (the "Required Holders"), the Corporation shall not, nor shall
it permit any Subsidiary to, redeem, purchase or otherwise acquire directly or
indirectly any Junior Stock, nor shall the Corporation directly or indirectly
pay or declare any dividend or make any distribution upon any Junior Stock. The
provisions of this Section 4.2(a)(ii) shall not, however, apply to (i) the
acquisition of shares of any Junior Stock in exchange for shares of any other
Junior Stock, (ii) the payment of cash dividends on the Common Stock to the
extent that equivalent dividends are paid on the Series Preferred as provided
above, or (iii) any repurchase of any Reserved Employee Stock from former
employees, directors or consultants in connection with termination of employment
or service as a director or consultant that is approved by the Corporation's
board of directors.
3
<PAGE> 4
(b) VOTING RIGHTS.
(i) Generally. Except as otherwise provided herein or as
required by law, the Series Preferred shall vote with the shares of the Common
Stock of the Corporation (and not as a separate class) at any annual or special
meeting of stockholders of the Corporation, and may act by written consent in
the same manner as the Common Stock, in either case upon the following basis:
each holder of shares of the Series Preferred shall be entitled to such number
of votes as shall be equal to the whole number of shares of Common Stock into
which such holder's aggregate number of shares of the Series Preferred are
convertible (pursuant to Section 4.2(e) below) immediately after the close of
business on the record date fixed for such meeting or the effective date of such
written consent.
(ii) Except as specifically set forth in this Article Four,
or as otherwise required by law, each outstanding share of Series B-1 Preferred
shall not be entitled to vote on any matter on which the stockholders of the
Corporation shall be entitled to vote; and shares of Series B-1 Preferred shall
not be included in determining the number of shares voting or entitled to vote
on any such matters.
(iii) Class Vote Requirement. Without the affirmative vote
of the Required Holders, the Corporation shall not (i) create, issue or
authorize the issuance of any additional Common Stock or Preferred Stock or
create or authorize any new class or series of the Corporation's capital stock
(except for issuances of Reserved Employee Stock, issuances upon conversion of
Preferred Stock, and issuances in connection with strategic transactions
involving the Corporation and the non-affiliates of the Corporation approved by
the Corporation's board of directors, the primary purpose of which is other than
to raise funds for the Corporation (including (1) joint ventures, manufacturing,
marketing or distribution arrangements or (2) technology transfer or development
arrangements)); (ii) amend this Certificate of Incorporation or the
Corporation's Bylaws; (iii) engage in (1) any merger, consolidation, business
combination, recapitalization, or reorganization in which (A) the stockholders
of the Corporation immediately prior to such transaction own capital stock
representing less than seventy percent (70%) of the surviving company's voting
power in the election of directors immediately after such transaction or (B) the
stockholders of the Corporation immediately prior to such transaction do not own
substantially the same proportion of capital stock of the surviving company
after the transaction as they owned of the Corporation immediately prior to the
transaction (a "Disproportionate Change"); provided, however, that any change in
a stockholder's ownership percentage of less than ten percentage points shall
not be deemed to be a Disproportionate Change, (2) a liquidation or sale of
substantially all of the assets by the Corporation or any of its subsidiaries
outside the ordinary course of business, or (3) a purchase of substantial assets
by the Corporation or any of its subsidiaries outside the ordinary course of
business; (iv) engage in any business other than telecommunications and
multimedia communications services, including but not limited to data, voice or
video transmission, cable, IP telephony, MMDS, Internet access or any other
telecommunications service using wireless, wireline, fiber, LMDS or broadband
access or any other technology, and
4
<PAGE> 5
also including any Internet content business; (v) increase the amount of
Reserved Employee Stock above twelve percent (12%) of the Corporation's Common
Stock Deemed Outstanding; or (vi) engage in any transaction with an affiliate of
the Corporation, except for transactions involving wholly-owned subsidiaries,
that is not approved by a majority of the Corporation's disinterested directors.
(c) LIQUIDATION RIGHTS.
(i) Liquidation Value. Upon any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, before any
distribution or payment shall be made to the holders of any Junior Stock or
Common Stock, (i) first, the holders of the Series B/B-1 Preferred and Series C
Preferred, on a pari passu basis, shall be entitled to be paid out of the assets
of the Corporation an amount with respect to each share of the Series B/B-1
Preferred or Series C Preferred, respectively, equal to the sum of (A) the
Original Series B/B-1 Issue Price or Original Series C Issue Price, as
applicable (as defined below), plus (B) all declared but unpaid dividends
thereon (the "Series B/B-1 Liquidation Value" and "Series C Liquidation Value,"
respectively) and (ii) second, after the payment of the full liquidation
preference of the Series B/B-1 Preferred and Series C Preferred, the holders of
the Series A Preferred shall be entitled to be paid out of the assets of the
Corporation an amount with respect to each share of the Series A Preferred equal
to the sum of (A) the Original Series A Issue Price (as defined below), plus (B)
all declared but unpaid dividends thereon (the "Series A Liquidation Value").
The "Original Series A Issue Price" shall be Three Dollars ($3.00) per share, as
appropriately adjusted for any future stock splits, stock combinations, stock
dividends or similar transactions affecting the Series A Preferred. The
"Original Series B/B-1 Issue Price" shall be Six Dollars ($6.00) per share, as
appropriately adjusted for any future stock splits, stock combinations, stock
dividends or similar transactions affecting the Series B/B-1 Preferred. The
"Original Series C Issue Price" shall be Ten Dollars ($10.00) per share, as
appropriately adjusted for any future stock splits, stock combinations, stock
dividends or similar transactions affecting the Series C Preferred.
(ii) Participation. After the payment of the full
liquidation preference of the Series Preferred as set forth in Section 4.2(c)(i)
above, the remaining assets of the Corporation legally available for
distribution, if any, shall be distributed to the holders of Junior Stock
entitled to a preference over the Common Stock and, thereafter, to the holders
of Common Stock. The holders of the Series Preferred shall be entitled to
participate in distributions to holders of the Common Stock such that, giving
effect to all distributions pursuant to Section 4.2(c)(i), the holders of the
Series Preferred receive aggregate distributions equal to the greater of (A) the
Series A Liquidation Value (in the case of the Series A Preferred), the Series
B/B-1 Liquidation Value (in the case of the Series B/B-1 Preferred) or the
Series C Liquidation Value (in the case of the Series C Preferred), and (B) the
amounts that such holders would have received if the Series Preferred had been
converted into Common Stock immediately prior to such liquidation, dissolution
or winding up of the Corporation.
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(iii) Liquidation Events. At the option of the Required Holders,
the following events shall be considered a liquidation for purposes of Section
4.2(c):
(A) any (1) merger, consolidation, business combination,
reorganization or recapitalization of the Corporation that involves a
Disproportionate Change; provided, however, that any change in a stockholder's
ownership percentage of less than ten percentage points shall not be deemed to
be a Disproportionate Change; or (2) transaction or series of related
transactions in which capital stock representing in excess of thirty percent
(30%) of the Corporation's voting power in electing the board of directors is
transferred to any Person or Persons not an Affiliate of the transferring
stockholders (an "Acquisition"); or
(B) a sale, lease or other disposition of all or
substantially all of the assets of the Corporation (an "Asset Transfer").
(iv) Proportionate Payments. If, upon any liquidation,
dissolution or winding up, the assets of the Corporation shall be insufficient
to make payment in full to all holders of the Series Preferred, then such assets
shall be distributed first, among the holders of the Series B/B-1 Preferred and
Series C Preferred on a pro rata basis at the time outstanding, ratably in
proportion to the full amounts to which they would otherwise be entitled and
second, any remaining assets shall be distributed among the holders of the
Series A Preferred at the time outstanding, ratably in proportion to the full
amounts to which they would otherwise be entitled.
(d) REDEMPTION RIGHTS.
(i) Scheduled Redemptions. Unless a holder of Series Preferred
elects otherwise in accordance with Section 4.2(d)(iii) below, on January 26,
2005, the Corporation shall redeem thirty three and one-third percent (33 1/3%)
of the then-outstanding shares of each of the Series A Preferred, the Series
B/B-1 Preferred and the Series C Preferred held by such holder; on January 26,
2006, the Corporation shall redeem fifty percent (50%) of the then-outstanding
shares of each of the Series A Preferred, the Series B/B-1 Preferred and the
Series C Preferred held by such holder; and shall redeem all remaining shares of
the Series A Preferred, the Series B/B-1 Preferred and the Series C Preferred
held by such holder on January 26, 2007 (the "Scheduled Redemption Dates"), at a
price per share equal to the Series A Liquidation Value, the Series B/B-1
Liquidation Value, or the Series C Liquidation Value, respectively.
(ii) Redemption Payments. For each share of the Series Preferred
which is to be redeemed hereunder, the Corporation shall be obligated on the
Scheduled Redemption Date to pay to the holder thereof (upon surrender by such
holder at the Corporation's principal office of the certificate representing
such share) an amount in cash equal to the Series A Liquidation Value, the
Series B/B-1 Liquidation Value or the Series C Liquidation Value, as applicable.
If the funds of the Corporation legally available for redemption of the Series
Preferred on any Scheduled Redemption
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Date are insufficient to redeem the total number of shares to be redeemed on
such date, those funds which are legally available shall be used to redeem the
maximum possible number of shares pro rata among the holders of the Series
Preferred to be redeemed based upon the aggregate Liquidation Value of such
shares of the Series Preferred held by each such holder. At any time thereafter
when additional funds of the Corporation are legally available for the
redemption of the Series Preferred, such funds shall immediately be used to
redeem the balance of the shares which the Corporation has become obligated to
redeem on any Scheduled Redemption Date but which it has not redeemed.
(iii) Notice of Redemption. Except as otherwise provided herein,
the Corporation shall mail written notice of each redemption of the Series
Preferred to each record holder thereof not more than 60 nor less than 30 days
prior to the Scheduled Redemption Date (the "Corporation's Notice"). Any holder
of the Series Preferred may elect not to participate in the redemption on any
Scheduled Redemption Date by providing written notice to the Corporation of its
election not to have its shares of Preferred Stock redeemed within 10 days after
receipt of the Corporation's Notice. The holders of the Series Preferred to be
redeemed shall in any event have the right to convert any or all of their shares
into Common Stock at any time prior to the close of business on any Scheduled
Redemption Date. In case fewer than the total number of shares represented by
any certificate are redeemed, a new certificate representing the number of
unredeemed shares shall be issued to the holder thereof without cost to such
holder within five business days after surrender of the certificate representing
the redeemed shares.
(iv) Other Redemptions or Acquisitions. The Corporation shall
not, nor shall it permit any Subsidiary to, redeem or otherwise acquire any
shares of the Series Preferred, except as expressly authorized herein or
pursuant to a purchase offer made pro rata to all holders of the Series
Preferred on the basis of the aggregate Liquidation Value of the shares of the
Series Preferred owned by each such holder. If the assets of the Corporation
shall be insufficient to make payment in full to all holders whose shares of
Series Preferred are being redeemed or otherwise acquired, such assets shall be
used first to redeem shares of Series B/B-1 Preferred and Series C Preferred,
ratably in proportion to the redemption price for the shares that such holders
otherwise would have been entitled to redeem, and second, any remaining assets
shall be used to redeem shares of Series A Preferred, ratably in proportion to
the redemption price for the shares that such holders otherwise would have been
entitled to redeem.
(e) CONVERSION RIGHTS - CONVERSION OF SERIES PREFERRED INTO COMMON
STOCK.
The holders of the Series Preferred shall have the following rights with
respect to the conversion of the Series Preferred into shares of Common Stock:
(i) Optional Conversion into Common Stock. Subject to and in
compliance with the provisions of this Section 4.2(e), any shares of the Series
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Preferred may, at the option of the holder, be converted at any time into
fully-paid and nonassessable shares of Common Stock (either Voting Common Stock,
in the case of Series A Preferred, Series B Preferred or Series C Preferred, or
Non-Voting Common Stock, in the case of Series B-1 Preferred). The number of
shares of Common Stock to which a holder of the Series A Preferred shall be
entitled upon conversion shall be the product obtained by multiplying the
"Series A Conversion Rate" then in effect (determined as provided in Section
4.2(e)(ii)) by the number of shares of the Series A Preferred being converted.
The number of shares of Common Stock to which a holder of the Series B/B-1
Preferred shall be entitled upon conversion shall be the product obtained by
multiplying the "Series B/B-1 Conversion Rate" then in effect (determined as
provided in Section 4.2(e)(ii)) by the number of shares of the Series B/B-1
Preferred being converted. The number of shares of Common Stock to which a
holder of the Series C Preferred shall be entitled upon conversion shall be the
product obtained by multiplying the "Series C Conversion Rate" then in effect
(determined as provided in Section 4.2(e)(ii)) by the number of shares of the
Series C Preferred being converted.
(ii) Series Conversion Rate. The conversion rate in effect at any
time for conversion of the Series A Preferred (the "Series A Conversion Rate")
shall be the quotient obtained by dividing the Series A Liquidation Value by the
"Series A Conversion Price" calculated as provided in Section 4.2(e)(iii). The
conversion rate in effect at any time for conversion of the Series B/B-1
Preferred (the "Series B/B-1 Conversion Rate") shall be the quotient obtained by
dividing the Series B/B-1 Liquidation Value by the "Series B/B-1 Conversion
Price" calculated as provided in Section 4.2(e)(iii). The conversion rate in
effect at any time for conversion of the Series C Preferred (the "Series C
Conversion Rate") shall be the quotient obtained by dividing the Series C
Liquidation Value by the "Series C Conversion Price" calculated as provided in
Section 4.2(e)(iii).
(iii) Conversion Price. The conversion price for the Series A
Preferred (the "Series A Conversion Price") shall initially be the Original
Series A Issue Price (i.e., $3.00). Such initial Series A Conversion Price shall
be adjusted from time to time in accordance with this Section 4.2(e). If and
whenever on or after the first date of issuance of any shares of Series A
Preferred (the "Original Series A Issue Date") the Corporation issues or sells,
or in accordance with this Section 4.2(e)(iii) is deemed to have issued or sold,
any shares of its Common Stock (other than pursuant to a Permitted Issuance) for
a consideration per share less than the Series A Conversion Price in effect
immediately prior to the time of such issue or sale, then immediately upon such
issue or sale or deemed issue or sale the Series A Conversion Price shall be
reduced to the amount determined by dividing (a) the sum of (1) the product
derived by multiplying the Series A Conversion Price in effect immediately prior
to such issue or sale by the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (2) the consideration, if any,
received or deemed to have been received by the Corporation upon such issue or
sale, by (b) the number of shares of Common Stock Deemed Outstanding immediately
after such issue or sale. All references to the Series A Conversion Price herein
shall mean the Series A Conversion Price as so adjusted.
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The conversion price for the Series B/B-1 Preferred (the "Series B/B-1
Conversion Price") shall initially be the Original Series B/B-1 Issue Price
(i.e., $6.00). Such initial Series B/B-1 Conversion Price shall be adjusted from
time to time in accordance with this Section 4.2(e). Except with respect to
Defaulting Purchasers (as defined in Section 4.2 (e)(ix) below) for whom the
Series B/B-1 Conversion Price shall be as set forth in Section 4.2(e)(ix) below,
if and whenever on or after the first date of issuance of any shares of Series
B/B-1 Preferred (the "Original Series B/B-1 Issue Date") the Corporation issues
or sells, or in accordance with this Section 4.2(e)(iii) is deemed to have
issued or sold, any shares of its Common Stock (other than pursuant to a
Permitted Issuance) for a consideration per share less than the Series B/B-1
Conversion Price in effect immediately prior to the time of such issue or sale,
then immediately upon such issue or sale or deemed issue or sale the Series
B/B-1 Conversion Price shall be reduced to the amount determined by dividing (a)
the sum of (1) the product derived by multiplying the Series B/B-1 Conversion
Price in effect immediately prior to such issue or sale by the number of shares
of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus
(2) the consideration, if any, received or deemed to have been received by the
Corporation upon such issue or sale, by (b) the number of shares of Common Stock
Deemed Outstanding immediately after such issue or sale. All references to the
Series B/B-1 Conversion Price herein shall mean the Series B/B-1 Conversion
Price as adjusted pursuant to this Section 4.2(e)(iii) and Section 4.2 (e)(ix)
below.
The conversion price for the Series C Preferred (the "Series C
Conversion Price") shall initially be the Original Series C Issue Price (i.e.,
$10.00). Such initial Series C Conversion Price shall be adjusted from time to
time in accordance with this Section 4.2(e). If and whenever on or after the
first date of issuance of any shares of Series C Preferred (the "Original Series
C Issue Date") the Corporation issues or sells, or in accordance with this
Section 4.2(e)(iii) is deemed to have issued or sold, any shares of its Common
Stock (other than pursuant to a Permitted Issuance) for a consideration per
share less than the Series C Conversion Price in effect immediately prior to the
time of such issue or sale, then immediately upon such issue or sale or deemed
issue or sale the Series C Conversion Price shall be reduced to the amount
determined by dividing (a) the sum of (1) the product derived by multiplying the
Series C Conversion Price in effect immediately prior to such issue or sale by
the number of shares of Common Stock Deemed Outstanding immediately prior to
such issue or sale, plus (2) the consideration, if any, received or deemed to
have been received by the Corporation upon such issue or sale, by (b) the number
of shares of Common Stock Deemed Outstanding immediately after such issue or
sale. All references to the Series C Conversion Price herein shall mean the
Series C Conversion Price as so adjusted.
For purposes of determining the adjusted Series A Conversion Price for
any holder of Series A Preferred, the adjusted Series B/B-1 Conversion Price for
any holder of Series B/B-1 Preferred except for a Defaulting Purchaser, and/or
the adjusted Series C Conversion Price for any holder of Series C Preferred, the
following shall be applicable:
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(A) Issuance of Rights or Options. Except for Permitted
Issuances, if the Corporation in any manner grants or sells any Options and the
price per share for which Common Stock is issuable upon the exercise of such
Options, or upon conversion or exchange of any Convertible Securities issuable
upon exercise of such Options, is less than the Series A Conversion Price, the
Series B/B-1 Conversion Price and/or the Series C Conversion Price, as the case
may be, in effect immediately prior to the time of the granting or sale of such
Options, then the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or upon conversion or exchange of the total maximum
amount of such Convertible Securities issuable upon the exercise of such Options
shall be deemed to have been issued and sold by the Corporation at the time of
the granting or sale of such Options for such price per share. For purposes of
this paragraph, the "price per share for which Common Stock is issuable" shall
be determined by dividing (1) the total amount, if any, received or receivable
by the Corporation as consideration for the granting or sale of such Options,
plus the minimum aggregate amount of additional consideration payable to the
Corporation upon exercise of all such Options, plus in the case of such Options
which relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Corporation upon the issuance
or sale of such Convertible Securities and the conversion or exchange thereof,
by (2) the total maximum number of shares of Common Stock issuable upon the
exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options. No further
adjustment of the Series A Conversion Price, the Series B/B-1 Conversion Price,
and/or the Series C Conversion Price shall be made when Convertible Securities
are actually issued upon the exercise of such Options or when Common Stock is
actually issued upon the exercise of such Options or the conversion or exchange
of such Convertible Securities.
(B) Issuance of Convertible Securities. If the Corporation
in any manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon conversion or exchange thereof is less
than the Series A Conversion Price, the Series B/B-1 Conversion Price, and/or
the Series C Conversion Price, as the case may be, in effect immediately prior
to the time of such issue or sale, then the maximum number of shares of Common
Stock issuable upon conversion or exchange of such Convertible Securities shall
be deemed to have been issued and sold by the Corporation at the time of the
issuance or sale of such Convertible Securities for such price per share. For
the purposes of this paragraph, the "price per share for which Common Stock is
issuable" shall be determined by dividing (1) the total amount received or
receivable by the Corporation as consideration for the issue or sale of such
Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (2) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment of the Series A Conversion Price, the Series B/B-1 Conversion
Price, and/or the Series C Conversion Price, as the case may be, shall be made
when Common Stock is actually issued upon the conversion or exchange of such
Convertible Securities, and if
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any such issue or sale of such Convertible Securities is made upon exercise of
any Options for which adjustments of the Series A Conversion Price, the Series
B/B-1 Conversion Price, and/or the Series C Conversion Price had been or are to
be made pursuant to other provisions of this Section 4.2(e), no further
adjustment of the Series A Conversion Price, the Series B/B-1 Conversion Price,
and/or the Series C Conversion Price shall be made by reason of such issue or
sale.
(C) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Options, the additional consideration, if
any, payable upon the conversion or exchange of any Convertible Securities or
the rate at which any Convertible Securities are convertible into or
exchangeable for Common Stock changes at any time, the Series A Conversion
Price, the Series B/B-1 Conversion Price, and/or the Series C Conversion Price,
as the case may be, in effect at the time of such change shall be immediately
adjusted to the Series A Conversion Price, the Series B/B-1 Conversion Price,
and/or the Series C Conversion Price which would have been in effect at such
time had such Options or Convertible Securities still outstanding provided for
such changed purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold.
(D) Treatment of Expired Options and Unexercised Convertible
Securities. Upon the expiration of any Option or the termination of any right to
convert or exchange any Convertible Security without the exercise of any such
Option or right, the Series A Conversion Price, the Series B/B-1 Conversion
Price, and/or the Series C Conversion Price then in effect hereunder shall be
adjusted immediately to the Series A Conversion Price, the Series B/B-1
Conversion Price, and/or the Series C Conversion Price which would have been in
effect at the time of such expiration or termination had such Option or
Convertible Security, to the extent outstanding immediately prior to such
expiration or termination, never been issued.
(E) Calculation of Consideration Received. If any Common
Stock, Option or Convertible Security is issued or sold or deemed to have been
issued or sold for cash, the consideration received therefor shall be deemed to
be the amount received by the Corporation therefor (net of discounts,
commissions and related expenses). If any Common Stock, Option or Convertible
Security is issued or sold for a consideration other than cash, the amount of
the consideration other than cash received by the Corporation shall be the fair
value of such consideration. If any Common Stock, Option or Convertible Security
is issued to the owners of the non-surviving entity in connection with any
merger in which the Corporation is the surviving corporation, the amount of
consideration therefor shall be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Option or Convertible Security, as the case may be. The fair
value of any consideration other than cash and securities shall be determined
jointly by the Corporation and the Required Holders. If such parties are unable
to reach agreement within a reasonable period of time, the fair value of such
consideration shall be determined by an independent appraiser experienced in
valuing such type of consideration jointly selected by the Corporation and the
Required Holders. The
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determination of such appraiser shall be final and binding upon the parties, and
the fees and expenses of such appraiser shall be borne by the Corporation.
(F) Integrated Transactions. In case any Option is issued in
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Option by the parties thereto, the Option
shall be deemed to have been issued for a consideration of $.01.
(G) Treasury Shares. The number of shares of Common Stock
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation or any Subsidiary, and the disposition of any
shares so owned or held shall be considered an issuance or sale of Common Stock.
(iv) Adjustment for Stock Splits and Combinations. If the
Corporation shall at any time or from time to time effect a subdivision of the
outstanding Common Stock, the Series A Conversion Price, the Series B/B-1
Conversion Price and the Series C Conversion Price in effect immediately before
that subdivision shall be proportionately decreased. Conversely, if the
Corporation shall at any time or from time to time combine the outstanding
shares of Common Stock into a smaller number of shares, the Series A Conversion
Price, the Series B/B-1 Conversion Price and the Series C Conversion Price in
effect immediately before the combination shall be proportionately increased.
Any adjustment under this Section 4.2(e)(iv) shall become effective at the close
of business on the date the subdivision or combination becomes effective.
(v) Adjustment for Common Stock Dividends and Distributions. If
the Corporation at any time or from time to time makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive, a dividend
or other distribution payable in additional shares of Common Stock, in each such
event the Series A Conversion Price, the Series B/B-1 Conversion Price, and the
Series C Conversion Price that is then in effect shall be decreased as of the
time of such issuance or, in the event such record date is fixed, as of the
close of business on such record date, by multiplying each of the Series A
Conversion Price, the Series B/B-1 Conversion Price, and the Series C Conversion
Price then in effect by a fraction (1) the numerator of which is the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date, and (2) the
denominator of which is the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the close of
business on such record date plus the number of shares of Common Stock issuable
in payment of such dividend or distribution; provided, however, that if such
record date is fixed and such dividend is not fully paid or if such distribution
is not fully made on the date fixed therefor, the Series A Conversion Price, the
Series B/B-1 Conversion Price, and the Series C Conversion Price shall be
recomputed accordingly as of the close of business on such record date and
thereafter the Series A Conversion Price, the Series B/B-1 Conversion Price, and
the Series C Conversion Price shall be
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adjusted pursuant to this Section 4.2(e)(v) to reflect the actual payment of
such dividend or distribution.
(vi) Adjustments for Other Dividends and Distributions. If the
Corporation at any time or from time to time makes, or fixes a record date for
the determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the Corporation other than shares of
Common Stock, in each such event provision shall be made so that the holders of
the Series Preferred shall receive upon conversion thereof, in addition to the
number of shares of Common Stock receivable thereupon, the amount of other
securities of the Corporation which they would have received had their Series
Preferred been converted into Common Stock on the date of such event and had
they thereafter, during the period from the date of such event to and including
the conversion date, retained such securities receivable by them as aforesaid
during such period, subject to all other adjustments called for during such
period under this Section 4.2(e) with respect to the rights of the holders of
the Series Preferred or with respect to such other securities by their terms.
(vii) Adjustment for Reclassification, Exchange and Substitution.
If at any time or from time to time the Common Stock issuable upon the
conversion of the Series Preferred is changed into the same or a different
number of shares of any class or classes of stock, whether by recapitalization,
reclassification or otherwise (other than a subdivision or combination of shares
or stock dividend or a reorganization, merger, consolidation or sale of assets
provided for elsewhere in this Section 4.2), in any such event each holder of
the Series Preferred shall have the right thereafter to convert such stock into
the kind and amount of stock and other securities and property receivable in
connection with such recapitalization, reclassification or other change by
holders of the maximum number of shares of Common Stock into which such shares
of the Series Preferred could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustments
as provided herein or with respect to such other securities or property by the
terms thereof.
(viii) Reorganizations, Mergers, Consolidations or Sales of
Assets. If at any time or from time to time there is a capital reorganization of
the Common Stock (other than a recapitalization, subdivision, combination,
reclassification, exchange or substitution of shares provided for elsewhere in
this Section 4.2), as a part of such capital reorganization, provision shall be
made so that the holders of the Series Preferred shall thereafter be entitled to
receive upon conversion of the Series Preferred the number of shares of stock or
other securities or property of the Corporation to which a holder of the maximum
number of shares of Common Stock deliverable upon conversion would have been
entitled in connection with such capital reorganization, subject to adjustment
in respect of such stock or securities by the terms thereof. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 4.2(e) with respect to the rights of the holders of the Series
Preferred after the capital reorganization to the end that the provisions of
this Section 4.2 (including adjustment of the Series A Conversion Price, the
Series B/B-1 Conversion Price, and the Series C Conversion Price then in effect
and the number of shares of Common Stock
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issuable upon conversion of the Series Preferred) shall be applicable after that
event and be as nearly equivalent as practicable.
(ix) Adjustment upon Default under Stock Purchase Agreements.
With respect to the shares of Series B/B-1 Preferred owned by a Defaulting
Purchaser who has not Cured such Default within a 10-day cure period, (as such
terms are defined in Amendment No. 1 to Series B Preferred Stock Purchase
Agreement dated as of December 31, 1999, and in Article 3 of the Follow-On
Series B/B-1 Preferred Stock Purchase Agreement dated December 20, 1999, in each
case among the Corporation and certain purchasers of the Corporation's Series
B/B-1 Preferred (collectively, the "Stock Purchase Agreements")), immediately
upon the expiration of such 10-day cure period, the Series B/B-1 Conversion
Price for such shares in effect immediately prior to such Default shall be
increased to an amount equal to two (2) times the Original Series B/B-1 Issue
Price. Once the Series B/B-1 Conversion Price for such shares of Series B/B-1
Preferred held by the Defaulting Purchaser is adjusted in accordance with this
Section 4.2(e)(ix), it shall no longer be subject to any other adjustment
provided in Section 4.2(e)(iii) of this Certificate of Incorporation. This
Section 4.2(e)(ix) shall not affect the Series B/B-1 Conversion Price for any
holder of Series B/B-1 Preferred other than the Defaulting Purchaser, shall not
affect the Series A Conversion Price or the Series C Conversion Price for shares
of Series A Preferred or Series C Preferred held by the Defaulting Purchaser,
and shall not affect the Series B/B-1 Liquidation Value for any holder of Series
B/B-1 Preferred.
(x) Certificate of Adjustment. In each case of an adjustment or
readjustment of the Series A Conversion Price, the Series B/B-1 Conversion
Price, and/or the Series C Conversion Price for the number of shares of Common
Stock or other securities issuable upon conversion of the Series Preferred, the
Corporation, at its expense, shall compute such adjustment or readjustment in
accordance with the provisions hereof and prepare a certificate showing such
adjustment or readjustment, and shall mail such certificate, by first class
mail, postage prepaid, to each registered holder of the Series Preferred at the
holder's address as shown in the Corporation's books. The certificate shall set
forth such adjustment or readjustment, showing in detail the facts upon which
such adjustment or readjustment is based, including a statement of (1) the
consideration received or deemed to be received by the Corporation for any
additional shares of Common Stock issued or sold or deemed to have been issued
or sold, (2) the Series A Conversion Price, the Series B/B-1 Conversion Price
and/or the Series C Conversion Price at the time in effect, (3) the number of
additional shares of Common Stock issued or sold or deemed to have been issued
or sold, and (4) the type and amount, if any, of other property which at the
time would be received upon conversion of the Series Preferred.
(xi) Notices of Record Date. Upon (i) any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or (ii) any Acquisition (as defined in Section
4.2(c)(iii)(A)) or other capital reorganization of the Corporation, any
reclassification or recapitalization of the capital
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stock of the Corporation, any merger or consolidation of the Corporation with or
into any other corporation, any Asset Transfer (as defined in Section
4.2(c)(iii)(B)), or any voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, the Corporation shall mail to each holder of the
Series Preferred at least twenty (20) days prior to the record date specified
therein a notice specifying (1) the date on which any such record is to be taken
for the purpose of such dividend or distribution and a description of such
dividend or distribution, (2) the date on which any such Acquisition,
reorganization, reclassification, transfer, consolidation, merger, Asset
Transfer, dissolution, liquidation or winding up is expected to become
effective, and (3) the date, if any, that is to be fixed for determining the
holders of record of Common Stock (or other securities) that shall be entitled
to exchange their shares of Common Stock (or other securities) for securities or
other property deliverable upon such Acquisition, reorganization,
reclassification, transfer, consolidation, merger, Asset Transfer, dissolution,
liquidation or winding up.
(xii) Automatic Conversion into Common Stock. Each share of the
Series Preferred shall automatically be converted into shares of Common Stock
(Voting Common Stock in the case of Series A Preferred, Series B Preferred and
Series C Preferred, and Non-Voting Common Stock in the case of Series B-1
Preferred), based on the then-effective Series A Conversion Price, Series B/B-1
Conversion Price and/or Series C Conversion Price, as the case may be,
immediately upon the closing of a firmly underwritten public offering pursuant
to an effective registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of Common Stock for the account of the
Corporation in which (i) the per share price to the public is at least $15.00
per share (as adjusted for stock splits, recapitalizations and the like), and
(ii) the gross cash proceeds to the Corporation (prior to expenses and
underwriting commissions) are at least $50,000,000. Upon such automatic
conversion, all declared but unpaid dividends, if any, shall be paid in
accordance with Section 4.2(a).
(xiii) Mechanics of Conversion.
(A) Optional Conversion. Each holder of the Series Preferred
who desires to convert the same into shares of Common Stock pursuant to this
Section 4.2(e) shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Corporation or any transfer agent for the Series
Preferred, and shall give written notice to the Corporation at such office that
such holder elects to convert the same. Such notice shall state the number of
shares of the Series Preferred being converted. Thereupon, the Corporation shall
promptly issue and deliver at such office to such holder a certificate or
certificates for the number of shares of Common Stock to which such holder is
entitled and shall promptly pay in cash or, to the extent sufficient funds are
not then legally available therefor, in Common Stock (at the Common Stock's fair
market value determined by the Corporation's board of directors as of the date
of such conversion), any declared but unpaid dividends on the shares of the
Series Preferred being converted. Such conversion shall be deemed to have been
made at the close of business on the date of such surrender of the certificate
representing the shares of the Series Preferred to be converted, and the person
entitled to receive the shares of
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<PAGE> 16
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder of such shares of Common Stock on such date.
(B) Automatic Conversion. Upon the occurrence of the event
specified in Section 4.2(e)(xii) above, the outstanding shares of the Series
Preferred shall be converted into Common Stock (Voting Common Stock in the case
of Series A Preferred, Series B Preferred and Series C Preferred, and Non-Voting
Common Stock in the case of Series B-1 Preferred) automatically without any
further action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Corporation or its transfer
agent; provided, however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such conversion
unless the certificates evidencing such shares of the Series Preferred are
either delivered to the Corporation or its transfer agent as provided below, or
the holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates. Upon surrender by any holder of the
certificates formerly representing shares of the Series Preferred at the office
of the Corporation or any transfer agent for the Series Preferred, there shall
be issued and delivered to such holder promptly at such office and in its name
as shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the shares of
the Series Preferred surrendered were convertible on the date on which such
automatic conversion occurred, and the Corporation shall promptly pay in cash
or, at the option of the Corporation, Common Stock (at the Common Stock's fair
market value determined by the Corporation's board of directors as of the date
of such conversion) or, at the option of the Corporation, a combination of both,
all declared but unpaid dividends on the shares of the Series Preferred being
converted. Until surrendered as provided above, each certificate formerly
representing shares of the Series Preferred shall be deemed for all corporate
purposes to represent the number of shares of Common Stock resulting from such
automatic conversion.
(xiv) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series Preferred. All shares of Common
Stock (including fractions thereof) issuable upon conversion of more than one
share of the Series Preferred by a holder thereof shall be aggregated for
purposes of determination whether the conversion would result in the issuance of
any fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of any fractional share, the Corporation shall, in
lieu of issuing any fractional share, pay cash equal to the product of such
fraction multiplied by the Common Stock's fair market value (as determined by
the Corporation's board of directors) on the date of conversion.
(f) CONVERSION RIGHTS - CONVERSION OF SERIES B PREFERRED INTO
SERIES B-1 PREFERRED OR VICE-VERSA.
The holders of Series B/B-1 Preferred shall have the following rights
with respect to the conversion of Series B Preferred into Series B-1 Preferred
or vice-versa:
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(i) Conversion of Series B Preferred into Series B-1 Preferred.
At any Regulated Holder's request at any time (whether in connection with any
action by the Corporation referred to in Section 4.2(f)(ii)(B) or otherwise),
such Regulated Holder shall have the right, upon the occurrence or possible
occurrence of a Regulatory Problem, to convert any number of shares of Series B
Preferred then held by such Regulated Holder into an equal number of shares of
Series B-1 Preferred.
(ii) Conversion of Series B-1 Preferred into Series B Preferred.
(A) In connection with the occurrence (or the expected
occurrence as described in Section 4.2(f)(ii)(C) below) of any Conversion Event,
each holder of Series B-1 Preferred shall be entitled to convert into an equal
number of shares of Series B Preferred all of such holder's shares of Series B-1
Preferred being (or expected to be) distributed, disposed of or sold in
connection with such Conversion Event.
(B) A "Conversion Event" shall mean (i) any public offering
or public sale of securities of the Corporation (including a public offering
registered under the Securities Act and a public sale pursuant to Rule 144 of
the Securities Exchange Commission or any similar rule then in force), (ii) any
sale of securities of the Corporation to a person or group of persons (within
the meaning of the U.S. Securities Exchange Act of 1934, as amended (the "1934
Act")) if, after such sale, such person or group of persons in the aggregate
would own or control securities which possess in the aggregate the ordinary
power to elect a majority of the Corporation's board of directors (provided that
such sale has been approved by the Corporation's board of directors or a
committee thereof), (iii) any sale of securities of the Corporation to a person
or group of persons (within the meaning of the 1934 Act) if, after such sale,
such person or group of persons in the aggregate would own or control securities
of the Corporation (excluding any Series B-1 Preferred being converted and
disposed of in connection with such Conversion Event) which possesses in the
aggregate the ordinary power to elect a majority of the Corporation's board of
directors, (iv) any sale of securities of the Corporation to a person or group
of persons (within the meaning of the 1934 Act) if, after such sale, such person
or group of persons would not, in the aggregate, own, control or have the right
to acquire more than two percent (2%) of the outstanding securities of any class
of voting securities of the Corporation, and (v) a merger, consolidation or
similar transaction involving the Corporation if, after such transaction, a
person or group of persons (within the meaning of the 1934 Act) in the aggregate
would own or control securities which possess in the aggregate the ordinary
voting power to elect a majority of the surviving company's directors (provided
that the transaction has been approved by the Corporation's board of directors
or a committee thereof).
(C) Each Regulated Holder holding Series B-1 Preferred shall
be entitled to convert Series B-1 Preferred in connection with any Conversion
Event if such Regulated Holder reasonably believes that such Conversion Event
shall be consummated, and a written request for conversion from any Regulated
Holder holding
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<PAGE> 18
Series B-1 Preferred to the Corporation shall obligate the Corporation to effect
such conversion in a timely manner so as to enable each such Regulated Holder to
participate in such Conversion Event. The Corporation shall not cancel the
Series B-1 Preferred so converted before the tenth day following such Conversion
Event and shall reserve such Series B-1 Preferred until such tenth day for
reissuance in compliance with the next sentence. If any shares of Series B-1
Preferred are converted into Series B Preferred in connection with a Conversion
Event and such shares of Series B Preferred are not actually distributed,
disposed of or sold pursuant to such Conversion Event, such shares of Series B
Preferred shall be promptly converted back into the same number of shares of
Series B-1 Preferred.
(D) If at any time the Bank Holding Company Act and the
rules and regulations thereunder (the "BHCA Rules") are amended to allow a
holder of Series B-1 Preferred to convert to Series B Preferred, then upon any
Regulated Holder's request, such Regulated Holder shall have the right to
convert shares of Series B-1 Preferred into an equal number of shares of Series
B Preferred to the extent permissible at such time under the BHCA Rules (as
determined by such holder in its sole discretion).
(iii) Conversion Procedure.
(A) Unless otherwise provided in connection with any
conversion, each conversion of Series B-1 Preferred or Series B Preferred, into
Series B Preferred or Series B-1 Preferred, as the case may be, shall be
effected by the surrender of the certificate or certificates representing the
shares to be converted at the principal office of the Corporation at any time
during normal business hours, together with a written notice by the holder of
such shares stating that such holder desires to convert the shares, or a stated
number of the shares, represented by such certificate or certificates into
shares of the other class (and such statement shall obligate the Corporation to
issue such shares). Unless otherwise provided in connection with any conversion,
each conversion shall be deemed to have been effected as of the close of
business on the date on which such certificate or certificates have been
surrendered and such notice has been received, and at such time the rights of
the holder of the converted Series B-1 Preferred and Series B Preferred, as the
case may be, as such holder shall cease and the person or persons in whose name
or names the certificate or certificates for shares of Series B Preferred or
Series B-1 Preferred are to be issued upon such conversion shall be deemed to
have become the holder or holders of record of the Series B Preferred and the
Series B-1 Preferred represented thereby.
(B) Promptly after the surrender of certificates and the
receipt of written notice, the Corporation shall issue and deliver in accordance
with the surrendering holder's instructions (i) the certificate or certificates
for the Series B Preferred and the Series B-1 Preferred issuable upon such
conversion and (ii) a certificate representing any Series B-1 Preferred and
Series B Preferred which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but which were
not converted.
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<PAGE> 19
(C) The issuance of certificates for Series B-1 Preferred or
Series B Preferred upon conversion of Series B Preferred or Series B-1
Preferred, respectively, shall be made without charge to the holders of such
shares for any issuance tax in respect thereof or other cost incurred by the
Corporation in connection with such conversion and the related issuance of
Series B Preferred and Series B-1 Preferred, as the case may be.
(D) The Corporation has duly authorized, solely for the
purpose of issuance upon the conversion of the Series B-1 Preferred and Series B
Preferred, respectively, such number of Series B Preferred and Series B-1
Preferred, as the case may be issuable upon the conversion of all outstanding
Series B-1 Preferred and Series B Preferred, as the case may be. All shares
which are so issuable shall, when issued, be duly and validly issued, fully paid
and nonassessable and free from all taxes, liens and charges. The Corporation
shall take all such actions as may be necessary to ensure that all such shares
may be so issued without violation of any applicable law or governmental
regulation or any requirements of any domestic securities exchange upon which
shares may be listed (except for official notice of issuance which shall be
immediately transmitted by the Corporation upon issuance).
(E) The Corporation shall not close its books against the
transfer of Series B-1 Preferred and Series B Preferred in any manner which
would interfere with the timely conversion of any Series B-1 Preferred or Series
B Preferred. The Corporation shall assist and cooperate with any holder of
Series B-1 Preferred and Series B Preferred required to make any governmental
filings or obtain any governmental approval prior to or in connection with any
conversion of Series B-1 Preferred and Series B Preferred hereunder (including,
without limitation, making any filings required to be made by the Corporation).
(F) If the Corporation in any manner subdivides or combines
the outstanding Series B-1 Preferred or Series B Preferred, the outstanding
shares of the other class shall be proportionately subdivided or combined in a
similar manner.
(g) CONVERSION RIGHTS - CONVERSION OF NON-VOTING COMMON STOCK INTO
VOTING COMMON STOCK AND VICE-VERSA.
The holders of Common Stock shall have the following rights with respect to
the conversion of Voting Common Stock into Non-Voting Common Stock or
vice-versa:
(i) Conversion of Voting Common Stock into Non-Voting Common
Stock. At any Regulated Holder's request at any time (whether in connection with
any action by the Corporation referred to in Section 4.2(f)(ii)(B) above or
otherwise), such Regulated Holder shall have the right, upon the occurrence or
possible occurrence of a Regulatory Problem, to convert any number of shares of
Voting Common Stock then held by such Regulated Holder into an equal number of
shares of Non-Voting Common Stock.
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<PAGE> 20
(ii) Conversion of Non-Voting Common Stock into Voting Common
Stock.
(A) In connection with the occurrence (or the expected
occurrence as described in Section 4.2(g)(ii)(B) below) of any Conversion Event,
each holder of Non-Voting Common Stock shall be entitled to convert into an
equal number of shares of Voting Common Stock all of such holder's shares of
Non-Voting Common Stock being (or expected to be) distributed, disposed of or
sold in connection with such Conversion Event.
(B) Each Regulated Holder holding Non-Voting Common Stock
shall be entitled to convert Non-Voting Common Stock in connection with any
Conversion Event if such Regulated Holder reasonably believes that such
Conversion Event shall be consummated, and a written request for conversion from
any Regulated Holder holding Non-Voting Common Stock to the Corporation shall
obligate the Corporation to effect such conversion in a timely manner so as to
enable each such Regulated Holder to participate in such Conversion Event. The
Corporation shall not cancel the Non-Voting Common Stock so converted before the
tenth day following such Conversion Event and shall reserve such Non-Voting
Common Stock until such tenth day for reissuance in compliance with the next
sentence. If any shares of Non-Voting Common Stock are converted into shares of
Voting Common Stock in connection with a Conversion Event and such shares of
Voting Common Stock are not actually distributed, disposed of or sold pursuant
to such Conversion Event, such shares of Voting Common Stock shall be promptly
converted back into the same number of shares of Non-Voting Common Stock.
(C) If at any time the BHCA Rules are amended to allow a
holder of Non-Voting Common Stock to convert to Voting Common Stock, then upon
any Regulated Holder's request, such Regulated Holder shall have the right to
convert shares of Non-Voting Common Stock into an equal number of shares of
Voting Common Stock to the extent permissible at such time under the BHCA Rules
(as determined by such holder in its sole discretion).
(iii) Conversion Procedure.
(A) Unless otherwise provided in connection with any conversion,
each conversion of Non-Voting Common Stock or Voting Common Stock, into Voting
Common Stock or Non-Voting Common Stock, as the case may be, shall be effected
by the surrender of the certificate or certificates representing the shares to
be converted at the principal office of the Corporation at any time during
normal business hours, together with a written notice by the holder of such
shares stating that such holder desires to convert the shares, or a stated
number of the shares, represented by such certificate or certificates into
shares of the other class (and such statement shall obligate the Corporation to
issue such shares). Unless otherwise provided in connection with any conversion,
each conversion shall be deemed to have been effected as of the close of
business on the date on which such certificate or certificates have been
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<PAGE> 21
surrendered and such notice has been received, and at such time the rights of
the holder of the converted Non-Voting Common Stock and Voting Common Stock, as
the case may be, as such holder shall cease and the person or persons in whose
name or names the certificate or certificates for shares of Voting Common Stock
or Non-Voting Common Stock are to be issued upon such conversion shall be deemed
to have become the holder or holders of record of the Voting Common Stock and
the Non-Voting Common Stock represented thereby.
(B) Promptly after the surrender of certificates and the receipt
of written notice, the Corporation shall issue and deliver in accordance with
the surrendering holder's instructions (i) the certificate or certificates for
the Voting Common Stock and the Non-Voting Common Stock issuable upon such
conversion and (ii) a certificate representing any Non-Voting Common Stock and
Voting Common Stock which were represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but which were
not converted.
(C) The issuance of certificates for Non-Voting Common Stock or
Voting Common Stock upon conversion of Voting Common Stock or Non-Voting Common
Stock, respectively, shall be made without charge to the holders of such shares
for any issuance tax in respect thereof or other cost incurred by the
Corporation in connection with such conversion and the related issuance of
Voting Common Stock and Non-Voting Common Stock, as the case may be.
(D) The Corporation has duly authorized, solely for the purpose
of issuance upon the conversion of the Non-Voting Common Stock and Voting Common
Stock, respectively, such number of shares of Voting Common Stock and Non-Voting
Common Stock, as the case may be, issuable upon the conversion of all
outstanding shares of Non-Voting Common Stock and Voting Common Stock, as the
case may be. All shares which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges. The Corporation shall take all such actions as may be necessary to
ensure that all such shares may be so issued without violation of any applicable
law or governmental regulation or any requirements of any domestic securities
exchange upon which shares may be listed (except for official notice of issuance
which shall be immediately transmitted by the Corporation upon issuance).
(E) The Corporation shall not close its books against the
transfer of Non-Voting Common Stock and Voting Common Stock in any manner which
would interfere with the timely conversion of any Non-Voting Common Stock or
Voting Common Stock. The Corporation shall assist and cooperate with any holder
of Non-Voting Common Stock and Voting Common Stock required to make any
governmental filings or obtain any governmental approval prior to or in
connection with any conversion of Non-Voting Common Stock and Voting Common
Stock hereunder (including, without limitation, making any filings required to
be made by the Corporation).
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(F) If the Corporation in any manner subdivides or combines the
outstanding Non-Voting Common Stock or Voting Common Stock, the outstanding
shares of the other class shall be proportionately subdivided or combined in a
similar manner.
(h) CERTAIN DEFINITIONS.
"AFFILIATE" means with respect to any transferring stockholder, any other
Person directly or indirectly controlling, controlled by or under common control
with, such transferring stockholder, including a member of such transferring
stockholder's immediate family, a trust established for the benefit of the
transferring stockholder or the members of such transferring stockholder's
immediate family, a partnership or limited liability company where the only
partners or members are such immediate family members, or a transferee of such
transferring stockholder by will or the laws of intestate succession. For
purposes of this definition, "control" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of an entity, whether through the ownership of voting securities, by
contract or otherwise.
"COMMON STOCK" means the Voting Common Stock and Non-Voting Common Stock,
par value $.0001 per share, of the Corporation.
"COMMON STOCK DEEMED OUTSTANDING" means, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus (a) the number of
shares of Common Stock which would be issued upon exercise of all of the
Corporation's outstanding Options and (b) the number of shares of Common Stock
which would be issued upon conversion or exchange of all of the Corporation's
outstanding Convertible Securities (including Convertible Securities issuable
upon exercise of Options).
"CONVERTIBLE SECURITIES" means any stock or securities directly or
indirectly convertible into or exchangeable for Common Stock.
"OPTIONS" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.
"PERMITTED ISSUANCE" means any issuance of Reserved Employee Stock.
"PERSON" means any individual, partnership, joint venture, firm,
corporation, limited liability company, association, trust or other similar
entity, or any government or political subdivision or agency, department or
instrumentality thereof.
"REGULATED HOLDER" means any holder of Preferred Stock or Common Stock who
is regulated under the BHCA Rules.
"REGULATORY PROBLEM" means any transaction, circumstance or situation
whereby (i) any Regulated Holder and its affiliates would own, control or have
power over a
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greater quantity of securities of any kind issued by the Corporation or any
other entity than are permitted under any requirement of any governmental
authority, or would cause such Regulated Holder or any of its affiliates to not
be able to hold an investment in or provide financing to the Corporation in
compliance with any applicable requirement of any governmental authority, or
(ii) it has been asserted by any governmental regulatory agency (or any
Regulated Holder believes that there is a risk of such assertion) that such
Regulated Holder and its affiliates are not entitled to hold the shares held by
such Regulated Holder and its affiliate or exercise any significant right with
respect to the shares held by such person or provide financing to the
Corporation in compliance with any applicable requirement of any governmental
authority.
"RESERVED EMPLOYEE STOCK" means the shares of Common Stock issuable to
employees, directors or consultants of the Corporation and its Subsidiaries
pursuant to options granted under the VeloCom Inc. Amended and Restated 1998
Stock Option Plan, which amount shall in no event exceed twelve percent (12%) of
the Corporation's Common Stock Deemed Outstanding.
"SUBSIDIARY" means any corporation of which 50% or more of the shares of
outstanding capital stock possessing the voting power (under ordinary
circumstances) in electing the board of directors are, at the time as of which
any determination is being made, owned by the Corporation either directly or
indirectly through Subsidiaries.
(i) AMENDMENT AND WAIVER.
No amendment, modification or waiver of any of the terms or provisions of
the Series Preferred shall be binding or effective without the prior written
consent of the Required Holders and no change in the terms hereof may be
accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the Required Holders; provided, however, that no such action shall
adversely alter or change any of the rights, preferences, or privileges of the
Series A Preferred without the prior written consent of the holders of at least
75% of the Series A Preferred then outstanding; and provided, further, than no
such action shall adversely alter or change any of the rights, preferences or
privileges of the Series B/B-1 Preferred without the prior written consent of at
least 75% of the Series B/B-1 Preferred then outstanding; and provided, further,
than no such action shall adversely alter or change any of the rights,
preferences or privileges of the Series C Preferred without the prior written
consent of at least 75% of the Series C Preferred then outstanding. Any
amendment, modification or waiver of any of the terms or provisions of the
Series Preferred by the Required Holders (or such higher vote as may be
required), whether prospective or retroactively effective, shall be binding upon
all holders of the Series Preferred.
(j) GENERAL PROVISIONS.
(i) Registration of Transfer. The Corporation shall keep at its
principal office a register for the registration of the Series Preferred. Upon
the
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<PAGE> 24
surrender of any certificate representing the Series Preferred at such place,
the Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares represented by the surrendered certificate. Each such new certificate
shall be registered in such name and shall represent such number of shares as is
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate.
(ii) Replacement. Upon receipt of evidence reasonably
satisfactory to the Corporation (an affidavit of the registered holder shall be
satisfactory) of the ownership and the loss, theft, destruction or mutilation of
any certificate evidencing shares of the Series Preferred, and in the case of
any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided, however, that if the holder is a
financial institution or other institutional investor its own agreement shall be
satisfactory), or in the case of any such mutilation upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
(iii) Reservation of Common Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series Preferred, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of the Series Preferred. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then-outstanding shares of the Series Preferred, the
Corporation shall take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
(iv) Notices. Any notice required by the provisions of this
Amended and Restated Certificate of Incorporation shall be in writing and shall
be deemed effectively given: (i) upon personal delivery to the party to be
notified, (ii) when sent by confirmed telex or facsimile if sent during normal
business hours of the recipient; if not, then on the next business day, (iii)
five (5) days after having been sent by registered or certified mail, return
receipt requested, postage prepaid, or (iv) one (1) day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All notices to stockholders shall be addressed
to each holder of record at the address of such holder appearing on the books of
the Corporation.
(v) Payment of Taxes. The Corporation shall pay all taxes (other
than taxes based upon income) and other governmental charges that may be imposed
with respect to the issue or delivery of shares of Common Stock upon conversion
of shares of the Series Preferred, excluding any tax or other charge imposed
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<PAGE> 25
in connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of the Series
Preferred so converted were registered.
(vi) No Dilution or Impairment. The Corporation shall not amend
its Certificate of Incorporation or participate in any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation.
(vii) No Reissuance of the Series Preferred. No share or shares
of the Series Preferred acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued.
ARTICLE FIVE.
The Corporation is to have perpetual existence.
ARTICLE SIX.
In furtherance and not in limitation of the powers conferred by
statute, the board of directors of the Corporation is expressly authorized to
make, alter or repeal the Bylaws of the Corporation.
ARTICLE SEVEN.
The management of the business and the conduct of the affairs of the
Corporation shall be vested in its board of directors. The number of directors
which shall constitute the whole board of directors shall be fixed by, or in the
manner provided in, the Bylaws of the Corporation.
ARTICLE EIGHT.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws of the Corporation may provide. The books of the
Corporation may be kept (subject to any provision contained in the statutes)
outside the State of Delaware at such place or places as may be designated from
time to time by the board of directors or in the Bylaws of the Corporation.
Election of directors need not be by written ballot unless the Bylaws of the
Corporation so provide.
ARTICLE NINE.
The Corporation shall indemnify, to the fullest extent permitted by
Section 145 of the Delaware General Corporation Law, as amended from time to
time, all persons who it may indemnify pursuant thereto. The personal liability
of a director of the Corporation to the Corporation or its stockholders for
monetary damages for breach of
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fiduciary duty as a director shall be limited to the fullest extent permitted by
the Delaware General Corporation Law, as it now exists or may hereafter be
amended. Any repeal or modification of this paragraph by the stockholders of the
Corporation shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification.
ARTICLE TEN.
The Corporation expressly elects not to be governed by Section 203 of
the Delaware General Corporation Law.
ARTICLE ELEVEN.
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed herein and by the laws
of the State of Delaware, and all rights conferred upon stockholders herein are
granted subject to this reservation.
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IN WITNESS WHEREOF, the Corporation has caused this Third Amended and
Restated Certificate of Incorporation to be signed and executed in its corporate
name by David J. Leonard, its President and Chief Executive Officer, and
attested to by Billi R. McCullough, its Secretary, and its Corporate Seal to be
affixed on this ___ day of April, 2000.
VELOCOM INC.
By:
-------------------------------
Name: David J. Leonard
Title: President and Chief
Executive Officer
Attest:
- -------------------------
Name: Billi R. McCullough
Title: Secretary
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<PAGE> 1
Exhibit 3.3
- --------------------------------------------------------------------------------
BYLAWS
OF
WLL INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
ARTICLE I.
Offices and Agent
1. Principal Office. The principal office of the Corporation may be
located within or without the State of Delaware, as designated by the board of
directors. The Corporation may have other offices and places of business at such
places within or without the State of Delaware as shall be determined by the
directors.
2. Registered Office and Agent. The Corporation shall have and maintain
at all times (a) a registered office in the State of Delaware, which office
shall be located at 1013 Centre Road, County of New Castle, Delaware, 19805 and
whose name is Corporation Service Company, until changed from time to time as
provided by the General Corporation Law of the State of Delaware ("Delaware
Corporation Law").
ARTICLE II.
Stockholders Meetings
1. Annual Meetings. The annual meeting of stockholders for the election
of directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on such date and at such time as
determined by resolution of the board of directors. If, at the place of the
meeting, this date shall fall upon a legal holiday, then such meeting shall be
held on the next succeeding business day at the same hour. If no annual meeting
is held in accordance with the foregoing provisions, the board of directors
shall cause the meeting to be held as soon thereafter as convenient. If no
annual meeting is held in accordance with the foregoing provisions, a special
meeting may be held in lieu of the annual meeting, and any action taken at that
special meeting shall have the same effect as if it had been
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taken at the annual meeting, and in such case all references in these Bylaws to
the annual meeting of stockholders shall be deemed to refer to such special
meeting.
2. Special Meetings. Special meetings of the stockholders of the
Corporation may be called for any purpose at any time by the president, shall be
called by the secretary if directed by the board of directors and shall be
called by the president upon the written request of holders of shares entitled
to cast not less than ten percent (10%) of the votes entitled to notice of and
to vote at such special meeting. Such written request shall specify the purpose
or purposes of, and a proposed date for, the meeting and shall be delivered to
the president. Upon receipt of such written request, the president shall fix a
date and time for such meeting, which such date shall be within ten (10)
business days of the proposed date specified in the written request.
3. Place of Meetings. All meetings of stockholders of the Corporation
shall be held within or without the State of Delaware as may be designated by
the board of directors or the president, or, if not designated, at the
registered office of the Corporation.
4. Notice of Meeting. Except as otherwise provided in these Bylaws or
the Delaware Corporation Law, written notice of any meeting of stockholders
stating the place, date and hour of the meeting and, in the case of a special
meeting, the purpose for which the meeting is called, shall be delivered either
personally or by mail to each stockholder of record entitled to vote at such
meeting not less than ten (10) nor more than sixty (60) days before the date of
the meeting, by or at the direction of the board of directors, the president or
the secretary. If mailed, such notice shall be deemed to be delivered as to any
stockholder of record when deposited in the United States mail, addressed to the
stockholder at his address as it appears on the stock transfer books of the
Corporation, with postage prepaid. When a meeting is adjourned to another time
or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty (30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
5. Waiver of Notice. Any stockholder, either before or after any
stockholders' meeting, may waive in writing notice of the meeting, and his
waiver shall be deemed the equivalent of giving notice. Attendance at a meeting
by a stockholder shall constitute a waiver of notice, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
6. Fixing of Record Date. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights
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in respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the board of directors of the Corporation may fix, in
advance, a record date which shall be not more than sixty (60) days nor less
than ten (10) days prior to the date of such meeting, nor more than sixty (60)
days prior to any other action. If no record date is fixed, the record date for
determining the stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. The record date for
determining the stockholders entitled to express consent to corporate action in
writing without a meeting, when no prior action by the board of directors is
necessary, shall be the day on which the first written consent is expressed. The
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the board of directors adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the board of directors may fix a new
record date for the adjourned meeting.
7. Stockholders List. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, at a place within the city where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof and may be inspected by any
stockholder who is present.
8. Proxies. A stockholder entitled to vote at a meeting of stockholders
or to express consent or dissent to corporate action in writing without a
meeting may authorize another person or persons to act for him by proxy. No
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period.
9. Voting Rights. Each stockholder shall have one vote for each share
of stock entitled to vote held of record by such stockholder and a proportionate
vote for each fractional share so held, unless otherwise provided in the
Certificate of Incorporation.
Persons holding stock in a fiduciary capacity shall be entitled to vote
the shares so held. Persons whose stock is pledged shall be entitled to vote,
unless in the transfer by the pledgor on the books of the Corporation he has
expressly empowered the pledgee to vote thereon, in which case only the pledgee,
or his proxy, may represent such stock and vote thereon.
If shares having voting power stand of record in the names of two or
more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety, or otherwise, or if two or more
persons have the same fiduciary relationship
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respecting the same shares, unless the secretary of the Corporation is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (i) if only
one votes, his act binds all; (ii) if more than one vote, the act of the
majority so voting binds all; and (iii) if more than one vote, but the vote is
evenly split on any particular matter, each fraction may vote the securities in
question proportionately, or any person voting the shares or a beneficiary, if
any, may apply to the Court of Chancery or any court of competent jurisdiction
in the State of Delaware to appoint an additional person to act with the persons
so voting the shares. The shares shall then be voted as determined by a majority
of such persons and the person appointed by the Court. If a tenancy is held in
unequal interests, a majority or even-split for the purpose of this subsection
shall be a majority or even-split in interest.
10. Quorum and Required Vote. Except as otherwise provided by law, the
Certificate of Incorporation or these Bylaws, the holders of a majority of the
shares entitled to vote at the meeting, present in person or by proxy, shall
constitute a quorum for the transaction of business. If a quorum is present, the
affirmative vote of a majority of the shares present or represented by proxy at
the meeting and entitled to vote on the subject matter shall be the act of the
stockholders, and, if there are two or more classes of stock entitled to vote as
separate classes, then, in the case of each such class, the affirmative vote of
a majority of the shares of that class present or represented by proxy at the
meeting shall be the vote of such class unless a different vote is required by
an express provision of law, the Certificate of Incorporation or these Bylaws.
11. Informal Action By Stockholders. Except as otherwise provided in
the Certificate of Incorporation, any action required by the provisions of
Delaware Corporation Law to be taken or any action which may be taken at a
stockholders' meeting may be taken without a meeting without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. Prompt notice of the taking of the corporate action without a meeting by
less than unanimous consent shall be given to those stockholders who have not
consented in writing. Any action taken pursuant to such written consent of the
stockholders shall have the same force and effect as if taken by the
stockholders at a meeting thereof.
ARTICLE III.
Board of Directors
1. Number, Qualifications and Term of Office. Except as otherwise
provided in the Certificate of Incorporation or the Delaware Corporation Law,
the business and affairs of the Corporation shall be managed by or under the
direction of a board of directors consisting of one or more members. Directors
need not be stockholders of the Corporation. The board of directors, by
resolution, may increase or decrease the number of directors from time to time.
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Except as otherwise provided in these Bylaws, each director shall be elected at
each annual meeting of stockholders and shall hold such office until the next
annual meeting of stockholders and until his successor shall be elected and
shall qualify. No decrease in the number of directors shall have the effect of
shortening the term of any incumbent director.
2. Vacancies. Unless and until filled by the stockholders of the
Corporation, any vacancy in the board of directors, however occurring, including
a vacancy resulting from an enlargement of the board, may be filled by vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. A director elected to fill a vacancy shall be elected
for the unexpired term of his predecessor in office, and a director chosen to
fill a position resulting from an increase in the number of directors shall hold
office until the next annual meeting of stockholders and until his successor is
elected and qualified, or until his earlier death, resignation or removal.
3. Resignation. Any director may resign by delivering his written
resignation to the Corporation at its principal office addressed to the
president or secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
4. Removal. Except as otherwise provided in the Certificate of
Incorporation or the Delaware Corporation Law, any director or the entire board
of directors may be removed with or without cause by the holders of a majority
of the shares then entitled to vote at an election of directors.
5. Compensation. Directors may be paid such compensation for their
services and such reimbursements for expenses of attendance at meetings as the
Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
ARTICLE IV.
Meetings of the Board
1. Place of Meetings. The regular or special meetings of the board of
directors or any committee designated by the board shall be held at the
principal office of the Corporation or at any other place within or without the
State of Delaware that a majority of the board of directors or any such
committee, as the case may be, may designate from time to time by resolution.
2. Regular Meetings. The board of directors shall meet each year
immediately after and at the same place as the annual meeting of the
stockholders for the purpose of electing officers and transacting such other
business as may come before the meeting. The board of directors or any committee
designated by the board may provide, by resolution, for the holding of
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additional regular meetings within or without the State of Delaware without
notice of the time and place of such meeting other than such resolution;
provided that any director who is absent when such resolution is made shall be
given notice of said resolution.
3. Special Meetings. Special meetings of the board of directors or any
committee designated by the board may be held at any time and place, within or
without the State of Delaware, designated in a call by the chairman of the
board, if any, by the president or by a majority of the members of the board of
directors or any such committee, as the case may be.
4. Notice of Special Meetings. Except as otherwise provided by these
Bylaws or the laws of the State of Delaware, written notice of each special
meeting of the board of directors or any committee thereof setting forth the
time and place of the meeting shall be given to each director by the secretary
or by the officer or director calling the meeting not less than one (1) day
prior to the time fixed for the meeting. Notice of special meetings may be
either given personally, personally by telephone, by sending a copy of the
notice through the United States mail or by express courier, or by facsimile or
electronic mail, charges prepaid, to the address of each director appearing on
the books of the Corporation. If mailed, or sent by express courier such notice
shall be deemed to be delivered when deposited in the United States mail or
placed in the hands of the express courier, as the case may be, so addressed,
with postage or charges prepaid thereon. If notice be given by confirmed
facsimile or electronic mail during normal business hours, such notice shall be
deemed effective when sent, otherwise on the next business day. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the board of directors need be specified in the notice or waiver of notice of
such meeting.
5. Waiver of Notice. A director may waive, in writing, notice of any
special meeting of the board of directors or any committee thereof, either
before, at, or after the meeting; and his waiver shall be deemed the equivalent
of giving notice. By attending or participating in a regular or special meeting,
a director waives any required notice of such meeting unless the director, at
the beginning of the meeting, objects to the holding of the meeting or the
transacting of business at the meeting.
6. Quorum and Action at Meeting. At meetings of the board of directors
or any committee designated by the board, a majority of the total number of
directors, or a majority of the members of any such committee, as the case may
be, shall constitute a quorum for the transaction of business. In the event one
or more of the directors shall be disqualified to vote at any meeting, then the
required quorum shall be reduced by one for each such director so disqualified;
provided, however, that in no case shall less than one-third (1/3) of the number
so fixed constitute a quorum. If a quorum is present, the act of the majority of
directors in attendance shall be the act of the board of directors or any
committee thereof, as the case may be, unless the act of a greater number is
required by these Bylaws, the Certificate of Incorporation or Delaware
Corporation Law. If a quorum shall not be present at any meeting of the board of
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directors, the directors present thereat may adjourn that meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
7. Presumption of Assent. A director who is present at a meeting of the
board or a committee thereof when action is taken is deemed to have assented to
the action taken unless: (i) he objects at the beginning of such meeting to the
holding of the meeting or the transacting of business at the meeting; (ii) he
contemporaneously requests that his dissent from the action taken be entered in
the minutes of such meeting; or (iii) he gives written notice of his dissent to
the presiding officer of such meeting before its adjournment or to the secretary
of the corporation immediately after adjournment of such meeting. The right of
dissent as to a specific action taken at a meeting of a board or a committee
thereof is not available to a director who votes in favor of such action.
8. Committees. The board of directors may, by a resolution passed by a
majority of the whole board of directors designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members of the committee present at any meeting and not disqualified
from voting, whether or not he or they constitute a quorum, may unanimously
appoint another member of the board of directors to act at the meeting in the
place of the absent or disqualified member. Any such committee, to the extent
provided in the resolution of the board of directors and subject to the
provisions of Delaware Corporation Law, shall have and may exercise all the
powers and authority of the board of directors in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all such papers which may require it. Each such committee shall
keep minutes and make such reports as the board of directors may from time to
time request. Except as the board of directors may otherwise determine, any
committee may make rules for the conduct of its business, but, unless otherwise
provided by the directors or in such rules, its business shall be conducted as
nearly as possible in the same manner as is provided in these Bylaws for the
board of directors.
9. Informal Action by Directors. Except as otherwise provided in the
Certificate of Incorporation, any action required or permitted by the Delaware
Corporation Law to be taken at any meeting of the board of directors or any
committee thereof may be taken without a meeting if all members of the board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the board or committee.
10. Telephonic Meetings. Directors or any members of any committee
designated by the board may participate in a meeting of the board or committee
by means of a conference telephone or similar communications equipment by which
all persons participating in
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the meeting can hear each other at the same time. Such participation shall
constitute presence in person at the meeting.
ARTICLE V.
Officers and Agents
1. Enumeration, Election and Term. The officers of the Corporation
shall consist of a president, a secretary, a treasurer and such other officers
with such other titles as may be deemed necessary or desirable by the board of
directors, including one or more vice presidents, assistant treasurers and
assistant secretaries and a chairman of the board. Any number of offices may be
held by the same person and no officer need be a stockholder or a resident of
the State of Delaware. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, each officer shall hold office until his
successor is elected and qualified or until his earlier death, resignation or
removal. The officers of the Corporation shall be elected annually by the board
of directors at the first meeting of the board held after each annual meeting of
the stockholders.
2. General Duties. All officers and agents of the Corporation, as
between themselves and the Corporation, shall have such authority and shall
perform such duties in the management of the Corporation as may be provided in
these Bylaws or as may be determined by resolution of the board of directors not
inconsistent with these Bylaws. In all cases where the duties of any officer,
agent or employee are not prescribed by the Bylaws or by the board of directors,
such officer, agent or employee shall follow the orders and instructions of the
president.
3. Vacancies. The board of directors may fill any vacancy occurring in
any office for any reason and may, in its discretion, leave any vacancy unfilled
for such period as it may determine other than a vacancy in the office of
president or secretary. The officer so selected shall hold office until his
successor is elected and qualified or until his earlier death, resignation or
removal.
4. Compensation. The board of directors from time to time shall fix the
compensation of the officers of the Corporation. The compensation of other
agents and employees of the Corporation may be fixed by the board of directors,
or by any committee designated by the board or by an officer to whom that
function has been delegated by the board.
5. Resignation and Removal. Any officer may resign by delivering his
written resignation to the Corporation at its principal office addressed to the
president or secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event. Any officer or agent of the Corporation may be removed, with or
without cause, by a vote of the majority of the members of the board of
directors whenever in its judgment the best interests of the Corporation may be
served thereby,
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but such removal shall be without prejudice to the contract rights, if any, of
the person so removed. Election or appointment of an officer or an agent shall
not of itself create contract rights.
6. Chairman of the Board. The chairman of the board, if any, shall
preside as chairman at meetings of the stockholders and the board of directors.
He shall, in addition, have such other duties as the board may prescribe that he
perform. At the request of the president, the chairman of the board may, in the
case of the president's absence or inability to act, temporarily act in his
place. In the case of death of the president or in the case of his absence or
inability to act without having designated the chairman of the board to act
temporarily in his place, the chairman of the board shall perform the duties of
the president, unless the board of directors, by resolution, provides otherwise.
If the chairman of the board shall be unable to act in place of the president,
the vice presidents may exercise such powers and perform such duties as provided
in Section 8 below.
7. President. The president shall be the chief executive officer of the
Corporation and shall have general supervision of the business of the
Corporation. In the event the position of chairman of the board shall not be
occupied or the chairman shall be absent or otherwise unable to act, the
president shall preside at meetings of the stockholders and directors and shall
discharge the duties of the presiding officer. At each annual meeting of the
stockholders, the president shall give a report of the business of the
Corporation for the preceding fiscal year and shall perform whatever other
duties the board of directors may from time to time prescribe.
8. Vice Presidents. Each vice president, if any, shall have such powers
and perform such duties as the board of directors may from to time prescribe or
as the president may from time to time delegate to him. At the request of the
president, in the case of the president's absence or inability to act, any vice
president may temporarily act in his place. In the case of the death of the
president, or in the case of his absence or inability to act without having
designated a vice president or vice presidents to act temporarily in his place,
the board of directors, by resolution, may designate a vice president or vice
presidents to perform the duties of the president. If no such designation shall
be made, the chairman of the board of directors, if any, shall exercise such
powers and perform such duties, as provided in Section 7 above, but if the
Corporation has no chairman of the board of directors, or if the chairman is
unable to act in place of the president, all of the vice presidents may exercise
such powers and perform such duties.
9. Secretary. The secretary shall keep or cause to be kept in books
provided for that purpose, the minutes of the meetings of the stockholders,
executive committee, if any, and any other committees, and of the board of
directors; shall see that all notices are duly given in accordance with the
provisions of these Bylaws and as required by law; shall be custodian of the
records and of the seal of the Corporation and see that the seal is affixed to
all documents, the execution of which on behalf of the Corporation under its
seal is duly authorized and in accordance with the provisions of these Bylaws;
and, in general, shall perform all duties incident to the office of secretary
and such other duties as may, from time to time, be assigned to him by
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the board of directors or by the president. In the absence of the secretary or
his inability to act, the assistant secretaries, if any, shall act with the same
powers and shall be subject to the same restrictions as are applicable to the
secretary.
10. Treasurer. The treasurer shall have custody of corporate funds and
securities. He shall keep full and accurate accounts of receipts and
disbursements and shall deposit all corporate monies and other valuable effects
in the name and to the credit of the Corporation in the depository or
depositories of the Corporation, and shall render an account of his transactions
as treasurer and of the financial condition of the Corporation to the president
and/or the board of directors upon request. Such power given to the treasurer to
deposit and disburse funds shall not, however, preclude any other officer or
employee of the Corporation from also depositing and disbursing funds when
authorized to do so by the board of directors. The treasurer shall, if required
by the board of directors, give the Corporation a bond in such amount and with
such surety or sureties as may be ordered by the board of directors for the
faithful performance of the duties of his office. The treasurer shall have such
other powers and perform such other duties as may be from time to time
prescribed by the board of directors or the president. In the absence of the
treasurer or his inability to act, the assistant treasurers, if any, shall act
with the same authority and shall be subject to the same restrictions as are
applicable to the treasurer.
11. Delegation of Duties. Whenever an officer is absent, or whenever,
for any reason, the board of directors may deem it desirable, the board may
delegate the powers and duties of an officer to any other officer or officers or
to any director or directors.
ARTICLE VI.
Indemnification of Officers, Directors and Others
1. Indemnification: Third Party Actions. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Corporation) by reason of the fact that he or she is or was a
director, officer, employee or agent, of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interest of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with
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respect to any criminal action or proceeding, had reasonable cause to believe
that his or her conduct was unlawful.
2. Indemnification: Derivative Actions. The Corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he or she acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper.
3. Mandatory Indemnification. To the extent that a director or officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Sections 1
and 2 of this Article VI or in defense of any claim, issue or matter therein, he
or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith.
4. Authorization for Indemnification. Any indemnification under
Sections 1 and 2 of this Article VI (unless ordered by a court) shall be made by
the Corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in Sections 1 and 2 of this Article VI. Such determination shall be
made (1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
5. Advance Payment of Expenses. Expenses (including attorneys' fees)
incurred in defending a civil, criminal, administrative or investigative action,
suit or proceeding may be paid by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director or officer to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by the
corporation as authorized in this Article VI. Such expenses (including
attorneys' fees) incurred by other
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employees and agents may be so paid upon such terms and conditions, if any, as
the board of directors deems appropriate.
6. Non-exclusive. The indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections of this Article VI
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his or her official capacity and as to action in another capacity
while holding such office, and shall continue, unless otherwise provided when
authorized or ratified, as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
7. Insurance. The corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him or her and incurred by him or her in any such capacity, or arising out of
his or her status as such, whether or not the corporation would have the power
to indemnify him or her against such liability under the provisions of this
Article VI.
8. Definitions. For purposes of this Article VI, the following terms
shall have the following meanings:
(a) references to "the Corporation" shall include, in addition
to the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents so that any person who is
or was a director, officer, employee or agent of such constituent corporation,
or is or was serving at the request of such constituent corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise shall stand in the same position under the
provisions of this Article VI with respect to the resulting or surviving
corporation as he or she would have with respect to such constituent corporation
if its separate existence had continued;
(b) references to "other enterprises" shall include employee
benefit plans;
(c) references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan;
(d) references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and
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(e) a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the interests of the Corporation" as referred to in this Article VI.
ARTICLE VII.
Capital Stock
1. Certificates of Stock. The shares of the Corporation shall be
represented by certificates; provided that the board of directors of the
Corporation may, by resolution, provide that some or all of any or all classes
or series of its stock shall be uncertificated shares. Any such resolution shall
not apply to shares represented by a certificate until such certificate is
surrendered to the Corporation. Notwithstanding the adoption of such a
resolution by the board of directors, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the Corporation by
the chairman or vice chairman of the board of directors, or the president or
vice president, and by the treasurer or an assistant treasurer, or the secretary
or an assistant secretary of the Corporation representing the number of shares
registered in certificate form. Any or all the signatures on the certificate may
be a facsimile. In case any officer, transfer agent, or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if he
were such officer, transfer agent or registrar at the date of issue.
2. Issuance of Stock. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the Corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the Corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by resolution of the board of directors in such manner,
for such consideration and on such terms as the board of directors may
determine. Consideration for such shares of capital stock shall be expressed in
dollars, and shall not be less than the par value or stated value therefor, as
the case may be. The par value for shares, if any, shall be stated in the
Certificate of Incorporation, and the stated value for shares, if any, shall be
fixed from time to time by the board of directors.
3. Lost Certificates. The board of directors may direct a new
certificate to be issued in place of any previously issued certificate alleged
to have been destroyed or lost if the owner makes an affidavit or affirmation of
that fact and produces such evidence of loss or destruction as the board may
require. The board, in its discretion, may as a condition precedent to the
issuance of a new certificate require the owner to give the Corporation a bond
as indemnity
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against any claim that may be made against the Corporation relating to the
allegedly destroyed or lost certificate.
4. Transfer of Shares. Subject to applicable law, shares of stock of
the Corporation may be transferred on its books upon the surrender to the
Corporation or its transfer agent of the certificates representing such shares,
if any, duly endorsed or accompanied by a written assignment or power of
attorney duly executed and with such proof of authority or authenticity of
signature as the Corporation or its transfer agent may reasonably require. In
that event, the surrendered certificates shall be canceled, new certificates
issued to the persons entitled to them, if any, and the transaction recorded on
the books of the Corporation.
5. Registered Stockholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of the other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of the State of Delaware.
6. Stock Ledger. An appropriate stock journal and ledger shall be kept
by the secretary or such registrars or transfer agents as the directors by
resolution may appoint in which all transactions in the shares of stock of the
Corporation shall be recorded.
7. Restriction on Transfer of Shares. Notice of any restriction on the
transfer of the stock of the Corporation shall be placed on each certificate of
stock issued or in the case of uncertificated shares contained in the notice
sent to the registered owner of such shares in accordance with the provisions of
the Delaware Corporation Law.
ARTICLE VIII.
Seal and-Fiscal Year
1. Seal. The Corporation shall have a seal in the form impressed to the
left of this paragraph of the Bylaws.
2. Fiscal Year. The fiscal year of the Corporation shall be determined
by the board of directors and set forth in the minutes of the directors. Said
fiscal year may be changed from time to time by the board of directors in its
discretion.
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ARTICLE IX.
Dividends
Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation, if any, may be declared by the
board of directors at any regular or special meeting, pursuant to law. Dividends
may be paid in cash, in property, or in shares of the capital stock, subject to
the provisions of the Certificate of Incorporation. Before payment of any
dividend, there may be set aside out of any funds of the corporation available
for dividends such sum or sums as the directors from time to time, in their
absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purpose as the directors shall
think in the best interest of the Corporation, and the directors may modify or
abolish any such reserve in the manner in which it was created.
ARTICLE X.
Amendments
Subject to repeal or change by action of the stockholders, the board of
directors may amend, supplement or repeal these Bylaws or adopt new Bylaws, and
all such changes shall affect and be binding upon the holders of all shares
heretofore as well as hereafter authorized, subscribed for or offered.
ARTICLE XI.
Miscellaneous
1. Gender. Whenever required by the context, the singular shall include
the plural, the plural the singular, and one gender shall include all genders.
2. Invalid Provision. The invalidity or unenforceability of any
particular provision of these Bylaws shall not affect the other provisions
herein, and these Bylaws shall be construed in all respects as if such invalid
or unenforceable provision was omitted.
3. Governing Law. These Bylaws shall be governed by and construed in
accordance with the laws of the State of Delaware.
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I, Mark Adolf, as Secretary of WLL International, Inc., hereby certify
that the foregoing Bylaws were adopted by the Board of Directors of the
Corporation effective as of May 5, 1998.
---------------------------------
Mark Adolf, Secretary
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EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 21, 2000 on VeloCom Inc.'s financial statements included in
or made a part of this registration statement.
ARTHUR ANDERSEN LLP
Denver, Colorado
May 11, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 30, 2000 on Vesper Holding S.A. and subsidiary and Vesper
Holding Sao Paulo S.A. and subsidiaries financial statements included in or made
a part of this registration statement.
ARTHUR ANDERSEN S/C
Rio de Janeiro, Brazil
May 11, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated April 14, 1999 on the combined Telelatina Management Company LLC
Sucursal Argentina, Telelatina S.A., Smartel S.A. and Formus S.A. financial
statements included in or made a part of this registration statement.
Pistrelli, Diaz Y Asociados
Member firm of Arthur Andersen
Eduardo C. Coduri
Partner
Buenos Aires, Argentina
May 11, 2000
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
Each of the undersigned directors of VeloCom Inc. (the "Company"),
which proposes to file with the United States Securities and Exchange Commission
(the "SEC"), under the provisions of the Securities Act of 1933, as amended, a
Registration Statement on Form S-1 and any other applicable form prescribed by
the SEC for the registration under said Act of the initial public offering of
the common stock of the Company, hereby constitutes and appoints David J.
Leonard and Barry L. Rowan, and each of them singly, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
to act, for him and in his name, place and stead and on his behalf, in any and
all capacities, to sign such Registration Statement on Form S-1 and any and all
amendments, including post-effective amendments, and other documents relating
thereto and to file on behalf of the Company such Registration Statement on Form
S-1 and amendments with all exhibits thereto and any and all other information
and documents in connection therewith, with the SEC, hereby granting unto said
attorney-in-fact and agent, full power and authority to do and perform any and
all acts and things requisite as fully to all intents and purposes as he might
or could do in person as a director of the Company, hereby ratifying and
confirming all that said attorney-in-fact and agent may lawfully do or cause to
be done by virtue hereof, and this power of attorney shall remain in effect
until November 30, 2000.
SIGNATURE TITLE
--------- -----
/s/ Fred A. Vierra
-------------------------------- Chairman of the Board of Directors of the
Fred A. Vierra Company
/s/ William J. Elsner
-------------------------------- Director of the Company
William J. Elsner
/s/ Steven C. Halstedt
-------------------------------- Director of the Company
Steven C. Halstedt
/s/ Anthony Daffer
-------------------------------- Director of the Company
Anthony Daffer
/s/ Bernard W. Schotters, II
-------------------------------- Director of the Company
Bernard W. Schotters, II
/s/ Guillermo Liberman
-------------------------------- Director of the Company
Guillermo Liberman
/s/ Luis Gonzalez Lanuza
-------------------------------- Director of the Company
Luis Gonzalez Lanuza
/s/ Bernard Dvorak
-------------------------------- Director of the Company
Bernard Dvorak
<PAGE> 2
SIGNATURE TITLE
--------- -----
/s/ Jacques Gliksberg
-------------------------------- Director of the Company
Jacques Gliksberg
/s/ Michael Greeley
-------------------------------- Director of the Company
Michael Greeley
/s/ Scott Perper
-------------------------------- Director of the Company
Scott Perper
/s/ Nicolas Kauser
-------------------------------- Director of the Company
Nicolas Kauser
/s/ William Smith
-------------------------------- Director of the Company
William Smith
Dated: May 1, 2000
