<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 2000.
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AT&T LATIN AMERICA CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 22-3687745
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
2333 PONCE DE LEON BLVD.
CORAL GABLES, FLORIDA 33134
(305) 774-2040
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
FRANK J. VOYTEK
CHIEF FINANCIAL OFFICER
AT&T LATIN AMERICA CORP.
2333 PONCE DE LEON BLVD.
CORAL GABLES, FLORIDA 33134
(305) 774-1770
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
PAUL H. WILSON, JR., ESQ. STEPHEN H. SHALEN, ESQ.
JAMES C. SCOVILLE, ESQ. WILLIAM F. GORIN, ESQ.
DEBEVOISE & PLIMPTON CLEARY, GOTTLIEB, STEEN & HAMILTON
875 THIRD AVENUE ONE LIBERTY PLAZA
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10006
(212) 909-6000 (212) 225-2000
</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, 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, 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, check
the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock, $.0001 par value............... $543,375,000 $143,451
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) on the basis of the maximum aggregate offering
price of the Registrant's Class A common stock.
------------------------
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<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 PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued [ ], 2000
35,000,000 Shares
[AT&T LATIN AMERICA LOGO]
AT&T LATIN AMERICA CORP.
CLASS A COMMON STOCK
------------------------
AT&T LATIN AMERICA CORP. IS OFFERING 35,000,000 SHARES OF CLASS A COMMON STOCK.
AT&T CORP. OWNS ALL OF THE OUTSTANDING SHARES OF OUR CLASS B COMMON STOCK. CLASS
B COMMON STOCK IS ENTITLED TO TEN VOTES PER SHARE. THE CLASS A COMMON STOCK IS
ENTITLED TO ONE VOTE PER SHARE. CLASS A COMMON SHARES AND CLASS B COMMON SHARES
HAVE IDENTICAL ECONOMIC RIGHTS. AFTER THIS OFFERING, AT&T CORP.'S OWNERSHIP
INTEREST WILL REPRESENT APPROXIMATELY [ ]% OF THE VOTING POWER AND [ ]%
OF THE ECONOMIC POWER IN OUR COMPANY. AT&T CORP. WILL BE ABLE TO ELECT A
MAJORITY OF OUR BOARD OF DIRECTORS AND CONTROL THE OUTCOME OF SUBSTANTIALLY ALL
MATTERS SUBMITTED TO A VOTE OF OUR STOCKHOLDERS.
------------------------
AT&T LATIN AMERICA'S CLASS A COMMON STOCK HAS BEEN APPROVED FOR LISTING ON THE
NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ATTL". ON [ ], 2000, THE
REPORTED LAST SALE PRICE OF THE CLASS A COMMON STOCK ON THE NASDAQ NATIONAL
MARKET WAS $[ ] PER SHARE.
------------------------
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 13.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY
-------- ------------- -----------
<S> <C> <C> <C>
Per Share................................ $ $ $
Total.................................... $ $ $
</TABLE>
AT&T Latin America has granted the underwriters the right to purchase up to an
additional 5,225,000 shares of Class A common stock to cover overallotments.
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 Class A
common stock to investors on [ ], 2000.
------------------------
Morgan Stanley Dean Witter
Credit Suisse First Boston
Merrill Lynch & Co.
J.P. Morgan & Co.
Salomon Smith Barney
, 2000
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 13
Special Note Regarding Forward-Looking
Statements.......................... 20
Class A Common Stock Price Range...... 21
Dividend Policy....................... 22
Use of Proceeds....................... 23
Capitalization........................ 24
Dilution.............................. 26
Selected Financial Data............... 27
Unaudited Pro Forma Combined Financial
Information......................... 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 45
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Industry Overview..................... 56
Business.............................. 60
Management............................ 71
Certain Relationships and Related
Transactions........................ 79
Principal Stockholders................ 87
Description of Certain Indebtedness... 88
Description of Capital Stock.......... 89
Shares Eligible for Future Sale....... 94
Underwriters.......................... 95
Legal Matters......................... 96
Experts............................... 96
Where You Can Find More Information... 97
Index to Financial Statements......... F-1
</TABLE>
------------------------
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 Class A common
stock and seeking offers to buy shares of Class A 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 any sale of the Class A common
stock.
In this prospectus, the "Company," "we," "us" and "our" refer to AT&T Latin
America Corp.
Unless otherwise indicated, the information set forth in this prospectus
assumes that our merger with FirstCom Corporation has been completed.
WE HAVE NOT TAKEN ANY ACTION TO PERMIT A PUBLIC OFFERING OF THE SHARES OF
CLASS A COMMON STOCK OUTSIDE THE UNITED STATES OR TO PERMIT THE POSSESSION OR
DISTRIBUTION OF THIS PROSPECTUS 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 DISTRIBUTION OF THIS PROSPECTUS OUTSIDE OF THE UNITED STATES.
UNTIL [ ], 2000, ALL DEALERS THAT BUY, SELL OR TRADE SHARES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the Class A common stock being sold in
this offering and our financial statements and notes thereto appearing elsewhere
in this prospectus.
Unless otherwise indicated, the information set forth in this prospectus assumes
that our merger with FirstCom Corporation has been completed.
AT&T LATIN AMERICA
We provide broadband communications services to major metropolitan business
markets in Argentina, Brazil, Chile, Colombia and Peru. Broadband communications
services are delivered over high speed, high capacity transmission systems. Our
objective is to be a leading provider of broadband communications services to
business customers in the countries in South America and the Caribbean, plus
Panama, but excluding Venezuela and Cuba. Our communications services integrate
data, Internet, local and long distance voice, video and electronic commerce
services. We focus on business customers with growing and diverse broadband
communications needs, including multinational corporations, financial services
companies, media and content providers, technology companies, government
entities, Internet service providers and communications carriers, as well as
small and medium size businesses. We deliver our services through our own
technologically advanced networks, which interconnect with existing networks
owned by third parties.
Our business had the following operating characteristics as of March 31,
2000:
-- 2,684 network route kilometers;
-- 86,436 total fiber kilometers;
-- 2,241 buildings connected to our networks;
-- 70,786 voice grade equivalent circuits, a measure of transmission
capacity; and
-- 4,902 permanent virtual circuits sold.
COMPETITIVE STRENGTHS
We believe that we distinguish ourselves from our competition through
several competitive strengths, including:
-- We own and control our own high speed fiber optic networks, which are
able to carry a variety of data, Internet, voice, video conferencing
and electronic commerce traffic over a common Internet protocol-
based platform. High-speed fiber optic networks use laser-generated
light pulses to transmit information digitally through glass fiber
cables.
-- We market our services under the well-known AT&T brand.
-- Our relationship with AT&T Corp. and its affiliates allows us:
- access to AT&T Corp.'s worldwide customer base;
- access to the cross-border transport facilities of Concert, the joint
venture between AT&T Corp. and British Telecommunications plc; and
- access to the products and services of AT&T Global Network Services
and other AT&T entities.
-- We have local presence in multiple high-growth South American
communications markets.
-- Our strong management team has significant experience in the
communications industry in Latin America and proven entrepreneurial
skills.
1
<PAGE> 5
GROWTH STRATEGY
Our objective is to be a leading provider of broadband communications
services to business customers in the countries in South America and the
Caribbean, plus Panama, but excluding Venezuela and Cuba. To achieve this
objective, we intend to:
-- Focus on high-demand business customers in major Latin American
metropolitan areas.
-- Offer advanced data and Internet services through our networks and
facilities.
-- Offer a portfolio of advanced business communications services to
deepen customer relationships, increase revenues and enhance customer
loyalty.
-- Capitalize on our relationships with AT&T Corp. and its affiliates,
including Concert and AT&T Global Network Services.
-- Provide consistent and superior service levels under the AT&T brand.
-- Pursue rapid growth through continued network construction, as well
as strategic alliances and acquisitions.
HISTORY OF AT&T LATIN AMERICA
We were incorporated in October 1999 as an indirect subsidiary of AT&T
Corp. We began our operations in Brazil by acquiring Netstream Telecom Ltda., a
facilities-based communications carrier, in December 1999. In Brazil we own and
operate high-speed fiber optic networks in Sao Paulo, Rio de Janeiro, Belo
Horizonte and Barueri/Alphaville, an industrial suburb of Sao Paulo. We continue
to expand our existing networks in Brazil and have plans to begin building
additional networks in the Brazilian cities of Brasilia, Campinas, Curitiba,
Porto Alegre and Salvador during 2000.
Our merger with FirstCom was completed in [ ] 2000. Prior to the
merger, FirstCom provided broadband communications services primarily to
business customers in four major metropolitan business centers: Santiago, Chile;
Lima/Callao, Peru; and Bogota and Cali, Colombia. Until November 1996, FirstCom
was a development stage company whose activities primarily consisted of the
acquisition of licenses, concessions and rights-of-way in selected Latin
American communications markets. Since that time it has focused on the
development and operation of high-capacity fiber optic networks in Latin
American business centers.
Following our acquisition of AT&T Argentina S.A. (formerly named Keytech LD
S.A.), in June 2000 we began limited operations in Argentina. AT&T Argentina is
a development stage broadband communications company with a limited amount of
assets, consisting mainly of signal transmission switching equipment. It
currently serves a small number of customers by reselling services from other
communications providers. It has licenses that authorize it or will authorize it
by November 2000, to provide domestic and international long distance services,
local telephone services, value-added services and a range of data services.
AT&T Argentina also has rights to use the 1910-1930 MHz wireless spectrum for
fixed links beginning in November 2000 in nine of Argentina's largest cities.
Because we have a limited operating history, we have a limited competitive
standing in the countries in which we operate. These markets are generally
dominated by established incumbent communications service providers.
Our principal executive offices are located at 2333 Ponce de Leon Blvd.,
Coral Gables, Florida 33134. Our telephone number is (305) 774-1770.
2
<PAGE> 6
THE OFFERING
Class A common stock
offered....................... 35,000,000 shares
Common stock to be outstanding
after the offering:
Class A common stock........ [ ] shares
Class B common stock........ [ ] shares
Total............... [ ] shares
Use of proceeds............... We anticipate that we will use the net proceeds
we receive from this offering to expand our
communications networks, to repay $[ ]
outstanding under our $100 million credit
facility with an affiliate of AT&T Corp. and
for working capital and other general corporate
purposes.
Voting rights................. Each share of Class A common stock is entitled
to one vote. AT&T Corp., as holder of Class B
common stock, is entitled to ten votes per
share. Shares of Class A common stock and Class
B common stock have identical economic rights.
After this offering, AT&T Corp.'s ownership
interest will represent approximately [ ]%
of the voting power, or [ ]% if the
underwriters' overallotment option is exercised
in full, and [ ]% of the economic interest,
or [ ]% if the underwriters' overallotment
option is exercised in full, in our company.
Dividend policy............... We have not paid any cash dividends on our
common stock, and we do not expect to do so in
the foreseeable future.
Nasdaq National Market
symbol........................ ATTL
If the underwriters exercise their over-allotment option in full, the total
number of shares of Class A common stock offered will be [ ], and the total
number of shares of Class A common stock outstanding after this offering will be
[ ].
The information in the table above excludes 1,417,500 shares that may be
issued upon the exercise of options that we had agreed to grant as of July 31,
2000. It also excludes 9,051,166 former FirstCom stock options and warrants,
which had a weighted average exercise price of $6.25 per share, and 1,448,885
shares of FirstCom convertible preferred stock that were outstanding as of June
30, 2000. The FirstCom warrants, options and preferred stock became warrants,
options and preferred stock of AT&T Latin America as a result of our merger with
FirstCom.
3
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
We have set forth below certain summary historical financial information
relating to AT&T Latin America, Netstream and FirstCom. You should also refer to
the financial information included in this prospectus in "Unaudited Pro Forma
Combined Financial Information," our historical financial statements, including
the notes thereto, and those of Netstream and FirstCom included in this
prospectus and the information under "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Our financial information has been derived from:
-- our audited consolidated financial statements as of December 31, 1999
and for the period from inception (October 13, 1999) through December
31, 1999; and
-- our unaudited interim consolidated financial statements as of and for
the three months ended March 31, 2000.
The financial information regarding Netstream has been derived from:
-- Netstream's audited financial statements as of and for the eleven
months ended December 31, 1998; and
-- Netstream's audited financial statements as of and for the nine
months ended September 30, 1999.
The financial information regarding FirstCom has been derived from:
-- FirstCom's audited annual consolidated financial statements as of and
for the years ended December 31, 1995, 1996, 1997, 1998 and 1999; and
-- FirstCom's unaudited interim consolidated financial statements as of
and for the three months ended March 31, 1999 and 2000.
4
<PAGE> 8
AT&T LATIN AMERICA
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
PERIOD FROM INCEPTION THREE MONTHS ENDED
(OCTOBER 13, 1999) THROUGH MARCH 31, 2000
DECEMBER 31, 1999 (UNAUDITED)
-------------------------- ------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue............................................... $ 802 $ 4,364
Gross profit (loss)....................................... (63) (2,557)
Operating loss............................................ (3,934) (12,949)
Net loss.................................................. (4,124) (11,217)
Net loss per share........................................ (103.10) (280.43)
Weighted average shares outstanding....................... 40,000 40,000
Depreciation.............................................. $ 512 $ 2,705
Amortization.............................................. 1,195 3,455
BALANCE SHEET DATA
Cash and cash equivalents................................. $ 24,223 $ 279
Property, plant & equipment, net.......................... 68,269 86,051
Total assets.............................................. 384,428 384,238
Long term debt (including capital leases)................. 383 411
Total liabilities......................................... 10,634 22,438
Shareholders' equity...................................... 373,794 361,800
OTHER FINANCIAL DATA
EBITDA(A)................................................. (2,227) (6,789)
Capital expenditures...................................... 9,276 19,903
CASH FLOW DATA
Net cash flow provided by operating activities............ 17 155
Net cash flow (used in) investing activities.............. (353,787) (25,869)
Net cash flow provided by financing activities............ 377,490 1,770
</TABLE>
------------
(A) EBITDA as used in this prospectus is operating profit (loss) plus the sum of
depreciation and amortization and is presented because we believe that
EBITDA provides useful information regarding our ability to service our
debt. EBITDA should not be considered in isolation or as a substitute for
the consolidated income statements or the consolidated statements of changes
in financial position prepared in accordance with U.S. GAAP or as a measure
of profitability or liquidity. EBITDA is not a measure determined under U.S.
GAAP, an alternative to U.S. GAAP operating income (loss) and net income
(loss), or a measure of liquidity or cash flows as determined under U.S.
GAAP. EBITDA does not represent discretionary funds. As a result, EBITDA, as
calculated by us, may not be comparable to similarly titled measures
reported by other companies.
5
<PAGE> 9
NETSTREAM
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
ELEVEN MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------------- --------------------
(IN THOUSANDS, EXCEPT QUOTA AND PER QUOTA DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue............................................... $ -- $ 395
Gross profit (loss)....................................... -- (1,373)
Operating loss............................................ (3,848) (12,575)
Net loss.................................................. (3,442) (12,001)
Net loss per quota(A)..................................... (2.72) (5.13)
Weighted average quotas outstanding(A).................... 1,264,127 2,339,183
Depreciation.............................................. $ -- $ 1,511
Amortization.............................................. -- --
BALANCE SHEET DATA
Cash and cash equivalents................................. $ 2 $ 29
Property, plant & equipment, net.......................... 12,212 47,484
Total assets.............................................. 12,980 49,793
Long term debt (including capital leases)................. 457 375
Total liabilities......................................... 14,475 33,814
Quotaholders' equity interest(A).......................... (1,495) 15,979
OTHER FINANCIAL DATA
EBITDA(B)................................................. (3,848) (11,064)
Capital expenditures...................................... 12,212 36,783
CASH FLOW DATA
Net cash flow (used in) provided by operating
activities.............................................. (7) 27
Net cash flow provided by investing activities............ 9 --
Net cash flow provided by financing activities............ -- --
</TABLE>
------------
(A) As a Brazilian limited liability company (sociedade de responsabilidade
limitada), Netstream's capital is represented by quotas rather than shares
of capital stock.
(B) EBITDA as used in this prospectus is operating profit (loss) plus the sum of
depreciation and amortization and is presented because we believe that
EBITDA provides useful information regarding Netstream's ability to service
its debt. EBITDA should not be considered in isolation or as a substitute
for the consolidated income statements or the consolidated statements of
changes in financial position prepared in accordance with U.S. GAAP or as a
measure of profitability or liquidity. EBITDA is not a measure determined
under U.S. GAAP, an alternative to U.S. GAAP operating income (loss) and net
income (loss), or a measure of liquidity or cash flows as determined under
U.S. GAAP. EBITDA does not represent discretionary funds. As a result,
EBITDA, as calculated by us with respect to Netstream, may not be comparable
to similarly titled measures reported by other companies.
6
<PAGE> 10
FIRSTCOM
<TABLE>
<CAPTION>
AS OF AND FOR THE THREE
AS OF AND FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED MARCH 31,
------------------------------------------------------------------ -------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
(IN THOUSANDS,
EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue.................. $ 224 $ 652 $ 1,130 $ 18,142 $ 38,356 $ 8,281 $ 11,750
Gross profit (loss).......... (580) (306) (73) 4,063 16,351 2,253 6,441
Operating loss(A)............ (2,498) (4,493) (10,592) (10,642) (20,919) (3,067) (12,745)
Net loss(A).................. (2,873) (4,762) (15,866) (25,322) (41,472) (7,149) (17,954)
Net loss per share........... (.31) (.32) (.95) (1.33) (1.94) (.37) (.61)
Weighted average shares
outstanding................ 9,407,000 14,795,660 16,667,719 19,084,300 21,354,012 19,115,555 29,660,707
Depreciation &
amortization............... $ 396 $ 842 $ 1,201 $ 2,237 $ 10,211 $ 893 $ 2,936
BALANCE SHEET DATA
Cash and cash equivalents.... $ 57 $ 723 $ 14,936 $ 8,892 $ 12,896 $ 3,174 $ 26,891
Property, plant & equipment,
net........................ 2,885 3,956 9,348 45,901 92,469 78,454 99,143
Total assets................. 4,347 14,893 176,936 154,844 172,110 169,432 193,495
Long term debt (including
capital leases) and
redeemable preferred
stock...................... 210 248 131,982 133,913 149,109 134,304 151,158
Total liabilities............ 3,677 2,074 145,009 148,670 166,078 168,375 175,373
Shareholders' equity
(deficit).................. 670 12,819 31,927 6,174 (8,700) (789) 2,966
OTHER FINANCIAL DATA
EBITDA(A)(B)................. (2,102) (3,651) (9,391) (8,405) (10,708) (2,174) (9,809)
Capital expenditures......... 720 1,453 2,763 34,674 33,124 12,072 9,346
CASH FLOW DATA
Net cash flow (used in)
operating activities....... (2,150) (3,934) (5,472) (28,389) (31,941) (3,442) (6,927)
Net cash flow (used in)
provided investing
activities................. (1,170) (2,968) (69,590) 2,227 (15,948) (2,436) (8,807)
Net cash flow provided by
financing activities....... 3,263 7,570 89,275 20,118 51,983 160 29,639
</TABLE>
------------
(A) These amounts reflect a non-recurring expense of $6,137 for the three months
ended March 31, 2000 and $1,008 for the year ended December 31, 1999 for
merger expenses relating to the merger with AT&T Latin America.
(B) EBITDA as used in this prospectus is operating profit (loss) plus the sum of
depreciation and amortization and is presented because we believe that
EBITDA provides useful information regarding FirstCom's ability to service
its debt. EBITDA should not be considered in isolation or as a substitute
for the consolidated income statements or the consolidated statements of
changes in financial position prepared in accordance with U.S. GAAP or as a
measure of profitability or liquidity. EBITDA is not a measure determined
under U.S. GAAP, an alternative to U.S. GAAP operating income (loss) and net
income (loss), or a measure of liquidity or cash flows as determined under
U.S. GAAP. EBITDA does not represent discretionary funds. As a result,
EBITDA, as calculated by us with respect to FirstCom, may not be comparable
to similarly titled measures reported by other companies.
7
<PAGE> 11
SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL
AND OPERATING INFORMATION
The following summary unaudited pro forma combined financial information is
derived from the unaudited pro forma combined financial information and the
notes thereto included elsewhere in this prospectus. This information gives
effect to:
-- our merger with FirstCom as if it had occurred on January 1, 1999 for
statement of operations purposes and as of March 31, 2000 for balance
sheet purposes, and our acquisition of Netstream as if it had
occurred on January 1, 1999 for statement of operations purposes;
-- a cash equity contribution of $70 million received from affiliates of
AT&T Corp. and Promon Ltda., the prior owner of our Brazilian
business and a shareholder of AT&T Latin America, as required by the
FirstCom merger agreement;
-- the issuance and sale of 35,000,000 shares of our Class A common
stock in this offering, assuming a price per share of $13.50 (the
closing price of the FirstCom common shares on August 2, 2000), for
estimated net proceeds of $[ ] million, and the
application of those proceeds as described under "Use of Proceeds";
and
-- FirstCom's tender offer and consent solicitation for its 14% senior
notes due 2007 and our issuance to AT&T Corp. of [ ]
shares of non-voting, non-convertible and non-participating 15%
Series B redeemable preferred stock to finance the tender offer,
as if they had been completed as of January 1, 1999 for statement of operations
purposes and as of March 31, 2000 for balance sheet purposes.
The summary unaudited pro forma combined financial information does not
purport to present our results of operations had the FirstCom merger and the
AT&T Argentina acquisition occurred on the date, or at the beginning of the
periods, for which the transactions are being given pro forma effect. Nor is the
unaudited summary pro forma combined financial information necessarily
indicative of the results of operations that may be achieved in the future. Our
actual financial position and results of operations will differ, perhaps
significantly, from the pro forma amounts reflected herein because of a variety
of factors, including access to additional information, changes in value not
currently identified and changes in operating results between the dates of the
pro forma financial information and the date on which the merger took place. The
price per share of our Class A common stock assumed for purposes of the summary
unaudited pro forma combined financial information is not necessarily indicative
of our share price following the FirstCom merger or this offering.
8
<PAGE> 12
AT&T LATIN AMERICA UNAUDITED PRO FORMA
<TABLE>
<CAPTION>
AS OF AND FOR THE
THREE MONTHS ENDED
YEAR ENDED MARCH 31, 2000
DECEMBER 31, 1999 (UNAUDITED)
----------------- ------------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue................................................. $ 40,349 $ 16,114
Gross profit................................................ 12,303 3,884
Operating loss.............................................. (86,735) (32,981)
Net loss attributable to common stockholders................ (112,092) (38,273)
Net loss per share.......................................... (.99) (.34)
Weighted average shares outstanding......................... 113,469,672 113,469,672
Depreciation................................................ $ 12,526 $ 5,377
Amortization................................................ 49,279 10,756
BALANCE SHEET DATA
Cash and cash equivalents................................. 47,170
Property, plant & equipment, net.......................... 165,251
Goodwill and other intangible assets...................... 768,138
Total assets.............................................. 1,045,857
Long term debt (including capital leases) and redeemable
preferred stock........................................ 212,908
Total liabilities......................................... 55,419
Shareholders' equity...................................... 780,505
OTHER FINANCIAL DATA
EBITDA(A)................................................. (24,930) (16,848)
Capital expenditures...................................... 94,341 31,165
</TABLE>
------------
(A) EBITDA as used in this prospectus is operating profit (loss) plus the sum of
depreciation and amortization and is presented because we believe that
EBITDA provides useful information regarding AT&T Latin America's ability to
service its debt. EBITDA should not be considered in isolation or as a
substitute for the consolidated income statements or the consolidated
statements of changes in financial position prepared in accordance with U.S.
GAAP or as a measure of profitability or liquidity. EBITDA is not a measure
determined under U.S. GAAP, an alternative to U.S. GAAP operating income
(loss) and net income (loss), or a measure of liquidity or cash flows as
determined under U.S. GAAP. EBITDA does not represent discretionary funds.
As a result, EBITDA, as calculated, may not be comparable to similarly
titled measures reported by other companies.
9
<PAGE> 13
SUMMARY SELECTED OPERATING INFORMATION
The following table sets forth selected operating statistics on a
historical and on a pro forma combined basis as of March 31, 2000. No statistics
are provided for Argentina, because we did not have material operations in
Argentina as of this date.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
---------------------------------------------------
AT&T
LATIN
AMERICA
PRO FORMA
BRAZIL CHILE COLOMBIA PERU COMBINED
------ ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C>
Network route kilometers
Metropolitan.......................... 335 306 815 1,228 2,684
Domestic (long-haul).................. 0 0 0 0 0
------ ------ ------ ------ ------
Total............................ 335 306 815 1,228 2,684
Total fiber kilometers.................. 32,461 4,743 17,996 31,236 86,436
Number of buildings connected........... 601 225 734 681 2,241
Number of voice grade equivalent
circuits.............................. 14,218 35,115 10,770 10,683 70,786
Number of permanent virtual circuits
sold.................................. 1,652 1,089 1,314 847 4,902
Number of dedicated data and Internet
customers............................. 623 699 181 582 --
Number of employees..................... 193 276 164 284 917
</TABLE>
Network route kilometers. Network route kilometers are the total number of
kilometers of fiber optic cable installed in a network. Network route kilometers
include cable laid as a backbone for the network, cable from the backbone to a
building and cable within a building to reach the customer's hardware at its
premises. A measurement in route kilometers does not take into account the
number of fibers in the cables that make up the network.
Total fiber kilometers. Total fiber kilometers are network route
kilometers multiplied by the number of strands of fiber in each of the cables
that make up the network. By counting strands of fiber, a measurement in fiber
kilometers indicates the maximum capacity of a network. For example, one route
kilometer of 144-strand fiber optic backbone cable would count as 144 fiber
kilometers, while one kilometer of 12-strand building access cable would count
as only 12 fiber kilometers.
Buildings connected. Buildings connected refers to the number of
buildings, each identified by a unique street address, that are connected to our
network.
Voice grade equivalent circuits. The number of voice grade equivalent
circuits relates to the transmission capacity of lines. These circuits are
measured in terms of their ability to transmit the equivalent of 64 kilobits of
information per second, the capacity needed for one voice call. A bit is the
smallest unit of information a computer can process and is the basic measurement
unit of data communications. If two sites are connected with a 256 kilobit link,
there would be four voice grade equivalent circuits.
Permanent virtual circuits sold. A permanent virtual circuit represents a
data connection, typically between two locations such as a customer's
headquarters and an off-site branch or other entity. We connect customers to our
network by deploying a port connection within or near to the customer's
premises. Each port can accommodate several permanent virtual circuits. As a
customer increases its usage of services, the customer will obtain additional
available transmission capacity on the same installed port.
Number of dedicated data and Internet customers. The number of customers
represents the number of billable customer accounts for data or Internet
services.
Employees. The number of employees excludes third-party contractor
employees and agents.
10
<PAGE> 14
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before investing in our Class A common
stock. Investing in our Class A common stock involves a high degree of risk. Any
of the following factors could harm our business and future operating results
and could result in a partial or complete loss of your investment.
IF WE DO NOT INTEGRATE SUCCESSFULLY WITH FIRSTCOM, OUR ANTICIPATED GROWTH AND
INCREASE IN REVENUES MAY NOT BE REALIZED AND OPERATING COSTS MAY BE GREATER THAN
EXPECTED.
If we do not integrate successfully our various operations, our anticipated
growth and increase in revenues may not be realized and operating costs may be
greater than expected. Integration of our operations with FirstCom's may be
difficult because it will involve changes affecting the employees, management
and operations of both companies. Future acquisitions, which are part of our
growth strategy, could further complicate the integration process.
AT&T CORP.'S VOTING CONTROL OVER OUR COMPANY COULD CAUSE US TO TAKE ACTIONS
BENEFICIAL TO AT&T CORP. THAT ARE NOT IN OUR OR YOUR BEST INTERESTS.
After this offering, AT&T Corp. will control indirectly [ ]% of the
voting power, or [ ]%, if the underwriters' overallotment option is exercised
in full, and [ ]% of the economic interest, or [ ]% if the underwriters'
overallotment option is exercised in full, in our company. It will be able to
control the election of the members of our board of directors and the outcome of
substantially all matters submitted to a vote of our stockholders. AT&T Corp.'s
voting control may continue in the future through its ownership of our high vote
Class B common stock even if AT&T Corp. no longer owns a majority economic
interest in us.
AT&T Corp. may have interests that differ from yours which may give it an
incentive to cause us to take actions beneficial to AT&T Corp. that are not
necessarily in our or your best interests. AT&T Corp. and companies in which it
owns equity interests, some of which are larger than its equity interest in us,
will have commercial arrangements with us. A subsidiary of AT&T Corp. will also
be our creditor with respect to a $100 million revolving credit facility and
will own all of our 15% Series B redeemable preferred stock.
AT&T CORP.'S VOTING CONTROL AND SOME OF THE PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS MAY DELAY, DEFER OR PREVENT A CHANGE IN CONTROL OF OUR
COMPANY THAT MIGHT BE OTHERWISE BENEFICIAL TO OUR STOCKHOLDERS.
AT&T Corp.'s voting control and some of the provisions in our certificate
of incorporation and bylaws could delay, defer or prevent a change in control of
our company that might be otherwise beneficial to our stockholders. Those
provisions are described in this prospectus under the heading "Provisions of
AT&T Latin America's Certificate of Incorporation and Bylaws That Could Affect,
Delay or Prevent a Change of Control". This may adversely affect the prevailing
market price of the shares of Class A common stock if viewed as discouraging
takeover attempts in the future.
AT&T CORP. MAY COMPETE WITH US IN PROVIDING VARIOUS SERVICES, WHICH COULD
ADVERSELY AFFECT OUR ABILITY TO GAIN MARKET SHARE AND ATTRACT AND RETAIN
CUSTOMERS.
AT&T Corp. may compete with us in providing all the services we provide,
except long distance, toll free, local voice delivered through fixed lines,
dedicated line, Internet access, and a number of data services. These services
are described in this prospectus under the heading "Regional Vehicle Agreement
with AT&T Corp". The restrictions on competition with us do not apply to
Concert, subsidiaries of AT&T Corp. related to the Liberty Media group, the AT&T
Global Network Services and the businesses AT&T Corp. is acquiring through its
acquisition of MediaOne. Competition from AT&T Corp. and its affiliates could
adversely affect our ability to gain market share and attract and retain
customers.
13
<PAGE> 15
TERMINATION OF AT&T CORP.'S BRAND LICENSE AGREEMENT WITH US WOULD RESULT IN THE
LOSS OF THE USE OF THE WELL-KNOWN AT&T BRAND, WHICH WOULD ADVERSELY AFFECT OUR
ABILITY TO MAINTAIN AND EXPAND OUR CUSTOMER BASE AND GENERATE REVENUES.
AT&T Corp. may terminate its brand license with us if it no longer has
voting control over us or if we misuse the marks or otherwise materially breach
our obligations under the brand license agreement and are not able to correct
the breach in a timely fashion. Loss of the AT&T brand would detract from our
ability to gain market share, and could result in increased marketing costs
associated with developing market recognition for a different brand name. These
effects would adversely affect our ability to attract and retain customers and
generate revenues.
THE RESTRICTIONS ON OUR BUSINESS ACTIVITIES IN OUR CERTIFICATE OF INCORPORATION
AND AGREEMENTS WITH AT&T CORP. COULD ADVERSELY AFFECT OUR PROVISION OF NEW
SERVICES AS WELL AS OUR GEOGRAPHIC REACH.
Our certificate of incorporation and our agreements with AT&T Corp. limit
the geographical area where we may operate. In addition, our regional vehicle
agreement with AT&T Corp. governs the services we may provide and, in some
cases, to whom we may provide these services. The services we offer under the
AT&T brand are also subject to our service mark license agreement with AT&T
Corp. which requires the maintenance of service levels appropriate for services
that bear an AT&T brand. Under our agreements with AT&T Corp., additional
restrictions on the types of services we may offer would also apply if we had
more than $150 million in annual revenues from services delivered over
cross-border networks which we own or in which we have an equity interest. Each
of these limitations could adversely affect our ability to provide new services
and expand into new markets.
THE SALE OF A SUBSTANTIAL NUMBER OF OUR SHARES COULD CAUSE THE MARKET PRICE OF
OUR SHARES TO DECLINE.
The sale of a substantial number of shares of our Class A common stock or
the perception that such a sale might occur could put downward pressure on the
market price for our shares. There could be substantial sales of our shares in
connection with acquisitions and upon the exercise of outstanding warrants and
options. Also, we may make additional equity offerings in the future to raise
funds to implement our growth strategy. Whether we make additional offerings and
what their terms might be will depend on prevailing market conditions.
WE HAVE HAD OPERATING LOSSES AND MAY NEVER ACHIEVE PROFITABILITY, WHICH WOULD
ADVERSELY AFFECT OUR ABILITY TO FINANCE FUTURE OPERATIONS AND MAKE SUITABLE
ACQUISITIONS.
FirstCom and Netstream have had significant losses and negative cash flow
from operations since their inception. On a pro forma basis giving effect to the
FirstCom merger and the Netstream acquisition as if they had been completed on
January 1, 1999, we had a loss from operations of approximately $86.7 million in
1999 and $33.0 million in the first quarter of 2000 and a net loss attributable
to common stockholders of approximately $112.1 million in 1999 and $38.3 million
in the first quarter of 2000.
We expect to continue to incur significant operating losses and have
negative cash flow from operations for at least the next several years. This
could result in our being unable to achieve or sustain profitable operations,
finance future operations or make suitable acquisitions.
OUR LIMITED OPERATING HISTORY MAY MAKE IT DIFFICULT TO EVALUATE OUR FUTURE
PERFORMANCE.
Prospective investors have only limited historical and operating
information about our operations to use in evaluating our performance. Prior to
the Netstream acquisition in December 1999, we had no material assets,
liabilities or operations. Netstream began commercial operations on a limited
scale in November 1998. Although FirstCom began operations in Chile in 1994, it
acquired its Peruvian operations in May 1996 and its Colombian operations in
February 1999. In addition, AT&T Argentina, which we acquired in June 2000, is a
development stage broadband communications company in Argentina with limited
assets and a limited operating history consisting of reselling other carriers'
services to a few customers.
14
<PAGE> 16
IF WE FAIL TO RAISE THE NECESSARY FUNDS FOR OUR CAPITAL EXPENDITURE PROGRAMS AND
TO FUND OPERATING LOSSES, IT WILL BE DIFFICULT TO IMPLEMENT OUR GROWTH STRATEGY.
We have substantial cash requirements. We estimate that we will have cash
requirements of approximately $725 million during 2000 and the first half of
2001. We and FirstCom had spent an aggregate of $40 million of that amount
through March 31, 2000. The remaining amount will be needed to develop and
expand our communications networks and services and fund working capital needs,
operating losses and debt service obligations. We expect that our funding needs
to implement our growth strategy will continue at a somewhat higher level from
mid-2001 through the end of 2002. Moreover, we could require additional funding
if operating losses are greater than anticipated or if we take advantage of
acquisitions or other expansion opportunities using cash.
We expect to receive $[ ] million of net proceeds from this offering
and to use $[ ] million to fund our cash requirements described above. We
are not sure we will be able to raise sufficient funds to meet our remaining
cash requirements on acceptable terms or at all. Failure to raise sufficient
funds could affect our ability to meet our debt service and other obligations
and would affect our ability to carry out our growth strategy. If we do not
complete this offering or obtain additional financing by the end of the third
quarter of 2000, we will have to postpone most of our capital expenditures until
financing is obtained. This would detract from our time to market and our
ability to pursue our growth strategy.
WE WILL HAVE SIGNIFICANT DEBT AND PREFERRED DIVIDEND OBLIGATIONS THAT COULD
ADVERSELY AFFECT OUR ABILITY TO MAKE CAPITAL EXPENDITURES, OBTAIN ADDITIONAL
FINANCING, MAKE SUITABLE ACQUISITIONS AND REACT TO COMPETITIVE AND OTHER
CHANGES.
We will have significant amounts of debt and preferred stock obligations,
and therefore, substantial debt service and preferred dividend obligations.
Having a high level of debt and preferred dividend obligations imposes risks
such as the following:
-- we may have difficulty obtaining additional financing for working
capital, capital expenditures, acquisitions or general corporate
purposes;
-- our substantial cash requirements to service debt and pay preferred
dividends will reduce amounts available for capital expenditures and
other purposes;
-- our failure to generate sufficient cash flow or obtain sufficient
cash from our subsidiaries could cause us to default on our debt; and
-- our high debt level may increase our vulnerability to adverse changes
in our business and economic conditions, as well as limit our ability
to react to competitive changes.
On a pro forma basis giving effect to the acquisition of Netstream and the
merger with FirstCom, we have had operating results that failed by a substantial
amount to cover fixed charges. We do not expect to have sufficient cash flow to
cover fixed charges for at least the next several years.
If we fail to meet our debt or preferred dividend obligations, we may have
to modify our growth plans, restructure or refinance our indebtedness or seek
additional capital, which may not be available on reasonable terms or at all.
Our ability to meet our obligations depends on factors affecting our business
and operations, many of which are beyond our control. They include such things
as economic conditions in Latin America, the entry of new competitors and
technological change.
OUR SUBSIDIARIES HAVE ONLY LIMITED ABILITY TO MAKE FUNDS AVAILABLE TO US TO PAY
OUR DEBT AND OTHER OBLIGATIONS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND
FINANCIAL STANDING.
Our only significant assets that generate cash are our direct and indirect
interests in our operating subsidiaries. These subsidiaries may not be able to
make funds available to enable us to meet our obligations, in which case our
business and financial standing would be adversely affected. The ability of our
subsidiaries to make funds available to us will depend on their earnings and
business and on tax considerations and legal restrictions, such as local legal
restrictions relating to foreign payments and repatriation of capital, as well
as their agreement with lenders.
15
<PAGE> 17
ACQUISITIONS COULD RESULT IN SHAREHOLDER DILUTION, ADDITIONAL LIABILITIES,
INCREASED AMORTIZATION EXPENSES AND DIFFICULTIES IN INTEGRATING NEW BUSINESSES
AND DIVERSION OF MANAGEMENT'S ATTENTION.
Acquisitions are an important part of our growth strategy. However,
acquisitions could result in one or more of the following:
-- dilutive issuances of equity securities;
-- additional debt and contingent liabilities;
-- increased amortization expenses related to goodwill and other
intangible assets;
-- difficulties in assimilating the operations, technologies, services
and products of the acquired companies; and
-- diversion of management's attention from other business activities.
WE MAY NOT BE ABLE TO COMPLETE THE ACQUISITIONS NECESSARY TO IMPLEMENT OUR
GROWTH STRATEGY.
Our growth will depend in part on whether we can identify suitable
acquisition candidates and complete acquisitions at attractive prices and on
satisfactory terms. Completing acquisitions may require approval from regulatory
agencies and other third parties. We have no commitments or agreements for any
acquisitions. We are not certain that we will be able to complete any future
acquisitions. An inability to make suitable acquisitions would make it more
difficult for us to implement our growth strategy.
WE MAY HAVE DELAYS OR UNANTICIPATED EXPENSES IN CONSTRUCTING OUR NETWORKS THAT
PUT US AT A COMPETITIVE DISADVANTAGE.
Substantial construction of additions to our network and of new network
systems involve material risks. Failure to complete construction on a timely
basis could adversely affect our ability to attract and retain customers, as
well as our contracts, franchises and licenses. In addition, this type of
construction project is subject to cost overruns and delays beyond our control.
Increased expense due to construction difficulties could adversely affect our
financial results. Delays such as those caused by government entities, financing
problems and catastrophic occurrences are not unusual and may be common. Delays
can also arise from design changes and material or equipment shortages or delays
in delivery. Services to buildings can also be delayed if our operating
companies or their subcontractors have difficulty in obtaining easements from
third parties.
WE NEED TO ATTRACT NEW CUSTOMERS AND THERE MUST BE SUBSTANTIAL GROWTH IN THE
OVERALL LEVEL OF DEMAND IN LATIN AMERICA FOR OUR SERVICES IF WE ARE TO GENERATE
PROFITS.
Our success will depend heavily on the extent to which prospective
subscribers use our data, Internet and other broadband services. Attracting new
customers is particularly important to our growth strategy because we have only
a limited operating history. In addition, for us to succeed, the overall level
of demand for the type of services we offer by businesses in our target markets
in Latin America must increase significantly. Also, there must be strong demand
for services that we introduce in the future.
We cannot be sure what the future demand for these services will be,
particularly because the demand will depend to a significant extent on factors
beyond our control. Those factors include business, economic, regulatory and
competitive factors in our markets. Insufficient demand for our services will
adversely affect our business and results of operations.
INCREASING COMPETITION IN THE COMMUNICATIONS INDUSTRY IN LATIN AMERICA AND OUR
LIMITED COMPETITIVE STANDING AND SIZE COULD ADVERSELY AFFECT OUR ABILITY TO
GENERATE REVENUES, GAIN SIGNIFICANT MARKET SHARE AND ATTRACT NEW CUSTOMERS FROM
EXISTING PROVIDERS.
The communications industry in Latin America is becoming increasingly
competitive due in part to recent privatizations, deregulation and a related
increase in the number and size of new competitors. Moreover, because we have a
limited operating history, we have a limited competitive standing. This is
16
<PAGE> 18
particularly true in Brazil, where Netstream began selling services in November
1998. In addition, we only began limited operations in Argentina when we
completed our acquisition of Keytech LD in June 2000.
We will compete with several other service providers in each of our
markets. Competitors include global alliances of some of the world's largest
communications carriers, incumbent communications providers with large customer
bases, wireless telephone companies and satellite-based communications carriers.
Other existing and potential competitors include cable television companies,
railway companies, utilities and other entities with rights-of-way and large end
users which operate private networks. Competition has been intensifying and we
believe it is likely to continue to intensify as the number of new market
entrants increases.
As a result, we may not be able to generate adequate revenues or gain a
substantial share of the markets we intend to serve. We also may have difficulty
attracting new customers from established providers.
SIGNIFICANT PRICE COMPETITION COULD ADVERSELY AFFECT OUR REVENUES AND OPERATING
RESULTS.
Our price levels for our services will depend to a significant degree on
competitors' prices over which we have no control. A number of our existing and
potential competitors have greater financial and other resources than we have.
Some competitors may be able to use their financial resources and incumbent
status to cause severe price competition. If we have to reduce prices to compete
effectively, our operating results may be adversely affected.
We expect that we may need to renegotiate the pricing of our services
periodically to remain competitive, especially for larger users, and as
competition increases in Latin America for advanced communication services
generally. Lower prices for communications services could have a material
adverse effect on us if they cannot be offset by increases in our customer base,
increases in overall usage of our networks, or increases in the provision of
higher value-added services to customers, or some combination of these
offsetting factors.
BECAUSE WE ARE BUILDING OUR CUSTOMER BASE AND EXPANDING AND BUILDING NETWORKS,
WE ARE PARTICULARLY VULNERABLE TO THE IMPACT OF DAMAGE TO OUR NETWORKS AND
SYSTEM FAILURES.
To market our services to business customers and other high volume users
our network infrastructure will need to provide a high level of reliability,
capacity and security. Our networks, many of which are being expanded or newly
constructed, are subject to physical damage, power loss, capacity limitations,
software defects and security breaches. Service interruptions or other defects
could impede our ability to attract and retain customers.
WE NEED TO OBTAIN ADDITIONAL LICENSES AND APPROVALS IN ORDER TO EXPAND OUR
SERVICES AND ENTER NEW MARKETS.
We must from time to time obtain additional licenses and approvals from
governmental agencies in order to provide our services. Because many of our
markets have been recently deregulated, there may be particular difficulties or
delays in obtaining them. If we encounter difficulties or delays in obtaining
licenses, zoning variances or rights-of-way agreements, our ability to provide
new services and expand into new markets could be adversely affected.
OUR ABILITY TO SERVE CUSTOMERS AND COMPETE EFFECTIVELY COULD BE ADVERSELY
AFFECTED IF WE FAIL TO OBTAIN RIGHTS-OF-WAY AND VARIOUS THIRD PARTY AGREEMENTS
TO CONSTRUCT AND MAINTAIN OUR NETWORKS.
We will need easements, rights-of-way, franchises and licenses from various
private parties, actual and potential competitors and local governments to
construct and maintain our networks. We do not yet have all of the approvals
required to build networks in several markets we consider attractive. We may not
be able to obtain and maintain the necessary approvals on acceptable terms.
Also, other service providers may obtain similar approvals that allow them to
compete against us or enter these markets before we can. Moreover, some of the
agreements and approvals we have are short-term or are revocable by third
parties. Termination or non-renewal of any of these agreements could require us
to remove our fiber optic cable or abandon our network in place. This would
adversely affect our ability to service customers and compete effectively.
17
<PAGE> 19
CHANGES IN GOVERNMENTAL DEREGULATION COULD ADVERSELY AFFECT OUR OPERATIONS AND
GROWTH BY RESTRICTING OUR ABILITY TO OFFER EXISTING AND PLANNED COMMUNICATIONS
SERVICES.
We have largely based our growth strategy upon our expectation that
deregulation of the communications markets will continue in the countries where
we operate. These countries may not proceed with deregulation on schedule or may
stop entirely or reverse the trend towards deregulation. This could adversely
affect our operations and growth by restricting our ability to offer existing
and planned communications services. Incumbent providers, trade unions and
others may resist legislation directed toward deregulation. In addition,
national and local laws and regulations differ significantly among the countries
in which we operate. How these laws and regulations are interpreted and enforced
as well as changes in laws or regulations and judicial intervention could limit
our ability to provide some of our existing and planned communications services.
WE MUST KEEP PACE WITH RAPID INDUSTRY AND TECHNOLOGICAL CHANGE TO ATTRACT AND
MAINTAIN CUSTOMERS AND COMPETE EFFECTIVELY.
The communications industry, particularly in Latin America, is changing
rapidly. This is due to factors such as:
-- deregulation;
-- privatization;
-- technological improvements;
-- expansion of communications infrastructure; and
-- the globalization of the world's economies and liberalization of
trade.
Our success depends, in part, upon how well we anticipate and adapt to
change and whether we offer our customers attractive services. If we cannot do
so, it will be more difficult for us to attract and retain customers and compete
effectively.
OUR CUSTOMER SERVICE COULD SUFFER IF WE ARE UNABLE TO OBTAIN SATISFACTORY
SERVICES FROM LOCAL COMMUNICATIONS PROVIDERS, WHICH COULD ADVERSELY AFFECT OUR
ABILITY TO COMPETE.
We depend on incumbent local carriers to provide various communications
services to us and to our customers. FirstCom and Netstream have from time to
time had delays in receiving these communications services. We may not be able
to obtain these services on the scale and within the time required by us at an
affordable cost, or at all. If adequate services are not provided, customer
service could suffer as could our competitive position and financial results.
FAILURE TO RETAIN KEY PERSONNEL AND ATTRACT ADDITIONAL PERSONNEL MAY DETRACT
FROM OUR ABILITY TO MANAGE OUR BUSINESS EFFECTIVELY, ATTRACT CUSTOMERS AND
EXECUTE OUR GROWTH STRATEGY.
A small number of key executive officers and operating personnel manage our
company. They include Patricio E. Northland, our chairman of the board,
president and chief executive officer, who has led FirstCom since 1996. Our
business will be adversely affected if we do not attract, retain and motivate
skilled and qualified technical and sales personnel with experience in the
communications industry and, particularly, in Latin America. In particular, it
may detract from our ability to manage our business effectively, attract
customers and execute our strategy to grow through construction of additional
networks and suitable acquisitions. People with the requisite qualifications and
experience are in great demand and often have competing offers of employment.
OUR LIMITED OPERATING AND FINANCIAL SYSTEMS RESOURCES MAY MAKE IT DIFFICULT TO
MANAGE FUTURE GROWTH.
We may not be able to keep pace with a high level of growth. Our ability to
effectively manage the growth and expansion contemplated by our growth strategy
will require that we implement and improve our operating and financial systems.
We will also need to expand, train and manage a growing base of employees.
18
<PAGE> 20
WE COULD ENTER INTO ARRANGEMENTS WITH CONCERT THAT COULD CHANGE OUR STRATEGY AND
BUSINESS, WHICH COULD AFFECT OUR GROWTH AND RESULTS OF OPERATIONS, AND ADVERSELY
AFFECT THE MARKET PRICE OF OUR CLASS A COMMON STOCK.
One of our strategies is to collaborate with Concert. There have been
preliminary discussions among AT&T Corp., British Telecommunications and Concert
with respect to the desirability of various arrangements that would, among other
things, enhance such collaboration.
Possible arrangements with respect to Concert range from enhanced
commercial cooperation to AT&T Corp.'s contributing to Concert all or a portion
of its ownership interest in our company. Neither AT&T Corp., Concert nor we
have made any determination with respect to these matters. AT&T Corp. would have
the right to terminate its brand license to us if it ceased to own a majority of
the voting power in our company. AT&T Corp. has advised us, however, that it
would be prepared to continue the brand license in the context of any
arrangements of this type.
It is not possible to predict what steps we will take to enhance our
collaboration with Concert. Nor is it possible to predict whether any
arrangements will be made or on what terms. This type of arrangement would be
likely to be subject to governmental and other third-party approvals. Any
arrangements with Concert could change our strategy and business, which could
affect our growth and results of operations, or adversely affect the market
price of our Class A common stock.
THE SPECIAL ECONOMIC AND POLITICAL RISKS OF CONDUCTING OPERATIONS IN LATIN
AMERICA COULD ADVERSELY AFFECT OUR ABILITY TO INCREASE REVENUES IN RESPONSE TO
INCREASES IN INFLATION RATES OR CURRENCY DEVALUATIONS WHERE WE OPERATE.
Because all of our operations are in Latin America, we will be subject to
significant economic, political and social instability and other risks not
typical of investments in businesses conducted in the United States. During the
past several years, many countries where we now operate or may operate have had
high inflation, uneven economic growth rates and political instability. Also
many of these countries have economies in various stages of development or
structural reform and their local economies have fluctuated. We may not be able
to mitigate the effect of inflation on our operations in these countries by
price increases, even over the long-term. In addition, to the extent these
factors affect the ability of subscribers to pay for our services, the growth of
revenues from services offered in these markets could be limited.
In addition to inflation, many of these countries have had significant
volatility in currency exchange rates. We would also be adversely affected if
currency exchange rates change in ways adverse to us or if currency controls are
imposed.
WE COULD PAY ADDITIONAL TAXES BECAUSE OUR OPERATIONS ARE SUBJECT TO VARIOUS
FOREIGN TAXES.
We structure our operations based on assumptions about various tax laws,
U.S. and international tax treaty developments, international currency exchange
and capital repatriation laws and other relevant laws of a variety of non-U.S.
jurisdictions. Taxing or other authorities might not reach the same conclusions
we reach. We could suffer adverse tax and other financial consequences if our
assumptions about these matters are incorrect or the relevant laws are changed
or modified.
DISTRIBUTIONS AND OTHER PAYMENTS FROM OUR SUBSIDIARIES AND AFFILIATES MAY BE
SUBJECT TO FOREIGN TAXES, REDUCING OUR EARNINGS.
Distributions of earnings and other payments, including interest, we
receive from our subsidiaries and affiliates may be subject to withholding taxes
imposed by the jurisdictions in which these entities are formed or operating.
These taxes would reduce the amount of after-tax cash we would receive from
these entities.
LABOR REGULATIONS AND STRONG LABOR UNIONS IN LATIN AMERICA MAY INCREASE OUR
OPERATING AND LABOR COSTS.
Labor regulations in Latin America are generally more favorable to
employees than they are in the United States. Most Latin American countries also
require higher rates of mandatory social security and similar contributions by
employers than the United States. In addition, labor unions in most Latin
American countries are considered to be strong and influential. If our
operations become unionized, we could experience strikes or other conflicts with
labor unions or personnel that increase our operating and labor costs.
19
<PAGE> 21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Risk Factors," "Business" and
elsewhere 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 in or implied by
the forward-looking statements.
Forward-looking statements include but are not limited to statements and
references about the following matters:
-- expectations and estimates of completion dates, construction costs,
subsequent maintenance expenses and growth of the networks to be
built or expanded, as to the amount of cash requirements to implement
our growth strategy and as to our ability to obtain financing;
-- expectations concerning growth and demand for communications
services;
-- expectations about the sources of revenues and the percentage
breakdown of sources of revenues;
-- our ability to implement successfully our growth strategy and to sell
capacity on our networks; and
-- future financial performance, including growth in sales and income.
In addition to matters that are described in this prospectus, particularly
the cautionary statements included in "Risk Factors," the following factors,
among others, could cause our actual results to differ materially from those
expressed in or implied by any forward-looking statements contained in this
prospectus:
-- the rate of expansion of our networks and customer base;
-- inaccurate forecasts of customer or market demand;
-- loss of one or more important customers;
-- highly competitive market conditions;
-- changes in or developments under laws, regulations and licensing
requirements in the countries in which we may operate;
-- changes in communications technology;
-- currency fluctuations; and
-- changes in economic, regulatory and political conditions in the
countries in which we operate.
20
<PAGE> 22
CLASS A COMMON STOCK PRICE RANGE
AT&T LATIN AMERICA CLASS A COMMON SHARES
Our Class A common stock began trading on the Nasdaq National Market on
[ ], 2000 under the symbol "ATTL". The following table sets forth on a
per share basis the high and low sales prices of our Class A common stock as
reported by the Nasdaq National Market for the period indicated. We have never
paid cash dividends on our common stock.
<TABLE>
<CAPTION>
COMMON STOCK
PRICE RANGE
----------------
HIGH LOW
------ ------
<S> <C> <C>
Third Quarter, 2000 (beginning [ ], 2000).......... $ $
</TABLE>
For a recent reported last sale price for the Class A common stock, see the
cover page of this prospectus.
As of [ ], 2000, there were [ ] holders of record of [ ]
outstanding shares of Class A common stock, which excludes beneficial owners of
shares held in "street name." AT&T Corp. holds all [ ] outstanding shares of
our Class B common stock.
As of July 31, 2000 we had agreed to grant options to purchase 1,417,500
shares of Class A common stock. In addition, FirstCom had outstanding stock
options and warrants to purchase 9,051,166 FirstCom shares as of June 30, 2000,
with a weighted average exercise price of $6.25 per share and 1,448,885 shares
of FirstCom convertible preferred stock, all of which were converted in the
FirstCom merger to options, warrants and preferred stock of AT&T Latin America.
FIRSTCOM COMMON SHARES
The following table shows the range of the high and low closing prices of
FirstCom common shares, as reported by the Nasdaq National Market for the
periods indicated. FirstCom never paid any cash dividends on its common shares.
Although in the FirstCom merger shares of FirstCom common stock were exchanged
for shares of our Class A common stock on a 1:1 basis, stock prices of FirstCom
prior to the merger may not be an indication of our stock price thereafter.
<TABLE>
<CAPTION>
COMMON STOCK
PRICE RANGE
----------------
HIGH LOW
------ ------
<S> <C> <C>
1997
Fourth Quarter............................................ $ 4.00 $ 1.56
Third Quarter............................................. 3.44 2.06
Second Quarter............................................ 3.25 1.44
First Quarter............................................. 3.50 1.88
1998
Fourth Quarter............................................ 2.62 .75
Third Quarter............................................. 2.87 1.00
Second Quarter............................................ 2.62 1.66
First Quarter............................................. 2.69 1.66
1999
Fourth Quarter............................................ 42.00 9.38
Fourth Quarter (through October 29)(1).................... 12.44 9.38
Third Quarter............................................. 11.12 7.69
Second Quarter............................................ 9.12 2.75
First Quarter............................................. 3.16 2.16
2000
Third Quarter (through July 31)........................... 17.56 13.88
Second Quarter............................................ 32.12 11.19
First Quarter............................................. 37.94 29.38
</TABLE>
------------
(1) October 29, 1999 was the last trading day before the signing of the FirstCom
merger agreement.
21
<PAGE> 23
DIVIDEND POLICY
We have not paid any cash dividends on our common stock and we do not
expect to do so in the foreseeable future. We plan to retain earnings, if any,
for use in the operation of our business and to fund future growth.
22
<PAGE> 24
USE OF PROCEEDS
We estimate the net proceeds from the sale of 35,000,000 shares of Class A
common stock will be $[ ] million, after deducting underwriting discounts of
$[ ] million. We estimate that we will pay offering expenses of $[ ]
million. If the underwriters exercise their over-allotment option in full, we
estimate that the net proceeds from our sale of 40,250,000 shares of Class A
common stock will be $[ ] million.
We anticipate that we will use the net proceeds from the offering to expand
our communications networks, to repay $[ ] outstanding under our $100
million credit facility with an affiliate of AT&T Corp. and for working capital
and other general corporate purposes. Our $100 million credit facility bears
interest at an annual interest rate equal to the 90-day London Inter-Bank
Offered Rate, or LIBOR, plus 3.75% and has a final maturity of two years after
the completion of the FirstCom merger.
23
<PAGE> 25
CAPITALIZATION
The following table sets forth our capitalization at March 31, 2000:
- on an actual basis as adjusted to reflect a reclassification of our
shares in June 2000;
- on an unaudited pro forma basis after giving effect to the FirstCom
merger as if the transaction had been completed on March 31, 2000,
including:
- a cash capital contribution of $70 million received from affiliates
of AT&T Corp. and Promon Ltda., the prior owner of our Brazilian
business and a shareholder of AT&T Latin America, as required by
the FirstCom merger agreement;
- FirstCom's tender offer for its 14% senior notes due 2007 and our
issuance to AT&T Corp. of [ ] shares of non-voting,
non-convertible and non-participating 15% Series B redeemable
preferred stock to finance the tender offer; and
- the exchange on a 1:1 basis of outstanding FirstCom shares, options
and warrants for our shares, options and warrants in connection
with the FirstCom merger.
- on an unaudited pro forma basis, as adjusted to reflect the receipt by
us of net proceeds of $[ ] million from the issuance and sale of
35,000,000 shares of our Class A common stock in this offering,
assuming a price per share of $[ ], after deducting offering
expenses and the application of net proceeds from this offering.
24
<PAGE> 26
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-----------------------------------
PRO
FORMA
PRO AS
ACTUAL FORMA ADJUSTED
-------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.................................. $ 279 $ 47,170 $
======== ========== ==========
Short-term debt............................................ $ 3,184 $ 9,012 $
Long-term debt............................................. 411 6,008
-------- ---------- ----------
Total debt............................................ 3,595 15,020
-------- ---------- ----------
Preferred Equity:
Series A convertible preferred stock, $.001 par value, no
shares outstanding, actual; 1,448,885 shares issued
and outstanding, as adjusted for the FirstCom
merger................................................ -- --
15% Series B redeemable preferred stock, $.001 par value,
shares outstanding, actual; [ ] shares
issued and outstanding, as adjusted for the FirstCom
tender offer.......................................... -- 206,900
Common Equity:
Class A shares, $.0001 par value, 8,084,820 shares issued
and outstanding, actual; 41,631,128 shares issued and
outstanding, as adjusted for the FirstCom merger and
the AT&T Argentina acquisition; 83,297,794 shares
issued and outstanding, as adjusted for this
offering.............................................. $ 1,135
Class B shares, $.0001 par value, 72,763,384 shares
issued and outstanding, actual; 73,017,233 shares
issued and outstanding, as adjusted for the FirstCom
merger................................................ -- --
Additional paid-in capital................................. 376,566 756,904
Warrants................................................... -- 90,361
Accumulated deficit........................................ (15,341) (68,470)
Cumulative translation adjustments......................... 575 575
-------- ---------- ----------
Total shareholders' equity............................ 361,800 780,505
-------- ---------- ----------
Total capitalization....................................... $365,395 $1,002,425 $
======== ========== ==========
</TABLE>
25
<PAGE> 27
DILUTION
Our pro forma net tangible book value as of March 31, 2000 was
$[ ] million, or $[ ] per share of Class A common stock. We
have calculated this amount by:
-- subtracting our total liabilities from total tangible assets; and
-- then dividing the difference by the pro forma number of shares of
Class A common stock outstanding, including the number of shares of
Class A common stock that could be issued upon the conversion of all
Series A convertible preferred stock outstanding upon the completion
of this offering.
After giving effect to the sale of 35,000,000 shares of Class A common
stock in this offering at an assumed public offering price of $[ ] per
share, after deducting the estimated underwriting discounts and commissions of
$[ ] and $[ ] million, respectively, and the estimated
offering expenses payable by us, our adjusted pro forma net tangible book value
as of March 31, 2000 would have been $[ ] million, or $[ ] per
share. This amount represents an immediate dilution of $[ ] per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share................. $
Pro forma net tangible book value per share before
this offering...................................... $
Increase in pro forma net tangible book value per
share attributable to new investors................
------------
Pro forma net tangible book value per share after this
offering..............................................
------------
Dilution per share to new investors................... $
============
</TABLE>
The following table summarizes, as of March 31, 2000, after giving effect
to the difference between the number of shares of Class A common stock purchased
from us, the total consideration paid to us, and the average price per share
paid by existing stockholders and by new investors, at an assumed public
offering price of $[ ] per share before deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 114,648,361 % % $
New investors........... $
----------- ----- ------------ ----- ------
Total.............. 100.0% 100.0%
=========== ===== ============ ===== ======
</TABLE>
If the underwriters exercise their over-allotment option in full, the
number of shares held by new investors will increase to [ ]
shares, or [ ]% of the total shares of common stock outstanding
after this offering, the shares held by existing stockholders will be reduced to
70.5% of the total shares of Class A common stock outstanding after this
offering and the dilution to new investors would increase to $[ ] per
share.
The table above assumes no exercise of stock options or warrants to
purchase shares of Class A common stock outstanding on March 31, 2000. As of
July 31, 2000, we had agreed to grant options to purchase 1,417,500 shares of
Class A common stock. In addition, as of June 30, 2000 FirstCom had granted
9,051,166 stock options and warrants, which had a weighted average exercise
price of $6.25 per share, and 1,448,885 shares of FirstCom convertible preferred
stock, all of which were converted in the FirstCom merger to options, warrants
and preferred stock of AT&T Latin America. To the extent all of these
outstanding options and warrants had been exercised as of June 30, 2000, pro
forma net tangible book value per share after this offering would have been
$[ ] and total dilution per share to new investors would have been
$[ ].
26
<PAGE> 28
SELECTED FINANCIAL DATA
We have set forth below certain selected historical financial information
relating to AT&T Latin America, Netstream and FirstCom. You should also refer to
the financial information included in this prospectus in "Unaudited Pro Forma
Combined Financial Information," our historical financial statements and those
of Netstream and FirstCom included in this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Our financial information has been derived from:
-- our audited consolidated financial statements as of December 31, 1999
and for the period from inception (October 13, 1999) through December
31, 1999; and
-- our unaudited interim consolidated financial statements as of and for
the three months ended March 31, 2000.
The financial information regarding Netstream has been derived from:
-- Netstream's audited financial statements as of and for the eleven
months ended December 31, 1998; and
-- Netstream's audited financial statements as of and for the nine
months ended September 30, 1999.
The financial information regarding FirstCom has been derived from:
-- FirstCom's audited annual consolidated financial statements as of and
for the years ended December 31, 1995, 1996 1997, 1998 and 1999; and
-- FirstCom's unaudited interim consolidated financial statements as of
and for the three months ended March 31, 1999 and 2000.
27
<PAGE> 29
AT&T LATIN AMERICA
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
PERIOD FROM INCEPTION THREE MONTHS ENDED
(OCTOBER 13, 1999) THROUGH MARCH 31, 2000
DECEMBER 31, 1999 (UNAUDITED)
-------------------------- ------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue.............................. $ 802 $ 4,364
Gross profit (loss)...................... (63) (2,557)
Operating loss........................... (3,934) (12,949)
Net loss................................. (4,124) (11,217)
Net loss per share....................... (103.10) (280.43)
Weighted average shares outstanding...... 40,000 40,000
Depreciation............................. $ 512 $ 2,705
Amortization............................. 1,195 3,455
BALANCE SHEET DATA
Cash and cash equivalents................ $ 24,223 $ 279
Property, plant & equipment, net......... 68,269 86,051
Total assets............................. 384,428 384,238
Long term debt (including capital
leases)............................... 383 411
Total liabilities........................ 10,634 22,438
Shareholders' equity..................... 373,794 361,800
OTHER FINANCIAL DATA
EBITDA(A)................................ (2,227) (6,789)
Capital expenditures..................... 9,276 19,903
CASH FLOW DATA
Net cash flow provided by operating
activities............................ 17 155
Net cash flow provided by (used in)
investing activities.................. (353,787) (25,869)
Net cash flow provided by financing
activities............................ 377,490 1,770
</TABLE>
------------
(A) EBITDA as used in this prospectus is operating profit (loss) plus the sum of
depreciation and amortization and is presented because we believe that
EBITDA provides useful information regarding our ability to service our
debt. EBITDA should not be considered in isolation or as a substitute for
the consolidated income statements or the consolidated statements of changes
in financial position prepared in accordance with U.S. GAAP or as a measure
of profitability or liquidity. EBITDA is not a measure determined under U.S.
GAAP, an alternative to U.S. GAAP operating income (loss) and net income
(loss), or a measure of liquidity or cash flows as determined under U.S.
GAAP. EBITDA does not represent discretionary funds. As a result, EBITDA, as
calculated by us, may not be comparable to similarly titled measures
reported by other companies.
28
<PAGE> 30
NETSTREAM
<TABLE>
<CAPTION>
AS OF AND FOR THE AS OF AND FOR THE
ELEVEN MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1998 SEPTEMBER 30, 1999
--------------------- --------------------
(IN THOUSANDS, EXCEPT QUOTA AND PER QUOTA DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA
Net revenue.................................. $ -- $ 395
Gross profit (loss).......................... -- (1,373)
Operating loss............................... (3,848) (12,575)
Net loss..................................... (3,442) (12,001)
Net loss per quota(A)........................ (2.72) (5.13)
Weighted average quotas outstanding(A)....... 1,264,127 2,339,183
Depreciation................................. $ -- $ 1,511
Amortization................................. -- --
BALANCE SHEET DATA
Cash and cash equivalents.................... $ 2 $ 29
Property, plant & equipment, net............. 12,212 47,484
Total assets................................. 12,980 49,793
Long term debt (including capital leases).... 457 375
Total liabilities............................ 14,475 33,814
Quotaholders' equity interest(A)............. (1,495) 15,979
OTHER FINANCIAL DATA
EBITDA(B).................................... (3,848) (11,064)
Capital expenditures......................... 12,212 36,783
CASH FLOW DATA
Net cash flow (used in) provided by operating
activities................................ (7) 27
Net cash flow provided by investing
activities................................ 9 --
Net cash flow provided by financing
activities................................ -- --
</TABLE>
------------
(A) As a Brazilian limited liability company (sociedade de responsabilidade
limitada), Netstream's capital is represented by quotas rather than shares
of capital stock.
(B) EBITDA as used in this prospectus is operating profit (loss) plus the sum of
depreciation and amortization and is presented because we believe that
EBITDA provides useful information regarding Netstream's ability to service
its debt. EBITDA should not be considered in isolation or as a substitute
for the consolidated income statements or the consolidated statements of
changes in financial position prepared in accordance with U.S. GAAP or as a
measure of profitability or liquidity. EBITDA is not a measure determined
under U.S. GAAP, an alternative to U.S. GAAP operating income (loss) and net
income (loss), or a measure of liquidity or cash flows as determined under
U.S. GAAP. EBITDA does not represent discretionary funds. As a result,
EBITDA, as calculated by us with respect to Netstream, may not be comparable
to similarly titled measures reported by other companies.
29
<PAGE> 31
FIRSTCOM
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE THREE
DECEMBER 31, MONTHS ENDED MARCH 31,
------------------------------------------------------------------ ----------------------------
1995 1996 1997 1998 1999 1999 2000
---------- ----------- ----------- ----------- ----------- ----------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net revenue................. $ 224 $ 652 $ 1,130 $ 18,142 $ 38,356 $ 8,281 $ 11,750
Gross profit (loss)......... (580) (306) (73) 4,063 16,351 2,253 6,441
Operating loss(A)........... (2,498) (4,493) (10,592) (10,642) (20,919) (3,067) (12,745)
Net loss(A)................. (2,873) (4,762) (15,866) (25,322) (41,472) (7,149) (17,954)
Net loss per share.......... (.31) (.32) (.95) (1.33) (1.94) (.37) (.61)
Weighted average shares
outstanding............... 9,407,000 14,795,660 16,667,719 19,084,300 21,354,012 19,115,555 29,660,707
Depreciation &
amortization.............. $ 396 $ 842 $ 1,201 $ 2,237 $ 10,211 $ 893 $ 2,936
BALANCE SHEET DATA
Cash and cash equivalents... $ 57 $ 723 $ 14,936 $ 8,892 $ 12,896 $ 3,174 $ 26,891
Property, plant & equipment,
net....................... 2,885 3,956 9,348 45,901 92,469 78,454 99,143
Total assets................ 4,347 14,893 176,936 154,844 172,110 169,432 193,495
Long term debt (including
capital leases) and
redeemable preferred
stock..................... 210 248 131,982 133,913 149,109 134,304 151,158
Total liabilities........... 3,677 2,074 145,009 148,670 166,078 168,375 175,373
Shareholders' equity
(deficit)................. 670 12,819 31,927 6,174 (8,700) (789) 2,966
OTHER FINANCIAL DATA
EBITDA(A)(B)................ (2,102) (3,651) (9,391) (8,405) (10,708) (2,174) (9,809)
Capital expenditures........ 720 1,453 2,763 34,674 33,124 12,072 9,346
CASH FLOW DATA
Net cash flow (used in)
operating activities...... (2,150) (3,934) (5,472) (28,389) (31,941) (3,442) (6,927)
Net cash flow (used in)
provided by investing
activities................ (1,170) (2,968) (69,590) 2,227 (15,948) (2,436) (8,807)
Net cash flow provided by
financing activities...... 3,263 7,570 89,275 20,118 51,983 160 29,639
</TABLE>
------------
(A) These amounts reflect a non-recurring expense of $6,137 for the three months
ended March 31, 2000 and $1,008 for the year ended December 31, 1999 for
merger expenses relating to the merger with AT&T Latin America.
(B) EBITDA as used in this prospectus is operating profit (loss) plus the sum of
depreciation and amortization and is presented because we believe that
EBITDA provides useful information regarding FirstCom's ability to service
its debt. EBITDA should not be considered in isolation or as a substitute
for the consolidated income statements or the consolidated statements of
changes in financial position prepared in accordance with U.S. GAAP or as a
measure of profitability or liquidity. EBITDA is not a measure determined
under U.S. GAAP, an alternative to U.S. GAAP operating income (loss) and net
income (loss), or a measure of liquidity or cash flows as determined under
U.S. GAAP. EBITDA does not represent discretionary funds. As a result,
EBITDA, as calculated by us with respect to FirstCom, may not be comparable
to similarly titled measures reported by other companies.
30
<PAGE> 32
UNAUDITED PRO FORMA
COMBINED FINANCIAL INFORMATION
The accompanying unaudited pro forma combined financial information gives
effect to the FirstCom merger and the issuance and sale of 35,000,000 shares of
our Class A common stock in this offering for estimated net proceeds of $[ ]
million, as if these transactions had been completed as of January 1, 1999 for
statement of operations purposes and as of March 31, 2000 for balance sheet
purposes, and gives effect to the Netstream acquisition as if it had been
completed as of January 1, 1999 for statement of operations purposes only. In
addition to those transactions, the unaudited pro forma combined financial
information also reflects the following related transactions:
-- one condition to the FirstCom merger required that we receive a total
of $70 million in cash equity contributions from our shareholders.
Accordingly, as part of the Netstream acquisition, in December 1999,
an affiliate of AT&T Corp. contributed $10 million and an affiliate
of Promon Ltda., the prior owner of Netstream, contributed $40
million of equity capital to our company, in cash. During June 2000,
AT&T Corp. and an affiliate of Promon contributed an additional $20
million of cash to our capital on a pro rata basis in accordance with
their respective ownership percentages in our company.
-- as permitted under the FirstCom merger agreement, we have required
FirstCom to make a tender offer for its outstanding 14% senior notes
due 2007 and, as part of that tender offer, to obtain the consent of
holders of at least a majority in principal amount of the outstanding
notes to certain amendments to the covenants of FirstCom relating to
the notes. We intend to finance the tender through the issuance to
AT&T Corp. of non-voting, non-convertible and non-participating 15%
Series B redeemable preferred stock of our company. The 14% senior
notes have a face value of $150,000,000 and are currently recorded on
FirstCom's balance sheet at $133,438,000.
The FirstCom merger has been accounted for using the purchase method of
accounting, in accordance with the guidelines required by U.S. GAAP. The fair
values of the acquired assets and liabilities of FirstCom are assumed to equal
their historical carrying values, except for property, plant and equipment and
intangible assets for which estimates of fair value have been separately
reflected, with all excess of such acquisition costs being attributable to
goodwill. Goodwill is amortized in the pro forma combined financial information
on a straight-line basis over a 20-year period.
A final determination of required purchase accounting adjustments will be
made upon the completion of a study undertaken by us to determine the fair value
of the net assets acquired. Therefore, the actual allocation to our assets for
goodwill may be adjusted.
The pro forma adjustments do not reflect any operating efficiencies, cost
savings or other synergies that may be achieved with respect to the combined
company following the FirstCom merger.
The combined financial information does not purport to present our results
of operations had the merger occurred on the date, or at the beginning of the
periods, for which the FirstCom merger and the Netstream acquisition are being
given pro forma effect. Nor is the unaudited pro forma combined financial
information necessarily indicative of the results of operations that may be
achieved in the future. Our actual financial position and results of operations
will differ, perhaps significantly, from the pro forma amounts reflected herein
because of a variety of factors, including access to additional information,
changes in value not currently identified and changes in operating results
between the dates of the pro forma financial information and the date on which
the merger took place. The price per share of our Class A common stock assumed
for purposes of the unaudited pro forma combined financial information is not
necessarily indicative of our share price following this offering.
The unaudited pro forma combined financial information should be read in
conjunction with the accompanying notes, our historical financial statements and
those of Netstream and FirstCom and the notes thereto included elsewhere in this
prospectus.
31
<PAGE> 33
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------------------------------------
AT&T LATIN
AT&T LATIN AMERICA
AMERICA FIRSTCOM PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(A) (B)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.............. $ 279 $ 26,891 $ 20,000(D) $ [ ]
[ ](L)
Restricted cash........................ -- 105 105
Restricted investments................. -- 20,713 (9,500)(E) 11,213
Short-term investments................. 30,636 30,636
Accounts receivable, net............... 3,606 12,030 15,636
Prepaid expenses and other current
assets............................... 3,902 3,196 7,098
-------- --------- --------- ----------
Total current assets................... 38,423 62,935 111,858
Property, plant and equipment, net..... 86,051 99,143 (19,943)(F) 165,251
Goodwill and other intangible assets,
net.................................. 259,764 17,286 7,114(F) 768,138
483,974(F)
Deferred financing costs and other..... -- 14,131 (13,521)(E) 610
-------- --------- --------- ----------
Total assets...................... $384,238 $ 193,495 $[ ]
======== ========= ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
32
<PAGE> 34
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------------------------------------
AT&T LATIN
AT&T LATIN AMERICA
AMERICA FIRSTCOM PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(A) (B)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Vendor financing, current.............. $ -- $ 1,340 $ 1,340
Short-term debt........................ 3,184 4,488 7,672
Lease obligations, current............. 340 51 391
Accounts payable....................... 7,281 13,520 20,801
Accrued interest....................... -- 8,954 $ (8,954)(E) --
Other accrued expenses................. 1,600 1,600
Deferred income taxes.................. 302 302
Other current liabilities.............. 9,598 2,600 12,198
-------- --------- --------- ----------
Total current liabilities......... 20,403 32,855 44,304
Vendor financing....................... -- 5,451 5,451
Senior notes, net...................... -- 133,438 (133,438)(E) --
Lease obligations, less current
portion.............................. 411 146 557
Deferred income taxes.................. 1,624 2,134 3,758
Other liabilities...................... -- 1,349 1,349
-------- --------- --------- ----------
Total liabilities................. 22,438 175,373 55,419
-------- --------- ----------
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
33
<PAGE> 35
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------------------------------------
AT&T LATIN
AT&T LATIN AMERICA
AMERICA FIRSTCOM PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
(A) (B)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Minority interest...................... $ -- $ 3,033 $ 3,033
Commitments and contingencies.......... -- -- --
Series A convertible Preferred Stock... 12,123 $ (12,123)(F) --
Series B redeemable Preferred Stock.... 172,500(E) 206,900
34,400(E)
Stockholders' equity:
Common stock........................... 30 [ ](L) [ ]
(30)(F)
1,135(F)
Additional paid in capital............. 376,566 89,852 [ ](L) [ ]
(89,852)(F)
20,000(D)
394,738(F)
(34,400)(E)
Warrants............................... -- 26,737 (26,737)(F) 90,361
90,361(F)
Accumulated deficit.................... (15,341) (113,415) 113,415(F) (68,470)
(53,129)(E)
Cumulative translation adjustments..... 575 (238) 238(F) 575
-------- --------- --------- ----------
Total stockholders' equity............. 361,800 2,966 [ ]
-------- --------- ----------
Total liabilities and stockholders'
equity............................... $384,238 $ 193,495 $ [ ]
======== ========= ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
34
<PAGE> 36
PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------------------
AT&T LATIN AT&T LATIN AT&T LATIN
AMERICA NETSTREAM AMERICA FIRSTCOM AMERICA
HISTORICAL HISTORICAL (PRO HISTORICAL PRO FORMA PRO FORMA
(A) (C) ADJUSTMENTS FORMA) (B) ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------- ---------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues:............. $ 802 $ 1,191 $ 1,993 $ 38,356 $ 40,349
Operating Expenses:
Cost of revenues............ 865 5,176 6,041 22,005 28,046
Selling, general and
administrative............ 2,164 7,010 9,174 25,698 $ 1,000(H) 35,872
Non-cash compensation and
consulting expenses....... -- 353 353
Depreciation and
amortization.............. 1,707 2,838 $18,746(G) 23,291 10,211 29,199(I) 61,805
(896)(I)
Merger Expense.............. -- -- 1,008 1,008
-------- ---------- ------- -------- ---------- -------- -----------
Loss from operations........ (3,934) (13,833) (36,513) (20,919) (86,734)
Other expense (income),
net....................... 190 258 448 20,350 (22,544)(E) (1,746)
-------- ---------- ------- -------- ---------- -------- -----------
Net loss before income taxes
and minority interest..... (4,124) (14,091) (36,961) (41,269) (84,989)
Income Taxes................ -- -- -- 170 170
-------- ---------- ------- -------- ---------- -------- -----------
Net Loss Before Minority
Interest.................. (4,124) (14,091) (36,961) (41,439) (85,159)
Minority Interest Expense... -- -- -- 33 33
-------- ---------- ------- -------- ---------- -------- -----------
Net Loss.................... $ (4,124) $ (14,091) $(36,961) $ (41,472) $ $ (85,192)
Redeemable preferred stock
dividends................. 26,900(E) 26,900
-------- ---------- ------- -------- ---------- -------- -----------
Net loss attributable to
common stockholders....... $ $ $ $ $ $ $ (112,092)
======== ========== ======= ======== ========== ======== ===========
Net basic and diluted loss
per common share.......... $(103.10) $ (1.19) $(924.03) $ (1.94) (J) $ (.99)
Weighted average common
shares outstanding........ 40,000 11,840,141 40,000 21,354,012 (K) 113,469,672
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
35
<PAGE> 37
PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 2000
--------------------------------------------------------
AT&T LATIN
AMERICA FIRSTCOM AT&T LATIN
HISTORICAL HISTORICAL AMERICA
(UNAUDITED) (UNAUDITED) PRO FORMA PRO FORMA
(A) (B) ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenues:.................... $ 4,364 $ 11,750 $ 16,114
Operating Expenses:
Cost of revenues................... 6,921 5,309 12,230
Selling, general and
administrative................... 4,232 10,056 $ 250(H) 14,538
Non-cash compensation and
consulting expenses.............. 57 57
Depreciation and amortization...... 6,160 2,936 7,300(I) 16,133
(263)(I)
Merger Expense..................... 6,137 6,137
-------- ---------- ------- -----------
Loss from operations............... (12,949) (12,745) (32,981)
Other expense (income), net........ (1,732) 5,192 (5,685)(E) (2,225)
-------- ---------- ------- -----------
Net loss before income taxes and
minority interest................ (11,217) (17,937) (30,756)
Income Taxes....................... 17 17
-------- ---------- ------- -----------
Net Loss Before Minority
Interest......................... (11,217) (17,954) (30,773)
Minority Interest Expense..........
-------- ---------- ------- -----------
Net Loss........................... $(11,217) $ (17,954) $ (30,773)
Redeemable preferred stock
dividends........................ 7,500(E) 7,500
-------- ---------- ------- -----------
Net loss attributable to common
stockholders..................... $ $ $ $ (38,273)
======== ========== ======= ===========
Net basic and diluted loss per
common share..................... $(280.43) $ (.61) $ $ (.34)
Weighted average common shares
outstanding...................... 40,000 29,660,707 113,469,672
</TABLE>
See Notes to Unaudited Pro Forma Combined Financial Information
36
<PAGE> 38
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(A) Our historical financial statements as of and for the three-month
period ended March 31, 2000 have been derived from our unaudited
interim consolidated financial statements. The historical statement of
operations for the period from inception (October 13, 1999) through
December 31, 1999 has been derived from our audited consolidated
financial statements.
(B) FirstCom's historical financial statements as of and for the
three-month period ended March 31, 2000 have been derived from a
previously filed Form 10-Q. The historical statement of operations for
the year ended December 31, 1999 has been derived from a previously
filed Form 10-K, as amended.
(C) Netstream's historical financial statement as of and for the period
from January 1 through December 7, 1999 has been derived from its
audited financial statements for the period from January 1, 1999 to
September 30, 1999 and from its books and records for the period from
October 1, 1999 to December 7, 1999, which is unaudited.
(D) Cash and cash equivalents:
A condition to the FirstCom merger requires that we have received a
total of $70 million in cash equity contributions from our
shareholders. Accordingly, in connection with the Netstream
acquisition, in December 1999 an affiliate of AT&T Corp. contributed
$10,000 and an affiliate of Promon contributed $40,000 of equity
capital to our company. During June 2000, AT&T Corp. and an affiliate
of Promon contributed an additional $20,000 of cash to the capital of
our company in proportion to their respective ownership percentages
in our company.
(E) Senior notes, net:
As permitted under the FirstCom merger agreement, we have required
FirstCom to make a tender offer and consent solicitation related to
the 14% senior notes due 2007. The notes have a face value of
$150,000 and a book value of $133,438. The adjustments to face value
of the notes are set forth on the table below:
FirstCom Senior Notes
<TABLE>
<S> <C>
Face value.................................................. $150,000
Original issue discount recorded............................ (18,507)
Accretion of original issue discount (inception to March 31,
2000)..................................................... 1,945
--------
Carrying book value at March 31, 2000....................... $133,438
</TABLE>
The tender offer would have an impact on several historical FirstCom
amounts currently recorded on its balance sheet, including the
payment of the notes of $133,438, the elimination of accrued interest
of $8,954, the expense of the related deferred financing costs of
$13,521 and the use of the remaining restricted cash balance utilized
for interest payments on the notes of $9,500. We intend to finance
the tender offer through the issuance to a subsidiary of AT&T Corp.,
of our non-voting, non-convertible and non-participating 15% Series B
preferred stock. The proceeds of the issuance of the Series B
preferred stock would be used to complete the tender offer for the
notes. The value of the Series B preferred stock has been estimated
at $172,500, based on the tender of 100% of the notes in the tender
offer at a premium. Based on the current estimated amounts, we would
incur a loss related to the repayment of the notes of $53,129, which
amount has been reflected as an increase to accumulated deficit as of
March 31, 2000.
37
<PAGE> 39
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION--(CONTINUED)
The amount of the preferred stock actually issued may vary from
$172,500, depending on, among other things:
-- the principal amount of the notes received in the tender offer;
-- the amount of any tender premium for the notes;
-- the balance of restricted cash held by FirstCom as of the
completion of the tender offer and the amount of interest
accrued at that time with respect to the tendered notes; and
-- the amount of our costs and expenses relating to the tender
offer.
Dividends have been calculated based on the assumption that they will
be accrued throughout the year at 15% of the total face amount of the
Series B redeemable preferred stock resulting in approximately
$26,900 and $7,500 for the year ended December 31, 1999 and for the
three-month period ended March 31, 2000, respectively. These amounts
have been recorded as a reduction of additional paid-in-capital.
Additionally, an adjustment has been made to reflect the elimination
of the historical FirstCom interest expense relating to the notes of
$22,544 and $5,685 currently recorded in the statements of operations
for the year ended December 31, 1999 and for the three-month period
ended March 31, 2000, respectively.
(F) Equity and intangible assets:
In connection with recording the FirstCom merger, the following
information outlines the recording of intangible assets, including
goodwill, for the FirstCom merger, the elimination of equity of
FirstCom and the issuance of AT&T Latin America shares:
Intangible assets. The issuance of shares, options and warrants for
our shares due to the FirstCom merger will result in an amount to be
recorded on our accounting records as goodwill. The following
discussion represents a preliminary estimate of the calculation of
goodwill as required by U.S. GAAP. The actual goodwill recorded in
our financial statements may vary from the amounts presented in this
unaudited pro forma combined financial information pending the
results of a study currently under way.
We have tentatively considered the carrying value of the acquired net
assets to approximate fair value, except for property, plant and
equipment and identified intangible assets for which estimates of
fair value have been separately reflected, with all excess of such
acquisition costs being attributable to goodwill. We are in the
process of fully evaluating the assets acquired and, as a result, the
purchase price allocation among tangible and intangible (and their
related useful lives) assets acquired may change. Goodwill associated
with the transaction will be amortized over a 20-year life.
The following discussion assumes that the shareholders' equity of
FirstCom consisted of its outstanding shares, options and warrants as
of March 31, 2000, except that the number of shares of Series A
convertible preferred stock of FirstCom is assumed to reflect accrual
of paid-in-kind share dividends through June 30, 2000.
To record preliminary goodwill related to the FirstCom merger as
follows:
<TABLE>
<S> <C>
Fair value of our Class A common and preferred shares
issued in the FirstCom merger........................ $ 388,073(i)
Fair value of our options and warrants issued in the
FirstCom merger...................................... 90,361(ii)
Estimated transaction costs............................ 7,800(iii)
---------
Total estimated cost of acquisition.................... $ 486,234
</TABLE>
38
<PAGE> 40
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION--(CONTINUED)
<TABLE>
<S> <C>
Less net assets value of FirstCom:
FirstCom property, plant and equipment.............................................. 79,200(iv)
FirstCom intangible assets.......................................................... 24,400(v)
Historical FirstCom remaining net assets............................................ (101,340)(vi)
-----------
Preliminary goodwill........................................................ $ 483,974(vii)
</TABLE>
(i) As of March 31, 2000, we would have issued in the FirstCom merger
30,890,528 shares of our Class A common stock and 1,448,885 shares
of our Series A convertible preferred stock (assuming accrual of
share dividends through June 30, 2000) at a 1:1 ratio for each
share of FirstCom common stock and Series A convertible preferred
stock outstanding and assuming a market price of $12 per share.
The estimated value of the stock issued by us was determined by
obtaining the average market price of the FirstCom securities for
a period from three days prior to and three days subsequent to
November 1, 1999, the date of the announcement of the merger.
(ii) Also as of March 31, 2000, we would have issued options and
warrants to acquire approximately 10,016,269 shares of our Class A
common stock. The options and warrants to purchase shares of Class
A common stock will be at an exercise or purchase price per share
equal to the exercise or purchase price per share in effect under
the FirstCom options or warrants. The fair value, using the Black
Scholes model, of these options and warrants is $90,361.
(iii) AT&T Corp. will incur estimated transaction costs of $7,800
relating to our merger with FirstCom. Accordingly, the $7,800 has
been reflected as an additional equity contribution by AT&T Corp.
We will not be responsible for these transaction costs, because,
as provided in the merger agreement, any such costs incurred by
us will be reimbursed by AT&T Corp.
(iv) We have estimated the fair value of the fixed assets to be
acquired. We are finalizing our study of the FirstCom assets and
liabilities acquired and as such, this estimate is subject to
change.
(v) We have preliminarily identified and valued certain intangible
assets (software and workforce-in-place) related to the merger. For
purposes of estimating the amortization expense related to these
intangibles, we have assumed a five-year and three-year
amortization period for the software and workforce in place,
respectively.
(vi) Represents all assets other than property, plant and equipment and
intangible assets less total liabilities and minority interest.
(vii) We have tentatively considered the carrying value of the acquired
net assets to approximate fair value, except for property, plant
and equipment and identifiable intangible assets for which
estimates of fair value have been separately reflected, with all
excess of such acquisition costs being attributable to goodwill.
We are in the process of fully evaluating the assets acquired and,
as a result, the purchase price allocation among tangible and
intangible assets (and their related useful lives) acquired may
change. Goodwill associated with the transaction will be amortized
over a 20-year life.
Stockholders' equity elimination. Once the merger is complete,
the equity on FirstCom's books will be eliminated. As such this
part of the entry reflects the elimination of FirstCom historical
stockholders' equity accounts in connection with the merger.
Issuance of AT&T Latin America shares. This part of the entry
reflects our issuance of common stock and preferred stock as of
the completion of the merger.
39
<PAGE> 41
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION--(CONTINUED)
As of March 31, 2000, our capital was represented by 40,000 issued and
outstanding shares of common stock. Of these shares, 36,000 were Class B shares
owned by an affiliate of AT&T Corp., and 4,000 were Class A shares owned by an
affiliate of Promon. During June 2000, we reclassified our share capital in
order to accommodate the issuance to FirstCom shareholders of one Class A share
of our common stock for each outstanding share of FirstCom common stock. We will
have as of, and without giving effect to, the FirstCom merger, the following
number of shares outstanding, which is the maximum number of shares permitted by
the merger agreement:
(i) 80,848,204 common shares; plus
(ii) an additional number of common shares equal to 2.077 times the number of
paid-in-kind share dividends accrued with respect to the Series A
convertible preferred stock of FirstCom from November 1, 1999 up to the
closing date of the merger (which additional number would be 282,054
common shares as of June 30, 2000, or 2.077 times the accrued dividend of
135,795 shares over that period); plus
(iii) 1,178,689 common shares that were issued to the selling stockholders of
AT&T Argentina in June 2000.
It is not possible to fix the number of outstanding shares as of the closing of
the FirstCom merger because, as discussed above, that number will be affected by
the number of common shares issued to affiliates of AT&T Corp. and Promon to
compensate for accrual of the share dividends on the Series A convertible
preferred stock of FirstCom. However, if the closing of the merger had occurred
on June 30, 2000, our capital would have consisted of up to 124,190,940 common
shares, on a fully-diluted basis, excluding any shares of non-voting,
non-convertible and non-participating preferred stock issued to AT&T Corp. to
finance a tender offer for the FirstCom notes. Those fully-diluted shares would
have been distributed as follows immediately after the merger:
(a) 81,130,258 common shares would have been owned directly or indirectly by
AT&T Corp. and Promon and 1,178,689 common shares would have been owned by
the selling stockholders of AT&T Argentina;
(b) 40,906,797 common shares would have been owned by the former common
shareholders of FirstCom or would have been reserved for issuance upon
exercise of options and warrants to acquire shares of FirstCom. As of March
31, 2000, this number included 30,890,528 outstanding common shares of
FirstCom, 9,545,833 outstanding options to acquire common shares of
FirstCom at an average weighted exercise price of $5.84 per share and
470,436 outstanding warrants to acquire common shares of FirstCom at an
average weighted exercise price of $3.92 per share. From November 1, 1999,
the date of the merger agreement and the announcement of the merger,
through March 31, 2000, 6,516,002 options or warrants were exercised,
25,000 options were cancelled and FirstCom granted 220,000 new options to
its employees;
(c) up to 705,000 common shares would be reserved for issuance upon exercise of
options granted by FirstCom and us between March 31, 2000 and the date of
the merger; and
(d) 1,448,885 Series A convertible preferred shares would be owned by former
holders of the Series A convertible preferred stock of FirstCom.
The number of shares outstanding under items (a) and (d) above will be slightly
higher since the FirstCom merger will be completed after June 30, 2000.
Common stock at par value was calculated as the total number of outstanding
shares of 113,469,672 as of March 31, 2000 multiplied by the par value of $0.01
per share.
40
<PAGE> 42
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION--(CONTINUED)
On June 30, 1999, FirstCom issued 1,250,000 shares of 15% Series A
convertible preferred stock for an aggregate principal amount of
$10,000. The Series A convertible preferred stock is convertible at
any time by the holders into FirstCom common stock on a one-for-one
basis, subject to adjustment to reflect the accretion of the 15%
paid-in-kind dividend. On November 1, 1999, the Series A convertible
preferred stock was convertible into 1,313,086 shares of FirstCom
common stock. In the merger, the Series A convertible preferred stock
will be exchanged for our preferred stock having substantially the
same terms and conditions as the Series A convertible preferred
stock. For purposes of the pro forma adjustments, we assumed the
conversion of Series A convertible preferred stock into 1,448,885
Series A common shares, reflecting the accretion of the paid-in-kind
dividend through June 30, 2000.
(G) Netstream amortization:
To record the additional amortization expense for the Netstream
related goodwill and other intangibles as though the companies had
been combined at the beginning of the period. The preliminary
goodwill and the other intangibles recorded were $277,600 and $4,900,
respectively. Goodwill and the other intangibles are amortized on a
straight line basis over 20 years and 3 years, respectively.
(H) Employment contract:
Patricio E. Northland, FirstCom's chairman of the board and chief
executive officer, has executed a five-year employment agreement with
us that became effective upon completion of the FirstCom merger. The
employment agreement includes a retention bonus of six $500 payments
payable on each six-month anniversary of the closing date up to the
third anniversary. Accordingly, $1,000 of compensation expense has
been reflected for the year ended December 31, 1999 and $250 for the
three-month period ended March 31, 2000.
(I) Depreciation & amortization:
The estimated goodwill amortization expense arising from the merger
is based on the straight-line method over a 20-year life. The
adjustments of $24,199 and $6,050 are calculated as total preliminary
goodwill for FirstCom divided by the 20-year estimated life for the
year ended December 31, 1999 and for the three-month period ended
March 31, 2000, respectively. Additionally, the adjustment for the
amortization of the intangible assets of approximately $5,000 and
$1,250 for the year ended December 31, 1999 and for the three months
ended March 31, 2000, respectively, was calculated based on the
estimated lives of three to five years. An adjustment has been made
to reflect the decrease of the historical FirstCom goodwill
amortization in the statement of operations of approximately $896 for
the year ended December 31, 1999 and $263 for the three-month period
ended March 31, 2000, respectively. The depreciation and amortization
expense represents a preliminary estimate of the calculation of
goodwill as required by U.S. GAAP. The actual goodwill recorded in
our financial statements may vary from the amounts presented in this
unaudited pro forma combined financial information pending the
results of the study now underway.
(J) Net basic and diluted loss per share:
The computation of net basic loss per share of common stock is
computed by dividing net loss for the year by the weighted average
number of common shares outstanding during the year. The weighted
average number of shares outstanding for the year ended December 31,
1999 and for the three-month period ended March 31, 2000 excludes
10,016,269 outstanding stock options and warrants and 1,448,885
shares of Series A convertible preferred stock because they are anti-
dilutive.
41
<PAGE> 43
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION--(CONTINUED)
(K) Weighted average common shares outstanding:
Below is the number of AT&T Latin America shares that would have been
outstanding had the transactions occurred at the earliest date
presented. This calculation reflects the outstanding shares of
FirstCom as of March 31, 2000:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
STOCKHOLDER OUTSTANDING CLASS OF COMMON SHARE
----------------------------------- ----------- ---------------------
<S> <C> <C>
FirstCom shareholders.............. 32,339,413 Class A common shares
Affiliate of Promon Ltda........... 8,113,026 Class A common shares
Affiliate of AT&T Corp............. 73,017,233 Class B common shares
Purchasers in this offering........ Class A common shares
----------
Total.........................
==========
</TABLE>
In addition, an additional 1,178,689 common shares outstanding are
owned by the selling stockholders of AT&T Argentina. The number of
common shares listed above assumes that no holder of Series A
convertible preferred shares converts its shares into common shares.
(L) This offering:
Represents gross proceeds of $[ ] from the issuance and sale
of 35,000,000 shares of our Class A common stock in this offering,
less underwriting discounts and estimated offering expenses
aggregating $[ ].
42
<PAGE> 44
SELECTED OPERATING INFORMATION
The following tables set forth selected operating statistics on a
historical and on a pro forma combined basis as of December 31, 1999 and March
31, 2000. No statistics are presented for Argentina, which did not have material
operations as of such dates.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------
AT&T
LATIN
AMERICA
PRO FORMA
BRAZIL CHILE COLOMBIA PERU COMBINED
------ ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C>
Network route kilometers
Metropolitan.......................... 198 276 715 1,007 2,196
Domestic (long-haul).................. 0 0 0 0 0
------ ------ ------ ------ ------
Total................................. 198 276 715 1,007 2,196
Total fiber kilometers.................. 26,744 4,388 14,635 28,184 73,951
Number of buildings connected........... 451 178 687 226 1,542
Number of voice grade equivalent
circuits.............................. 10,702 23,662 9,592 9,941 53,897
Number of permanent virtual circuits
sold.................................. 1,336 476 1,134 636 3,582
Number of dedicated data and Internet
customers............................. 544 533 169 375 --
Number of employees..................... 141 265 135 248 789
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
---------------------------------------------------
AT&T
LATIN
AMERICA
PRO FORMA
BRAZIL CHILE COLOMBIA PERU COMBINED
------ ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C>
Network route kilometers
Metropolitan.......................... 335 306 815 1,228 2,684
Domestic (long-haul).................. 0 0 0 0 0
------ ------ ------ ------ ------
Total................................. 335 306 815 1,228 2,684
Total fiber kilometers.................. 32,461 4,743 17,996 31,236 86,436
Number of buildings connected........... 601 225 734 681 2,241
Number of voice grade equivalent
circuits.............................. 14,218 35,115 10,770 10,683 70,786
Number of permanent virtual circuits
sold.................................. 1,652 1,089 1,314 847 4,902
Number of dedicated data and Internet
customers............................. 623 699 181 582 --
Number of employees..................... 193 276 164 284 917
</TABLE>
43
<PAGE> 45
Network route kilometers. Network route kilometers are the total number of
kilometers of cable installed in a network. Network route kilometers include
cable laid as a backbone for the network, cable from the backbone to a building
and cable within a building to reach the customers' hardware at its premises. A
measurement in route kilometers does not take into account the number of fibers
in the various fiber optic cables that make up the network.
Total fiber kilometers. Total fiber kilometers are network route
kilometers multiplied by the number of strands of fiber in each of the cables
that make up the network. By counting strands of fiber, a measurement in fiber
kilometers indicates the maximum capacity of a network. For example, one route
kilometer of 144-strand fiber optic backbone cable would count as 144 fiber
kilometers, while one kilometer of 12-strand building access cable would count
as only 12 fiber kilometers.
Buildings connected. Buildings connected refers to the number of
buildings, each identified by a unique street address, that are connected to a
network.
Voice grade equivalent circuits. The number of voice grade equivalent
circuits relates to the transmission capacity of lines. These circuits are
measured in terms of their ability to transmit the equivalent of 64 kilobits of
information per second, the capacity needed for one voice call. A bit is the
smallest unit of information a computer can process and is the basic measurement
unit of data communications. If two sites are connected with a 256 kilobit link,
there would be four voice grade equivalent circuits.
Permanent virtual circuits sold. A permanent virtual circuit represents a
data connection, typically between two locations such as a customer's
headquarters and an off-site branch or other entity. AT&T Latin America and
FirstCom connect customers to their networks by deploying a port connection
within or near to the customer's premises. Each port can accommodate several
permanent virtual circuits. As a customer increases its usage of services, the
customer will obtain additional available transmission capacity, on the same
installed port.
Number of dedicated data and Internet customers. The number of customers
represents the number of billable customers for data or Internet services.
Employees. The number of employees excludes third-party contractor
employees and agents.
44
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
our consolidated financial statements and the related notes included elsewhere
in this prospectus. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties, and assumptions. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, those
set forth under "Risk Factors", "Special Note Regarding Forward Looking
Statements" and elsewhere in this prospectus.
OVERVIEW
BASIS OF PRESENTATION. Our financial statements reflect operations for the
period from inception (October 13, 1999) through December 31, 1999 and include
the results of operations of Netstream beginning on December 8, 1999, the
effective date of that acquisition. Our interim unaudited financial statements
reflect operations for the three-month period ended March 31, 2000. Because our
historical financial information is limited, in order to provide potential
investors a more meaningful presentation of trends in our results of operations
and to facilitate comparisons, the following discussion and analysis considers
the pro forma results of operations of AT&T Latin America and Netstream for 1999
as though the companies had been combined as of the beginning of the period,
compared against Netstream's historical financial results for 1998. All
historical results were derived from the audited financial statements and
interim unaudited financial statements for respective periods included herein.
AT&T LATIN AMERICA. We were incorporated in October 1999 by AT&T Corp. to
be a leading provider of broadband communications services to business customers
in our designated region. The countries in which we may operate include the
countries in South America and the Caribbean, plus Panama, but excluding
Venezuela and Cuba. Our focus is on providing high-capacity and value-added
data, Internet, voice, video conferencing and electronic commerce services to
business customers.
NETSTREAM. Prior to the FirstCom merger, we conducted substantially all of
our business activities through our Brazilian subsidiary, Netstream, which we
acquired in December 1999. Except for $50 million cash proceeds that we received
in December 1999 as a capital contribution from our shareholders and a
substantial amount of goodwill arising from the acquisition of Netstream, the
assets and liabilities of Netstream constituted substantially all of our assets
on a consolidated basis prior to the FirstCom merger.
Throughout 1998 and until its acquisition in December 1999, Netstream was
operated as a part of Promon Ltda., a leading engineering and construction group
based in Brazil. The historical financial information of Netstream presented in
this prospectus is derived from periods during which it did not operate
independently of Promon. Therefore, this financial information may not
necessarily reflect the results of operations or the financial condition of
Netstream which would have resulted had it been an independent company during
the reporting periods presented.
AT&T Corp. acquired Netstream for $320 million in cash, and then
contributed its entire equity interest in Netstream and $10 million in cash to
us in exchange for shares of our Class B common stock. Immediately after the
Netstream acquisition, SL Participacoes, an affiliate of Promon Ltda.,
contributed $40 million in cash to us in exchange for shares of our Class A
common stock, representing a 10% interest in our company.
Netstream began construction of its first network located in Rio de Janeiro
in August 1998 and began commercial operations in Rio de Janeiro in November
1998. As of March 31, 2000, Netstream had installed 335 route kilometers of
fiber optic network, had connected 601 buildings in Sao Paulo, Rio de Janeiro
and Belo Horizonte, Brazil and served 623 users.
FIRSTCOM. We completed our merger with FirstCom in [ ] 2000. In
the merger, the holders of FirstCom common shares received one share of our
Class A common stock in exchange for each common share of FirstCom. Holders of
FirstCom Series A convertible preferred shares received one share of our Series
A convertible preferred stock in exchange for each Series A convertible
preferred share of FirstCom.
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<PAGE> 47
Until November 1996, FirstCom was a development stage company whose
activities primarily consisted of the acquisition of licenses, concessions and
rights-of-way in selected Latin American communications markets. Since that
time, FirstCom has focused on the development and operation of high-capacity
fiber optic networks in Latin American business centers. FirstCom provides
broadband communications services mainly to business customers in Santiago,
Chile; Lima/Callao, Peru; and Bogota and Cali, Colombia. FirstCom targets
primarily business customers, communications carriers and high volume users by
offering a wide range of high bandwidth integrated services including data,
voice, video, audio and Internet access.
AT&T ARGENTINA. We completed the acquisition of AT&T Argentina (formerly
named Keytech LD S.A.) in June 2000. AT&T Argentina is a development stage
broadband communications company in Argentina with a limited amount of assets,
consisting mainly of signal transmission equipment. Today it serves a small
number of customers by reselling services from other communications providers.
AT&T Argentina has licenses that authorize it or will authorize it by November
2000, to provide domestic and international long distance services, local
telephone services, value-added services and a range of data services. AT&T
Argentina also has rights to use the 1910-1930 MHz wireless spectrum for fixed
links beginning in November 2000 in nine of Argentina's largest cities.
Under the terms of our stock purchase agreement for AT&T Argentina, we
acquired all of the capital stock of AT&T Argentina in exchange for 1,178,689
shares of our Class A common stock, plus $5 million in cash. The parties placed
550,000 of those shares in escrow. These shares will be released to AT&T
Argentina's selling stockholders over six years to the extent they are not used
to satisfy indemnity obligations of the selling stockholders to us. We will also
make up to $1.5 million of contingent purchase price payments to the selling
stockholders one year after the acquisition.
EXPECTED OPERATING RESULTS. The revenues from services provided over our
networks prior to the FirstCom merger were not material. We expect that the
operating and net losses and negative cash flows from our business will increase
in the near future as we expand and develop our networks and customer base. The
more rapidly we expand our communications business, the greater our near term
operating losses and capital expenditures will be. There can be no assurance
that we will achieve or sustain profitability or positive cash flows from
operating activities in the near future as we develop our communications
networks.
Especially for larger users, and as competition increases for advanced
communication services, we expect that we may be required to renegotiate the
pricing of our services from time to time to remain competitive with other
communications service providers. Lower prices for communications services could
have a material adverse effect on us if they cannot be offset by increases in
our customer base, increases in overall usage of our networks, increases in the
provision of higher value-added services to customers, or some combination of
these offsetting factors. We believe that competition and price erosion will be
important factors in the development of communications markets in the countries
where we operate.
INFLATION AND EXCHANGE RATES. Inflation and exchange rate variations may
have substantial effects on our results of operations and financial condition.
Historically, the effects of inflation in many Latin American countries,
including Chile, Peru and Colombia, have been offset in part by a devaluation of
the local currency relative to the U.S. dollar. However, the devaluation of each
country's currency may itself have an adverse effect on our business, results of
operations and financial condition.
To date, we have not had significant foreign currency exposure. We
generally intend to be paid for our services in U.S. dollars or in local
currencies with a pricing adjustment that is structured to protect us against
the risk of fluctuations in exchange rates. However, Brazil restricts the use of
commercial contracts denominated in foreign currency or indexed to the value of
foreign currency. Our customer contracts in Brazil generally provide for payment
in local currency for all services and are generally indexed to various
Brazilian inflation indicators. Our customer contracts in the other countries
where we operate provide for payment in local currency for voice services and in
U.S. dollars for services other than voice, except for Chile where payment for
services other than voice is made in UFs, a Chilean inflation-adjusted unit.
We have not entered into foreign currency hedging transactions. In the
future, if our third party currency exposure increases, we may enter into
hedging transactions in order to mitigate any related financial exposure.
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<PAGE> 48
However, a portion of our sales to customers will be denominated in local
currencies, and substantial or continued devaluation in such currencies relative
to the U.S. dollar could have a negative effect on the ability of our customers
to absorb the costs of devaluation. This could result in our customers seeking
to renegotiate their contracts with us or, failing satisfactory renegotiation,
defaulting on these contracts.
From time to time, Latin American countries have experienced shortages in
foreign currency reserves and imposed restrictions on expatriation of local
earnings and conversion of local currencies into U.S. dollars. Also, currency
devaluations in one country may have adverse effects in another country, as in
late 1994 and 1995 when several Latin American countries were adversely impacted
by the devaluation of the Mexican peso. Any devaluation of local currencies in
the country where we operate, or restrictions on the expatriation of earnings or
capital from such countries, could have a material adverse effect on our
business, results of operations and financial condition.
RESULTS OF OPERATIONS
AT&T LATIN AMERICA
NET REVENUES. On a pro forma basis, assuming the acquisition of Netstream
had occurred on January 1, 1999, net revenues for 1999 were $2.0 million.
Netstream did not recognize any revenues for the eleven months ended December
31, 1998. Revenue in 1999 was derived primarily from the provision of data and
Internet services in Sao Paulo and Rio de Janeiro. Net revenues of AT&T Latin
America were $802,000 for its two and one half months of operations in 1999. We
expect to have increased revenues in 2000 as we add customers and deliver more
services over our network, and because 2000 will have a full year of operations
that includes revenues from FirstCom's operations following the merger. For the
first three months of 2000, AT&T Latin America's revenues increased to $4.3
million reflecting the signing of new customers.
We believe that Internet and data services will account for over 60% of our
revenue in 2000, after giving effect to the FirstCom merger and the AT&T
Argentina acquisition as if they had occurred on January 1, 2000. This
percentage may decrease thereafter as we initiate voice services in Brazil and
Argentina. However, we contemplate that over the long term a majority of our
revenues will continue to come from Internet and data services.
We believe that Brazil will account for approximately 25% of our revenues
for 2000 with the balance of our revenues coming from operations in Chile, Peru
and Colombia. We do not expect to have material revenues from Argentina during
2000 due to its start up nature.
We also believe that growth in our revenue in the short and medium term
will be relatively greater, in percentage terms, in Brazil and in Argentina,
than revenue growth in Chile, Colombia and Peru, principally because:
-- our operations in Brazil and Argentina are at an earlier stage of
development than our operations in Chile, Colombia and Peru, and
therefore will build upon a relatively lower initial revenue base in
what are the two largest markets in which we have operations; and
-- our metropolitan networks are in the development stage in Brazil and
Argentina and do not yet generate material revenues from customers.
COST OF REVENUES. Cost of revenues was $6.0 million on a pro forma basis
in 1999. In 1998, Netstream had no operations and did not recognize any costs of
revenue. Cost of revenues consists of leased line costs, maintenance costs and
network and operating system costs, including labor. We expect that, until
utilization of existing and planned facilities increases, costs of revenues will
increase both in absolute terms and as a percentage of revenue as service is
provided in additional cities. During the first quarter of 2000, AT&T Latin
America's cost of revenues was $6.9 million.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $9.2 million in 1999 on a pro forma basis. In 1998, Netstream's
selling, general and administrative expenses were $3.4 million. Netstream
incurred these costs in 1998, notwithstanding the lack of revenues during that
year, because it was engaged in activities to prepare for the launch of
operations. Selling, general and administrative
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<PAGE> 49
expenses are comprised primarily of marketing, sales commissions, office space
(including rent and lease expenses) and indirect labor expenses. During the
first quarter of 2000, AT&T Latin America's selling, general and administrative
expenses were $4.2 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $1.7
million and $23.3 million on a pro forma basis in 1999, including an estimate of
the calculation of goodwill as required by U.S. GAAP. In 1998, Netstream did not
recognize any depreciation and amortization expense because it had not started
operations. We expect that depreciation and amortization will increase
significantly in 2000 and upcoming periods as we continue to invest in the
installation and expansion of our networks. During the first quarter of 2000,
depreciation and amortization reached $6.2 million.
INTEREST EXPENSE. AT&T Latin America did not have any interest expense in
1999. On a pro forma basis, AT&T Latin America also did not have material
interest expense in 1999, because Netstream's debt to Promon Ltda., indicated in
the Netstream historical financial information, was eliminated in the
acquisition of Netstream. Interest expense includes capital lease expense. AT&T
Latin America did not show material interest expense in the first quarter of
2000. We expect that interest expense will increase significantly during 2000
and future periods as we obtain debt financing from AT&T Corp., from equipment
vendors and perhaps from the capital markets to expand our business.
See--"Liquidity and Capital Resources".
NET LOSS. Net loss was $36.7 million in 1999 on a pro forma basis as
expenses related to the development of AT&T Latin America's networks exceeded
revenues. For the eleven months ended December 31, 1998, Netstream had a net
loss of $3.4 million. AT&T Latin America's actual net loss for 1999 was $4.1
million. During 1999, the increase in net loss compared to 1998 was due to
significantly higher depreciation and amortization expenses during 1999, which
were not offset by revenues. This trend continued in the first quarter of 2000,
in which AT&T Latin America recorded a net loss of $11.2 million.
FIRSTCOM
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31,
1999
REVENUES. Consistent with 1999, during the first three months of 2000 the
majority of FirstCom's revenues were derived from its operations in Chile.
However, as a result of the October 1998 acquisition of FirstCom Internet in
Chile (formerly known as RDC), the February 1999 acquisition of FirstCom
Colombia and the completion of the asynchronous transfer mode/Internet protocol
networks in Chile and Peru, long distance revenues dropped from 73% of total
revenues for the three months ended March 31, 1999 to 57% of total revenues for
the three months ended March 31, 2000.
FirstCom's revenues were $11.8 million for the three months ended March 31,
2000 as compared to $8.3 million for the three months ended March 31, 1999. Long
distance revenues increased to $6.7 million for the three months ended March 31,
2000, from $6.0 million for the three months ended March 31, 1999. These
revenues were generated through the sale of approximately 37.1 million and 26.6
million minutes for the three months ending March 31, 2000 and 1999,
respectively, resulting in an average revenue per minute of approximately $0.18
and $0.23, respectively. The increased long distance revenue was primarily
attributable to the initiation of long distance services in Peru. The decrease
in the revenue per minute is due to an increased mix of domestic long distance
traffic and decreases in tariffs for wholesale long distance traffic. Internet
and data service revenue increased significantly from $2.3 million for the three
months ended March 31, 1999 to $5.1 million for the three months ended March 31,
2000. This increase was attributable to the acquisition of FirstCom Colombia and
FirstCom Internet in Chile and the initiation of Internet and data services over
FirstCom's asynchronous transfer mode/Internet protocol network in Peru and
Chile.
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The following table details FirstCom's revenue mix by country:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
Chile....................................................... 57% 86%
Colombia.................................................... 19% 13%
Peru........................................................ 24% 1%
--- ---
100% 100%
=== ===
</TABLE>
COST OF REVENUES. For the three months ended March 31, 2000, cost of
revenues related principally to long distance services and included access
charges paid to local exchange carriers and transmission payments to other
carriers. Cost of revenues also include payments for rights of way related to
FirstCom's fiber optic networks and license royalty payments related to
telecommunication services in Peru and Colombia.
FirstCom's cost of revenues was $5.3 million for the three months ended
March 31, 2000 as compared to $6.0 million for the three months ended March 31,
1999. Additionally, FirstCom's gross margin increased from 27% for the three
months ended March 31, 1999 to 55% for the year ended March 31, 2000. The
increase in gross margin and decrease in cost of revenues is attributable to the
significant growth in the higher margin data and Internet services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist principally of salaries, wages and related
liabilities, advertising and marketing costs, professional fees related to
legal, recruiting and accounting, and travel. We expect selling, general and
administrative expenses to increase over time as we continue to expand our
operations.
FirstCom's selling, general and administrative expenses were $10.1 million
for the three months ended March 31, 2000 as compared to $4.3 million for the
three months ended March 31, 1999. This increase was primarily attributable to
the hiring of additional personnel related to the growth of the Peruvian and
Chilean operations, the acquisition of FirstCom Colombia and increased marketing
efforts in Chile and Peru. At March 31, 2000 the Company and its subsidiaries
had 740 employees compared to 500 at March 31, 1999.
NON-CASH COMPENSATION AND CONSULTING. The expense of $57,000 and $82,000
for the three months ended March 31, 2000 and 1999, respectively, represents the
fair value of options granted to consultants for services provided during such
periods.
MERGER COSTS. Merger costs of $6.1 million for the three months ended
March 31, 2000 represents incremental expenses incurred in connection with the
pending merger transaction among FirstCom and AT&T Latin America. Included in
these merger costs are approximately $5.2 million of non-cash expense related to
the accelerated vesting of un-vested stock options for certain former employees.
DEPRECIATION AND AMORTIZATION. FirstCom depreciates its telecommunications
networks and intangible assets on a straight line basis over their estimated
useful lives. We believe that depreciation and amortization expense will
continue to increase with the expansion of operations.
FirstCom's depreciation and amortization was $2.9 million for the three
months ended March 31, 2000 as compared to $893,000 for the three months ended
March 31, 1999. This increase was primarily attributable to increased investment
in FirstCom's telecommunications networks and the placement in service of such
assets.
INTEREST EXPENSE. FirstCom's interest expense relates to its outstanding
notes, bank debt, promissory notes, and vendor financing. Interest expense has
been reduced for amounts capitalized related to FirstCom's construction of its
fiber optic networks. Interest costs reported with respect to FirstCom's notes
include amortization of deferred financing costs and original issue discount
related to detachable warrants.
FirstCom's interest expense was $5.9 million for the three months ended
March 31, 2000 as compared to $4.5 million for the three months ended March 31,
1999. This increase in interest expense is due to the decrease in capitalized
interest. Given the substantial completion of FirstCom's fiber optic networks
during the
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<PAGE> 51
three months ended March 31, 2000, FirstCom did not capitalize any interest
costs. However, during the three months ended March 31, 1999, FirstCom
capitalized $1.5 million of interest costs related to FirstCom's fiber optic
network that was then under construction.
INTEREST INCOME AND OTHER. FirstCom's interest income relates to cash and
cash equivalents, restricted cash, and restricted investments.
FirstCom's interest income and other was $392,000 for the three months
ended March 31, 2000 as compared to $800,000 for the three months ended March
31, 1999. This decrease was primarily attributable to a reduction in restricted
cash and investments.
INCOME TAXES. Although FirstCom was subject to federal, state and foreign
income taxes with the exception of its Colombian operations, it incurred no
liability for such taxes for the periods under review due to net operating
losses incurred. Under certain circumstances, these net operating losses could
be used to offset future taxable income. FirstCom's net deferred tax assets,
which result primarily from the future benefit of these net operating losses,
are fully offset by a valuation allowance for the same amount because of the
uncertainty surrounding the future realization of these net operating loss
carryforwards. However, as FirstCom expands its fiber optic networks in Chile,
Peru and Colombia, FirstCom expects to generate taxable income. Certain deferred
tax benefits could expire prior to the time FirstCom generates taxable income.
FirstCom's income tax expense for the three months ended March 31, 2000 was
$17,000. This expense related to FirstCom's operations in Colombia.
YEAR ENDED DECEMBER 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. FirstCom's revenues were $38.4 million for the year ended
December 31, 1999 as compared to $18.1 million for the year ended December 31,
1998. Long distance revenues were $24.3 million for the year ended December 31,
1999 and $16.4 million for the year ended December 31, 1998. These revenues were
generated through the sale of approximately 113.3 million and 55.9 million
minutes for the year ending December 31, 1999 and 1998, respectively, resulting
in an average revenue per minute of approximately $0.22 and $0.29, respectively.
The increased long distance revenue was primarily attributable to the marketing
and promotional campaigns that started in mid-1998 and continued through 1999,
and the initiation of long distance services in Peru. The decrease in the
revenue per minute was due to an increased mix of domestic long distance
traffic.
Consistent with 1998, during 1999 the majority of FirstCom's revenues were
derived from its operations in Chile. However, as a result of the acquisitions
of FirstCom Internet, FirstCom Colombia and the completion of the asynchronous
transfer mode/Internet protocol networks in Chile and Peru, long distance
revenues decreased from 91% of total revenues for year ended December 31, 1998
to 63% of total revenues for the year ended December 31, 1999.
Internet and data service revenue increased significantly from $1.7 million
for the year ended December 31, 1998 to $14.0 million for the year ended
December 31, 1999. This increase was attributable to the acquisition of FirstCom
Colombia and FirstCom Internet in Chile and also to the initiation of Internet
and data services over FirstCom's asynchronous transfer mode/Internet protocol
network in Peru and Chile.
COST OF REVENUES. For the year ended December 31, 1999, cost of revenues
related principally to long distance services and included access charges paid
to local exchange carriers and transmission payments to other carriers. Cost of
revenues also included payments for rights of way related to FirstCom's fiber
optic networks and license royalty payments related to telecommunication
services in Peru and Colombia.
FirstCom's cost of revenues was $22.0 million for the year ended December
1, 1999 as compared to $14.1 million for the year ended December 31, 1998. This
increase was primarily attributable to the increased long distance revenue and
proportionate increased cost of providing long distance services. FirstCom's
gross margin increased from 22% for the year ended December 31, 1998 to 43% for
the year ended December 31, 1999. This increase was attributable to a slight
decrease in long distance margins offset by significant growth in the higher
margin data and Internet services.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. FirstCom's selling, general
and administrative expenses were $25.7 million for the year ended December 31,
1999 as compared to $12.3 million for the year ended December 31, 1998. This
increase was primarily attributable to the hiring of additional personnel
related to the growth of the Peruvian and Chilean operations, the acquisition of
FirstCom Colombia and FirstCom Internet and increased marketing efforts in Chile
and Peru. At December 31, 1999 FirstCom and its subsidiaries had 664 employees
compared to 330 at December 31, 1998.
The significant components of selling, general and administrative expenses
were as follows:
<TABLE>
<CAPTION>
1999 1998
------- ------
(IN THOUSANDS)
<S> <C> <C>
Compensation................................................ $14,100 $5,775
Professional Fees........................................... 1,367 1,753
Marketing................................................... 3,661 1,664
Bad Debt.................................................... 961 943
Travel...................................................... 509 288
Other....................................................... 5,100 1,870
</TABLE>
NON-CASH COMPENSATION AND CONSULTING. This expense for the years ended
December 31, 1999 and 1998 represents the fair value of options granted to
consultants for services performed during 1998 and 1999. These services were
performed beginning in October 1998 through 1999, thus accounting for the
increase in expense from $175,000 for the year ended December 31, 1998 to
$353,000 for the year ended December 31, 1999.
MERGER COSTS. Merger costs of $1.0 million for the year ended December 31,
1999 represent incremental professional fees paid in connection with the then
pending merger with AT&T Latin America.
DEPRECIATION AND AMORTIZATION. FirstCom's depreciation and amortization
was $10.2 million for the year ended December 31, 1999 as compared to $2.2
million for the year ended December 31, 1998. This increase was primarily
attributable to increased investment in FirstCom's telecommunications networks.
INTEREST EXPENSE. FirstCom's interest expense was $22.6 million for the
year ended December 31, 1999 as compared to $19.6 million for the year ended
December 31, 1998. Capitalization of interest costs in connection with
FirstCom's construction of its fiber optic networks decreased from $3.0 million
for the year ended December 31, 1998 to $1.5 million for the year ended December
31, 1999 and were offset by increased interest expense related to bank debt and
promissory notes relating to the acquisition of FirstCom Colombia.
INTEREST INCOME AND OTHER. FirstCom's interest income and other was $2.2
million for the year ended December 31, 1999 as compared to $4.9 million for the
year ended December 31, 1998. This decrease was primarily attributable to a
reduction in restricted cash and investments.
INCOME TAXES. FirstCom's income tax expense for the year ended December
31, 1999 was $170,000. This expense related to FirstCom's operations in
Colombia. In 1998, FirstCom reported net operating losses and therefore did not
incur any income tax liability.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During December 1997, FirstCom acquired FirstCom Long Distance S.A.
(formerly Iusatel Chile S.A.). FirstCom's comparative operating results during
1998 were significantly affected by this acquisition as discussed in more detail
below.
REVENUES. During 1998 substantially all of FirstCom's revenues were
derived from its operations in Chile. During 1998 FirstCom Chile contributed
approximately 99% of total revenues.
FirstCom's revenues were $18.1 million for the year ended December 31, 1998
compared to $1.1 million for the year ended December 31, 1997. FirstCom Chile
generated long distance revenues during 1998 of approximately $16.4 million
through the sale of approximately 55.9 million minutes, resulting in average
revenue per minute of approximately $0.29. All of the long distance revenues
were generated by FirstCom
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<PAGE> 53
Long Distance S.A. which was acquired by FirstCom in December 1997. These long
distance revenues were generated from pick per call and contracted customers and
long distance traffic exchange with other carriers.
FirstCom Chile's data revenue during 1998 of $1.7 million consisted
primarily of equipment sales and system integration services. As a result of the
October 1998 acquisition of FirstCom Internet, FirstCom earned approximately
$670,000 of internet services revenue during the fourth quarter of 1998.
COST OF REVENUES. FirstCom's cost of revenues in 1998 resulted primarily
from its operations in Chile. Costs of revenues include both the cost of
services provided and the cost of equipment sold. During 1998 cost of revenues
related principally to FirstCom Chile's long distance services and included
access charges paid to local exchange carriers and transmission payments to
other carriers. Costs of revenues also include payments for rights of way
related to FirstCom's fiber optic networks.
FirstCom's cost of revenues was $14.1 million for the year ended December
31, 1998 as compared to $1.2 million for the year ended December 31, 1997. This
increase was primarily attributable to the increase in long distance revenue.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. FirstCom's selling, general
and administrative expenses were $12.3 million for the year ended December 31,
1998 as compared to $4.7 million for the year ended December 31, 1997. This
increase was primarily attributable to FirstCom Chile and the hiring of
additional personnel related to the anticipated growth of the Peruvian and
Chilean operations. At December 31, 1998 FirstCom had 330 employees compared to
130 at December 31, 1997. The significant components of selling, general and
administrative expenses were as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Compensation................................................ $5,775 $2,775
Professional Fees........................................... 1,753 728
Marketing................................................... 1,664 --
Bad Debt.................................................... 943 --
Travel...................................................... 288 254
Other....................................................... 1,870 921
</TABLE>
NON-CASH COMPENSATION AND CONSULTING. This expense of $4.6 million during
September 1997 was directly attributable to the intrinsic value of shares of
FirstCom's common stock and stock options issued to certain officers and former
directors of FirstCom. There were no similar transactions or expenses during
1998. The $175,000 of expense recognized during 1998 related to the fair market
value of stock options granted to a consultant for services performed during
1998.
DEPRECIATION AND AMORTIZATION. FirstCom's depreciation and amortization
was $2.2 million for the year ended December 31, 1998 as compared to $1.2
million for the year ended December 31, 1997. This increase was primarily
attributable to certain assets purchased in the acquisition of FirstCom Long
Distance.
INTEREST EXPENSE. FirstCom's interest expense was $19.6 million for the
year ended December 31, 1998 as compared to $6.5 million for the year ended
December 31, 1997. This increase was due to the notes that were issued on
October 21, 1997. Of the total interest costs incurred by FirstCom for the year
ended December 31, 1998 and 1997, $3.0 million and $712,000, respectively, of
such costs were capitalized in connection with FirstCom's construction of its
fiber optic network.
INTEREST INCOME AND OTHER. FirstCom's interest income and other was $4.9
million for the year ended December 31, 1998 as compared to $1.2 million for the
year ended December 31, 1997. This increase was primarily attributable to
interest income earned on FirstCom's restricted cash and investments.
INCOME TAXES. In 1998 and 1997 FirstCom reported net operating losses and
therefore incurred no income tax liability.
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LIQUIDITY AND CAPITAL RESOURCES
AT&T Latin America, FirstCom and Netstream have had significant operating
losses and negative cash flow from their respective operations since their
inception. We expect to incur significant operating losses and have negative
cash flow from operations for the next several years as we expand our existing
communications networks and develop new networks and services. We will,
therefore, need to engage in substantial capital-raising activities.
We estimate that we will have cash requirements of approximately $725
million during 2000 and the first half of 2001. We and FirstCom spent $40
million of that amount through March 31, 2000. We expect to spend the remaining
amount to develop and expand communications networks and services and fund
working capital needs, operating losses and debt service obligations. We expect
that our funding needs to implement our growth strategy will continue at a
somewhat higher level from mid-2001 through the end of 2002. As of March 31,
2000, we had not made any contractual commitments for capital expenditures and
had approximately $1.7 million in debt service obligations (including
obligations under capital leases) for the remainder of 2000 for debt outstanding
at that date. We expect that capital expenditures and debt service obligations
will increase in the future in connection with the cash requirements described
above.
We expect to receive $[ ] million of net proceeds from this offering
and to use $[ ] million to fund our cash requirements described above. To
fund our remaining cash requirements, we need to raise funds in addition to cash
on hand, amounts available under the credit facility provided by AT&T Corp. and
committed vendor financing. We expect to raise the additional amounts needed
principally through new vendor financing. We may also issue debt or make
additional equity offerings in the future, depending on prevailing market
conditions. We are not sure we will be able to raise sufficient funds on
acceptable terms or at all. Our inability to raise sufficient funds could affect
our ability to meet our debt service and other obligations and would affect our
ability to carry out our growth strategy. If we do not complete this offering or
obtain additional financing by the end of the third quarter of 2000, we will
have to postpone most of our capital expenditures until financing is obtained.
This would detract from our time to market and our ability to pursue our growth
strategy.
Our cash needs in the next several years will be affected by several
factors. Among them are:
-- the amount of cash generated by our business operations;
-- whether we change our plans for building and expanding our networks;
and
-- whether we use cash, issue common stock or increase our debt to
complete acquisitions and ventures, such as the possible
collaboration with AT&T Global Network Services, beyond those
currently anticipated.
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The following chart summarizes AT&T Latin America's and FirstCom's sources
of funds that were available as of March 31, 2000:
<TABLE>
<CAPTION>
SOURCE ENTITY AMOUNT
---------------------------------------------- ------------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Cash and short-term investments at March 31,
2000........................................ AT&T Latin America $ 30,915
Cash (including restricted cash) at March 31,
2000........................................ FirstCom 26,996
Cash contribution from AT&T Corp. and SL
Participacoes(1)............................ AT&T Latin America 20,000
Credit Facility from subsidiary of AT&T
Corp.(2).................................... AT&T Latin America 100,000
Equipment financing facilities(3)............. FirstCom 32,700
Bank credit facility(4)....................... FirstCom 6,700
Working capital revolving credit
facility(5)................................. FirstCom 1,400
--------
Total.................................... $218,711
========
</TABLE>
------------
Notes:
(1) As a condition to the FirstCom merger, we received a total of $70 million in
cash equity contributions from our shareholders. AT&T Corp. and SL
Participacoes contributed a total of $50 million in December 1999 in
connection with the Netstream acquisition. In June 2000, AT&T Corp. and an
affiliate of Promon Ltda. contributed an additional $20 million in cash to
AT&T Latin America pro rata in proportion to their respective shareholdings.
(2) Pursuant to the FirstCom merger agreement, a subsidiary of AT&T Corp. has
provided AT&T Latin America with a $100 million credit facility. That
facility has a two-year maturity, and bears interest at a floating rate per
annum based on 90-day LIBOR, plus 3.75%, payable quarterly.
(3) FirstCom has equipment financing facilities of $29,500 principal amount from
Cisco Systems Capital Corporation and $10,000 principal amount from Nortel
Networks. The purpose of these facilities is to finance the purchase of
network equipment from Cisco and Nortel. As of March 31, 2000, $6,800 had
been used under the Cisco facility and no amount had been used under the
Nortel facility. The purchased equipment is collateral for amounts
outstanding under these facilities. The Cisco facility bears interest at a
rate per annum of LIBOR plus 5.5%, payable quarterly. The Nortel facility
bears interest at a rate per annum of LIBOR plus 4.0%, payable quarterly.
Amounts used under the Cisco and the Nortel facilities are subject to
mandatory prepayment upon a change of control of FirstCom such as the
merger. We expect we will be able either to negotiate a waiver of these
provisions or to replace these facilities with new facilities after the
merger.
(4) Effective February 25, 2000, subsidiaries of FirstCom entered into a
short-term $10 million bank credit facility, collateralized by certain
telecommunications equipment. The terms of that facility are:
(i) annual interest rate of the 90-day LIBOR plus 6%, or the U.S. prime
rate, plus 5%;
(ii) principal maturity date of January 2, 2001; and
(iii) interest payments on the outstanding principal balance due beginning
April 2000.
This facility was mandatorily prepayable in the event of a change of control
of FirstCom, such as the FirstCom merger. As of March 31, 2000, $3,300 had
been used.
(5) During December 1999, one of FirstCom's Chilean subsidiaries obtained a
$1,400 working capital revolving credit facility from a local bank. No
amount had been used under the facility as of March 31, 2000. This facility
is denominated in UF's, a Chilean inflation-adjusted unit used as a
reference in financing and commercial transactions in Chile. The facility
bears interest at a per annum rate based on the Chilean bank rate, plus
4.0%.
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As permitted under the FirstCom merger agreement, we required FirstCom to
make a tender offer for its outstanding 14% senior notes due 2007. As of June
30, 2000, there was $150,000,000 in aggregate principal amount of the notes
outstanding. As part of that tender offer, FirstCom is seeking the consent of
holders of at least a majority in principal amount of the outstanding notes to
specified amendments to the covenants of FirstCom relating to the notes. We
intend to finance the tender offer by issuing to a wholly-owned subsidiary of
AT&T Corp. our non-voting, non-convertible and non-participating 15% Series B
preferred stock. The preferred stock will be redeemable at our option or the
option of the holder at any time after the fourth anniversary of its issuance.
In connection with the AT&T Argentina acquisition, we paid $5 million to
the selling stockholders and issued to them 1,178,689 shares of our Class A
common stock.
Prior to its acquisition, Netstream's debt consisted of intercompany
borrowings from Promon Ltda. and its affiliates. Those borrowings, which were
$29,400 as of September 30, 1999, increased up to the date of the acquisition as
Promon Ltda. continued to finance construction of networks and operating losses.
At the closing of the acquisition in early December 1999, approximately $45,000
of intercompany indebtedness that Netstream owed to Promon was repaid as a part
of the purchase price of Netstream. Netstream no longer has any outstanding debt
to Promon or its affiliates.
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1999 FirstCom had net tax operating carryforwards of
approximately $59,000 for U.S. income tax purposes and approximately $46,900 for
foreign income tax purposes. The U.S. carryforwards are available to offset
future taxable income, if any, and expire for U.S. income tax purposes in the
years 2007 through 2019, subject to limitation under Section 382 of the Internal
Revenue Code. The foreign net operating loss carryforwards related to Peru, of
$15,300 expire in the years 2000 through 2003 and to Chile, of $31,500, do not
expire.
EFFECTS OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. We have adopted this statement effective January 1, 2000. The
statement requires the recognition of all derivatives on our consolidated
balance sheet at fair value. The adoption of this statement did not have a
significant effect on our results of operations or financial position.
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<PAGE> 57
INDUSTRY OVERVIEW
Liberalization of the global communications industry and technological
change have resulted in an increasingly data-intensive business environment. In
Latin America, regulatory, technological, marketing and competitive trends have
created opportunities in the convergence of voice and data communications
markets. Liberalization of the communications industry in Latin America is also
leading to expanded opportunities in the local communications services market.
We believe there is significant unmet demand for advanced communications
services, including:
-- reliable, high capacity data circuits;
-- Internet access;
-- private local area networks; and
-- domestic and international long distance.
We believe that deregulation of the communications sector in many Latin
American countries, coupled with technological innovation, will lead to market
developments similar to those that have occurred in the United States. These
developments would include an increase in traffic volume and the entry of new
communications service providers. In Latin America the regulatory and market
environments differ from country to country and differ from those in the United
States.
We believe that demand for broadband transmission capacity will continue to
increase as customers require increased capability to handle complex data,
Internet, voice and video communications and that our high-speed data networks
and Internet platform are well suited to satisfy these requirements. In Latin
America, many incumbents and other communications carriers continue to use older
technologies for parts of their networks which were designed primarily for voice
services. However, many are using fiber optic technology to expand their
networks.
THE LATIN AMERICAN TELECOMMUNICATIONS MARKET
Latin America represents a large potential telecommunications market. Our
targeted Latin American markets have a combined:
-- estimated population of approximately 281 million people;
-- estimated growth in average gross domestic product per capita of over
4.6% per annum between 1999 and 2004;
-- estimated growth in telephone lines of approximately 6.8% per annum
between 1999 and 2004; and
The table below sets forth population and gross domestic product per capita
for 1999 for our targeted Latin American countries, according to industry
sources:
<TABLE>
<CAPTION>
GROSS
COUNTRY OF POPULATION DOMESTIC
OPERATION (MILLIONS) PRODUCT/CAPITA
------------------------------------------------- ---------- --------------
<S> <C> <C>
Argentina........................................ 35 $7,750
Brazil........................................... 164 3,149
Chile............................................ 15 4,590
Colombia......................................... 42 2,130
Peru............................................. 25 2,250
--- ------
Total/Average.................................... 281 $3,575
=== ======
</TABLE>
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INDUSTRY TRENDS
Recent growth in the Latin American communications industry, and
particularly in broadband communications services, has been shaped by a number
of underlying trends, including those listed below. We believe that these trends
are likely to cause this growth to continue.
-- MARKET LIBERALIZATION. Privatization and the related breakup of
monopolies in the Latin American telecommunications market has
resulted in increased competition for substantially all products and
services. Governments within the region are increasingly
demonstrating a pro-competition approach to the market. In addition,
Argentina, Brazil, Chile, Colombia and Peru are each signatories to
the World Trade Organization Agreement on Basic Telecommunications
Services, which mandates liberalization. Competition has facilitated
the development and availability of more advanced telecommunications
services to the Latin American business market, and generally reduced
prices, which has in turn increased demand.
-- GLOBALIZATION OF CORPORATIONS. As corporations in more developed
markets expand into Latin American markets, we believe that the need
for private network services and broadband capacity between and
within the major cities in these markets will grow. In addition, as
Latin American companies become more global, we believe that their
need for broadband connections will increase and their adoption of
bandwidth intensive applications is likely to accelerate.
-- INCREASED DEVELOPMENT OF TECHNOLOGICALLY ADVANCED COMMUNICATIONS
INFRASTRUCTURE. Historically, Latin American markets have depended
upon the communications infrastructure of incumbent operators, which
typically does not permit the transmission of large amounts of data
traffic. Due to the poor transmission quality of the regional
telecommunications infrastructure, Latin American business customers
have been slower to adopt data intensive applications than similar
customers in more developed markets. We believe that the demand for
broadband services will increase as the communications infrastructure
improves and the use of data intensive applications becomes more
feasible and economical in more markets in Latin America.
-- INCREASING WORLDWIDE USE OF THE INTERNET. We believe that the Latin
American market has lagged the United States market in using
Internet-related services. We believe as Internet use increases,
corporations will accelerate their adoption of new technologies and
applications, thereby increasing demand for broadband services.
According to the International Telecommunications Union, the number
of Internet users in Latin America increased almost 14-fold between
1995 and 1999, from approximately 540,000 to over 9 million.
According to industry sources, the number of Internet dial-up
accounts in our target markets should increase by 41% per annum from
approximately 3.4 million in 1999 to approximately 18.7 million in
2004.
ARGENTINA
COUNTRY OVERVIEW. Argentina, a new market for us following completion of
our acquisition of AT&T Argentina, is the third largest country in South America
with an estimated population of approximately 35 million as of December 1999.
Greater Buenos Aires, the country's primary economic center, has a population of
approximately 13.9 million. From 1994 through 1999, real gross domestic product
increased by an average annual growth rate of approximately 2.8%.
MARKET OVERVIEW. Argentina has one of the most developed communications
markets in Latin America due, in part, to its early privatization efforts.
According to Pyramid Research, Argentina's telephone subscribers grew from an
estimated 6.8 million as of year end 1997 to an estimated 7.6 million in 1999.
As is generally the case throughout Latin America, Argentina has a relatively
low penetration, or usage, rate per 100 inhabitants of approximately 21.2 lines
in service as of the end of 1999. We believe that Argentina's continued growth
in demand for communication services primarily will be influenced by the full
liberalization of the market in November 2000 and by demand from business
customers for broadband communications services.
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BRAZIL
COUNTRY OVERVIEW. Brazil is the largest country in South America with an
estimated population of approximately 164 million as of December 1999. Sao
Paulo, its largest city, has a population of approximately 10 million. From 1994
through 1999, real gross domestic product increased by an average annual growth
rate of approximately 2.8%.
MARKET OVERVIEW. One of the stated goals of the Brazilian government in
privatizing Brazil's former local and long distance incumbent, Telebras, in 1998
was to expand significantly the national communications network and improve
service quality. According to Pyramid Research, Brazil's total number of lines
in service has increased since the privatization of Telebras from approximately
17.0 million in 1997 to approximately 25.7 million in 1999. However, Brazil
continues to have a relatively low penetration rate per 100 inhabitants of
approximately 15.7 lines in service as of the end of 1999. We believe that
continued growth in demand from communication services in Brazil will be
influenced by the level of growth of the Brazilian economy, demand from business
customers for broadband communications services, foreign investment and
international trade and the continued expansion of the Brazilian communications
infrastructure.
CHILE
COUNTRY OVERVIEW. Chile is a highly urbanized country, with an estimated
population of approximately 15 million as of December 1999. Santiago, the
capital of Chile and a major international economic center, has a population of
approximately 5.1 million. The Chilean government has implemented a strategy to
encourage foreign investment in Chile. It has privatized and deregulated many
industries, including transportation, energy and communications. From 1994
through 1999, real gross domestic product increased by an average annual rate of
5.6%. Inflation has been significantly reduced, falling from 15.4% per annum in
1992 to 3.3% per annum in 1999.
MARKET OVERVIEW. As the first Latin American communications market to
begin to deregulate, Chile's communications sector has grown substantially.
According to Pyramid Research, Chile's lines in service have increased from
approximately 2.7 million in 1997 to approximately 3.4 million in 1999,
indicating a penetration rate of approximately 23 per 100 inhabitants.
COLOMBIA
COUNTRY OVERVIEW. Colombia is the second largest country in South America
with an estimated population of approximately 42 million. Bogota, the capital of
Colombia, has a population of approximately 6.3 million. Cali and Medellin, the
two next largest cities in Colombia, have populations of approximately 1.6
million and 2.2 million, respectively. From 1994 through 1999, gross domestic
product grew at an average annual rate of 1.9%. Inflation continuously dropped
each year from 22.8% per annum in 1994 to 10.9% per annum in 1999.
MARKET OVERVIEW. As Colombia continues to deregulate its communications
market, the country has continued to experience significant growth in
communications revenue and telephone density. With new competitors entering the
local market, local operators are marketing aggressively to obtain subscribers.
According to Pyramid Research, total lines in service in Colombia has increased
from approximately 5.4 million in 1997 to approximately 7.4 million in 1999,
indicating a penetration rate of approximately 18 per 100 inhabitants.
PERU
COUNTRY OVERVIEW. Peru is the fourth largest country in South America with
an estimated population of 25 million at December 1999. Lima, the capital of
Peru and the major economic center in Peru, has a population of approximately
6.3 million. In 1990, the Peruvian government embarked on a series of economic
and political measures to curtail inflation and restore economic stability. From
1994 through 1999, gross domestic product increased by an average annual growth
rate of 5.5%. During the same period, inflation decreased from 15.4% per annum
in 1994 to 3.7% per annum in 1999.
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MARKET OVERVIEW. Demand for telephone service in Peru has historically
been unmet due to lack of investment, high prices, poor service and long waiting
periods for service. One of the stated goals of privatizing Peru's former local
and long distance incumbent, Telefonica del Peru, was to expand significantly
the national communications network and improve service quality. The number of
lines in service has increased since the privatization from approximately 1.1
million in 1995 to approximately 1.6 million in 1999. Notwithstanding the
significant recent growth in lines in service, Peru continues to have a
relatively low penetration rate of 6.5 lines in service per 100 inhabitants as
of the end of 1999. We believe that continued growth in demand for communication
services in Peru will be influenced by the growth of the Peruvian economy,
foreign investment and international trade, the continued expansion of the
communications network and the re-balancing of tariffs. We consider Peru's
communications market to be an excellent environment for the growth of our
business due the relatively small number of competitors.
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BUSINESS
AT&T LATIN AMERICA
We provide broadband communications services to major metropolitan business
markets in Argentina, Brazil, Chile, Colombia and Peru. Broadband communications
services are delivered over high speed, high capacity transmission systems. Our
objective is to be a leading provider of broadband communications services to
business customers in the countries in South America and the Caribbean, plus
Panama, but excluding Venezuela and Cuba. Our communications services integrate
data, Internet, local and long distance voice, video and electronic commerce
services. We focus on business customers with growing and diverse broadband
communications needs, including multinational corporations, financial services
companies, media and content providers, technology companies, government
entities, Internet service providers and communications carriers, as well as
small and medium size businesses. We deliver our services through our own
technologically advanced networks, which interconnect with existing networks
owned by third parties.
Our business had the following operating characteristics as of March 31,
2000:
-- 2,684 network route kilometers;
-- 86,436 total fiber kilometers;
-- 2,241 buildings connected to our networks;
-- 70,786 voice grade equivalent circuits, a measure of transmission
capacity; and
-- 4,902 permanent virtual circuits sold.
Our networks use the asynchronous transfer mode format, a technology which
enables us to accommodate many different information systems and permits
transmission of a mix of voice, data and video. Our networks also utilize a
common Internet protocol-based platform. Internet protocol is an
inter-networking standard that enables communication across the large collection
of networks constituting the Internet regardless of the hardware or software
used.
COMPETITIVE STRENGTHS
We believe that we distinguish ourselves from our competition through
several competitive strengths, including:
-- TECHNOLOGICALLY ADVANCED NETWORKS. We believe that we have a
competitive advantage in attracting our target business customers
because we own and control technologically advanced networks. Our
fiber optic networks enable us to offer a wide range of reliable,
high quality services at competitive prices through a single customer
connection. Our networks are able to carry a variety of data,
Internet, voice, video conferencing and electronic commerce traffic
over a secure, common Internet protocol-based platform. Moreover,
unlike incumbent carriers, we do not have older network systems
designed primarily for voice services.
-- AT&T BRAND. We believe that the AT&T brand is well known in our
target markets in Latin America and represents high quality, reliable
service and good value to customers in these markets. Offering
services under the AT&T brand will be a competitive advantage in
attracting customers and we believe will shorten our sales cycle,
accelerate market penetration and increase our market share.
-- RELATIONSHIP WITH AT&T CORP. AND CONCERT. We benefit from our
relationship with AT&T Corp. and its affiliates, including Concert,
the joint venture between AT&T Corp. and British Telecommunications
plc. We expect that this relationship will:
-- give us access to AT&T Corp.'s worldwide customer base;
-- give us access to Concert's cross-border transport facilities,
including undersea cable systems and satellite capacity, enabling
us to offer customers the ability to connect to locations outside
of our region; and
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-- enable us to provide our customers with a wide range of services of
AT&T Corp., AT&T Global Network Services and Concert.
We believe that our unique relationship with AT&T Corp. provides an
advantage in competing with other providers of communications
services.
-- LOCAL PRESENCE IN MULTIPLE HIGH-GROWTH LATIN AMERICAN COMMUNICATIONS
MARKETS. We operate in most of the important metropolitan areas in
our region where there are concentrations of our target business
customers. Those areas are:
-- Sao Paulo, Rio de Janeiro and Belo Horizonte, Brazil;
-- Santiago, Chile;
-- Bogota and Cali, Colombia; and
-- Lima, Peru.
We plan to expand our network coverage to other major cities in our
region. Historically, these markets have depended upon the
communications infrastructures of incumbent operators, which typically
do not permit the transmission of large amounts of data traffic.
Recent privatizations and the related breakup of monopolies in many of
these markets has resulted in increased competition for the types of
products and services we offer. We believe that, as an early entrant
into the broadband communications market in Latin America, we will be
well positioned to benefit from the growth we anticipate in demand for
broadband communications services from business customers.
-- MANAGEMENT EXPERIENCE. We have a strong management team with
significant experience in the communications industry in Latin
America and proven entrepreneurial skills. We also expect to benefit
from access to technical and business personnel at AT&T Corp. and its
affiliates, and members of AT&T Corp.'s management will serve on our
board of directors.
GROWTH STRATEGY
Our objective is to be a leading provider of broadband communications
services to business customers in major Latin American markets. To achieve this
objective, we intend to:
-- FOCUS ON HIGH-DEMAND BUSINESS CUSTOMERS IN MAJOR LATIN AMERICAN
METROPOLITAN AREAS. We plan to focus mainly on the needs of business
customers, especially those with high demand for data, Internet and
other broadband communications services. We will primarily offer our
services in major Latin American metropolitan areas with
concentrations of this type of customer. As part of this focus, we
will continue to deploy our network facilities, construct new
networks and connect additional commercial buildings in these
markets.
-- OFFER ADVANCED DATA AND INTERNET SERVICE OFFERINGS THROUGH OUR OWN
NETWORKS AND FACILITIES. We believe our high speed networks and
advanced Internet protocol-based platform will enable us to respond
to increasing demand from business customers for advanced data,
Internet and electronic commerce services.
-- OFFER A PORTFOLIO OF ADVANCED BUSINESS COMMUNICATIONS SERVICES. We
will offer a flexible and integrated portfolio of data, Internet,
voice, video conferencing and electronic commerce services
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through a single connection to the customer. Once we have established
an initial relationship with a customer, we will seek to expand the
scope and range of services we provide to the customer. We believe
that this will result in increased revenue and enhanced customer
loyalty while using relatively limited additional capital investment
per customer. We plan to expand our portfolio of value added
services, such as web hosting, managed network and electronic
commerce services. Web hosting involves providing or managing
equipment to operate an Internet web site.
-- CAPITALIZE ON RELATIONSHIPS WITH AT&T CORP. AND CONCERT. We intend
to benefit from AT&T Corp.'s worldwide customer base and the ability
of AT&T Corp. and its affiliates, including Concert and AT&T Global
Network Services, to connect customers throughout the world. We plan
to supply services in our region to AT&T Corp., Concert and AT&T
Global Network Services and plan to distribute the services of
Concert and AT&T Global Network Services to our own customer base.
-- PROVIDE CONSISTENT AND SUPERIOR SERVICE LEVELS. We will offer a
similar portfolio of AT&T-branded services in each country in our
region. This will allow customers operating in several markets to
receive a consistent level of service and quality. We also plan to
deploy an integrated operations support system and implement a
coordinated customer care system and philosophy across product and
country lines. The operations support system will be designed to link
all key functional areas to enable us to provide superior customer
service. The key functional areas include provisioning, technical
support, customer care and billing. Sales and customer service
personnel will be able to access the operations support system 24
hours per day, seven days per week, and will promptly resolve
customer related operational, support or billing issues. We believe
that superior service quality and customer service can be a
significant competitive advantage.
-- PURSUE RAPID GROWTH THROUGH CONTINUED NETWORK CONSTRUCTION, AS WELL
AS STRATEGIC ALLIANCES AND ACQUISITIONS. We plan to invest
substantial amounts of capital to expand our networks and construct
additional networks in our region. This will include expanding our
existing networks in Brazil and constructing new networks in
additional cities in Brazil and in Buenos Aires and other cities in
Argentina. We plan to expand FirstCom's existing networks in Chile,
Colombia and Peru, and to construct new networks in Buenos Aires and
other cities in Argentina. In addition, we believe that, as in Europe
and the United States, the Latin American communications industry
will experience increased consolidation, with single-market providers
combining or aligning with pan-regional operations. We will pursue
acquisitions and alliances consistent with our growth strategy.
NETWORKS
Our broadband communications networks provide links to customers within a
given metropolitan area and the ability to connect to points outside that area.
We deploy our network facilities to reach larger office buildings, office parks
and other high concentrations of business access lines and potential business
customers. By doing so, we seek to use capital efficiently to reach a maximum
number of customers and prospects.
We will continue to deploy and expand our networks in the central financial
and business districts of major metropolitan areas in the countries where we
operate. We also intend to extend our metropolitan networks to reach nearby
concentrations of industrial and multinational corporate customers. We plan to
connect our metropolitan area networks to one another by constructing,
purchasing, swapping or signing long-term leases for fiber optic links.
In each city, our broadband communications networks consist of the
following components:
-- a network management center, operating on a 24-hour/7-day basis,
where we monitor the functioning of the network and traffic patterns;
-- primary, or backbone, rings of minimum 144-strand fiber optic cable,
each connected to the network management center, which extend through
the main areas or avenues served by the network and carry the most
traffic;
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-- numerous secondary rings of 36 or 72-strand fiber optic cable, each
connected to the primary rings, which extend the network along
additional streets and to other locations where the individual
buildings served are located;
-- for each building served, an access cable of 2 to 24-strand fiber
optic cable connecting central transmission equipment in the building
to the secondary ring in the street; and
-- for each customer in a building, a fiber optic, coaxial or copper
cable connecting the building's central transmission equipment unit
to one or more customer units.
Our metropolitan networks enable us to provide our advanced communications
services through a single customer connection. Although the major carriers in
the countries where we operate are installing updated transmission equipment, we
expect that the networks of these companies, which have traditionally focused on
voice communications, will predominantly consist of earlier-generation digital
and analog transmission equipment in the future.
Our networks have the following advantages over older systems:
-- the ability to carry distinct types of traffic (e.g., data, voice,
video, multimedia) over the network using a single transmission
system;
-- cost efficiency, due to the reduced amount of hardware required to
transmit diverse traffic;
-- high-speed routing of traffic through the network, due to fewer
capacity "bottlenecks";
-- high network and service reliability through the use of network
designs that allow the automatic re-routing of transmissions in case
of problems;
-- high degree of control, flexibility and manageability of the
networks, allowing for more sophisticated central management; and
-- high levels of transmission quality.
Our network's architecture is compatible with older transmission standards
used in public networks in the countries where we operate. Traffic can be passed
readily between and among our networks, other local private networks and public
national networks. These technological advantages, together with the high
bandwidth of our metropolitan area networks, permit us to offer the following
service benefits to our customers:
-- an integrated package of data, voice, video and audio services, as
well as basic communications and transmission services, from a single
provider;
-- high speed data transmission and, within each metropolitan area, an
ability to increase bandwidth easily;
-- an ability to accommodate flexibly the requirements of very large
networks, such as dial-up networks used by Internet service providers
and other complex networks used by financial institutions,
multinational corporations, universities and government entities;
-- a high degree of transmission quality, with negligible error rate and
"lost" traffic;
-- through sophisticated central network management systems, an ability
to continuously monitor and optimize a customer's traffic patterns,
as well as to allow the customer to monitor network performance, even
across interconnections with other carriers' networks;
-- maximum availability of the customer's internal and external networks
and externally transmitted data--through features that allow the
networks to re-route automatically any transmission over the network
that is held up by faulty equipment or line damage; and
-- flexibility to upgrade rapidly transmission speed and bandwidth.
We arranged to interconnect our networks in the countries where we operate
with the networks of the respective incumbent carriers. Terminal equipment is
located in either our premises or the premises of other
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companies. These arrangements permit us to satisfy rapidly any customer orders
for services outside our metropolitan area networks.
Our communications equipment vendors actively participate in planning and
developing electronic equipment for use in our networks. We currently obtain
asynchronous transfer mode equipment and Internet protocol-based routers from
Cisco, transmission equipment principally from Nokia and voice switching
equipment from Siemens. Asynchronous transfer mode equipment uses technology
that enables it to accommodate many different information systems and permits
transmission of a mix of voice, data and video. Internet protocol-based routers
use an inter-networking standard that enables communication across the large
collection of networks constituting the Internet, regardless of the hardware or
software used. We are in the process of analyzing additional suppliers in order
to diversify our supplier base. Because we use existing communications
technology rather than developing new technology, our research and development
expenditures are not material.
The dates we commenced business in each of the locations in which we do
business are set forth in the table below:
<TABLE>
<CAPTION>
COUNTRIES AND CITIES DATE COMMENCED
------------------------------------------------------------ --------------
<S> <C>
Argentina (Buenos Aires).................................... June 2000
Brazil (Sao Paulo, Rio de Janeiro, Belo Horizonte and
Barueri/Alphaville)....................................... November 1998
Chile (Santiago)............................................ July 1994
Colombia (Bogota and Cali).................................. February 1999
Peru (Lima/Callao).......................................... May 1998
</TABLE>
Selected operating statistics as of December 31, 1999 and March 31, 2000
for each of the countries where we operate are set forth under "Selected
Operating Information."
SERVICES
We believe that customers in our target markets demand high quality, cost
effective communications services with simplified interfaces. We also believe
that larger and more sophisticated customers expect us to anticipate their
communications requirements and provide customized solutions. By offering an
integrated package of advanced as well as basic services, we believe we can
access a larger market, enhance customer retention, achieve higher margins and
reduce the cost of acquiring new customers.
Our integrated portfolio of services in the countries in which we operate
falls into several principal categories, which are described below:
-- DATA SERVICES. Our data services include basic connection services,
such as point-to-point dedicated private lines, and private
multipoint network services, which consist of offering and managing
communications links among a number of locations, as wide area
network services. The basic infrastructure, plus supporting services
(available or being deployed) allows us to implement different
communications applications to support a wide range of customers'
needs. The availability of bandwidth and reliability of the services
allow customers to support additional value-added services, such as
video conferencing.
-- INTERNET AND INTERNET PROTOCOL-BASED SERVICES. Our Internet services
consist of dial-up and dedicated access services offered primarily to
businesses, as well as wholesale Internet services offered to
Internet service providers. Our integrated package of wholesale
Internet services allow Internet service providers to purchase and
lease their entire access infrastructure from us. The customer access
infrastructure of Internet service providers typically consists of a
combination of transmission lines, modems, traffic management
equipment and software.
-- VOICE SERVICES. Our voice services include a range of services that
allow us to provide high quality, reliable voice communications.
Services range from the provisioning of office or campus services, to
building a complete voice network covering multiple locations.
Through interfaces with other private networks and with public
networks, customers can place and receive calls originating and
terminating from outside our networks.
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SERVICES TO OTHER CARRIERS. We provide "last mile" services to other
carriers seeking to reach customers on our networks.
CUSTOMERS
ARGENTINA. We will seek to develop operations in Argentina through our
recently acquired subsidiary, AT&T Argentina (formerly named Keytech LD S.A.).
We plan to target data intensive users of communications services, including
small, medium and large businesses, regional and global multinational
corporations, government entities, internet service providers and other
communications carriers, in the major urban centers. These urban centers
primarily include Buenos Aires, Rosario, Cordoba and Mendoza as well as other
cities including Mar del Plata, Bahia Blanca, Neuquen and Tucuman.
AT&T Argentina is a development stage company and, to date, has not had a
material number of customers.
BRAZIL. Our customer base in Brazil has grown rapidly since Netstream
began commercial operations there in November 1998. As of March 31, 2000, our
Brazilian operations had attracted 600 customers.
Our customers in Brazil include:
-- the stock exchanges of Sao Paulo (Bovespa) and Rio de Janeiro (BVRJ);
-- numerous Brazilian and international banks, brokers, insurance
companies and other financial institutions including AGF, Banco
Cidade, Banco Santander, Bank of America, Barclay's Capital,
BCN--Banco de Credito Nacional, JP Morgan and Unibanco;
-- information and consulting businesses, including Andima, Bloomberg,
Deloitte Consulting and Reuters;
-- Internet service providers, including AmChamNet, AOL Brasil and
PSINet;
-- global and regional multinational corporations;
-- several international and domestic communications carriers; and
-- many medium-size and smaller-size business and professional entities.
Our customer contracts in Brazil generally provide for payment in local
currency and are generally indexed to various Brazilian inflation indicators.
The revenues of our customers are also generally denominated in local currency.
CHILE. For data and Internet services, we currently have more than 894
business customers in Chile. We also provide domestic and international long
distance services to approximately 17,745 business customers and more than
18,033 residential customers through annual service contracts. In addition, we
provide casual dialing services to approximately 130,000 non-subscribed users.
We also provide routing services to a number of other long distance carriers,
including Entel.
Our customers in Chile include:
-- The Santiago World Trade Center;
-- banking institutions, including Chase Manhattan Bank and Banco de
Credito e Inversiones;
-- communications carriers, including GlobalNet and Entel; and
-- educational institutions, such as Pontificia Universidad Catolica de
Chile.
COLOMBIA. We currently service approximately 260 customers in Colombia. We
offer and market to our current and potential customers services which include
asynchronous transfer mode services (Internet, ethernet, fast ethernet, video,
voice, and token ring), local area network to local area network interconnection
and frame relay services. Frame relay services are delivered using the frame
relay transfer mode designed for the transmission of data over digital networks
in packets of varying lengths. Prices charged to customers vary
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in accordance with the customers' requirements based on the number of locations,
type of services, transmission rates, and length of service contracts.
Our customers in Colombia include:
-- numerous banking institutions, including Banco de la Republica,
Ascredibanco and Banco Santander;
-- Deposito Central de Valores, the depositary of debt securities issued
in Colombia;
-- several communications carriers, including Global One, Telecom
Colombia and Telefonica Data; and
-- information and consulting businesses, including Bloomberg.
PERU. We provide data and Internet services to more than 773 customers in
Peru. We seek to enter into contracts with new customers for a term of at least
two years. Prices charged to customers vary in accordance with the customer's
requirements based on the number of locations, type of services, transmission
rates, and length of service contracts. In November 1999, we also began to offer
domestic and international long distance services. As of December 31, 1999, we
had more than 6,500 customers in Peru contracted for long distance service. We
also began to provide routing services to a number of other long distance
carriers.
Our customers in Peru include:
-- numerous banking institutions, including Interbank and Asbanc;
-- retailers, such as Santa Isabel S.A., a supermarket chain, and Saga
Falabella S.A., a department store;
-- multinational corporations, such as Nestle Peru; and
-- Internet service providers, including Red Privada Virtual (QNET).
SALES, MARKETING AND CUSTOMER SERVICE
We seek to build collaborative, long-term relationships with our customers
by offering to them a broad portfolio of communications services, by
continuously monitoring and identifying their changing communications needs and
by leveraging one or more of our services into a partnership with the customer
in which we become the single source provider of all of the customer's
communications needs. We believe that, in addition to providing our customers
with a good value, our sales and marketing approach allows us to integrate our
services into bundled packages that improve gross margins by encouraging
customers to use a greater number of, and more advanced, services.
We have a sales force of approximately 124 professionals that are supported
by our technical engineering and network center staff. Our sales force is
trained to emphasize our customer-focused sales and service efforts, including
our 24 hour/365 day customer service center. Our sales and marketing
professionals answer customer calls directly, rather than requiring customers to
use an automated queried message system. We provide customer assistance, at all
hours, in either Portuguese or English in Brazil and in Spanish in the other
countries. We also actively solicit customers' reaction in order to understand
their preferences and to enhance their overall satisfaction with us.
We have also developed and installed customer-focused software designed to
provide integrated communications services. This software permits us to present
our customers with one fully integrated monthly billing statement for local,
long distance, international, voice mail, paging and Internet access, and will
also permit us to include additional services, when available. We believe that
our customer-focused software platform is an important element in the marketing
of our communications services and gives us a competitive advantage in the
marketplace.
We compensate sales people by a combination of salary and incentive bonus.
Our sales force prioritizes target users not only by their size and potential
usage of advanced communications services, but also by their proximity to our
existing network. Our current commission structure rewards sales to existing
customers and new customers in buildings already connected to the network, as
well as customers in target buildings within a short distance of the existing
network.
Our sales force is supported by experienced technical engineering personnel
whose objective is to organize the efficient delivery of communications
solutions to each customer. The technical staff's role includes the proper
coordination of vendor service components, customer site preparation and
installation, testing, delivery
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and maintenance of the service solution for the customer. All of our engineering
personnel have local market experience and are receiving additional training
from AT&T Corp.
COMPETITION
ARGENTINA. We believe that our principal competitors in Argentina will be
Telecom Soluciones S.A. and Advance Telecomunicaciones S.A., which are data
transmission companies controlled by Telecom Argentina S.A. and Telefonica de
Argentina S.A. Telecom Argentina and Telefonica de Argentina are the incumbents
in northern and southern Argentina, respectively. AT&T Argentina, which we
acquired in June 2000, is not yet fully operational and its market share is not
significant. Telecom Soluciones and Advance Telecomunicaciones use the
infrastructure of their incumbent owners to deliver services to their customers.
We anticipate increased competition from both the incumbent operators, as well
as new market entrants, once Argentina's communications market is liberalized in
November 2000.
BRAZIL. Brazil's communications market is dominated by the incumbent
carriers, which are former Telebras operating companies, including Embratel and
the three local carriers, Telefonica, TeleCentroSul and TeleNorteLeste.
Telefonica (formerly TeleSP), the largest of the local carriers, is controlled
by Telefonica de Espana S.A. Embratel, which has operated historically as
Brazil's long distance carrier, is controlled by a consortium led by Worldcom.
Netstream started operations in 1998, and does not yet have a significant market
share. Emerging competitors in the Internet and data services markets include
MetoRed, Impsat and Diginet.
In the privatization of the Telebras operating companies in 1998, the
Brazilian government divided Telebras' local wireline communications business
into three incumbent local carriers, each serving a different geographic area.
The Brazilian government then sold at auction "mirror" licenses to provide
communications services over public switched networks in each of the three areas
of Brazil served by the incumbent local carriers. A public switched network is a
network available to all users and not dedicated to a particular user. The
auction of the mirror licenses produced three "mirror companies," named Vesper,
Global Village Telecom and Intelig. Each of the mirror companies is able to
offer the same public switched local services as the incumbent carrier serving
the same geographic area. Although the mirror companies are constructing modern
communications networks, we believe that they are focused mainly on competing
with the incumbent local carriers by increasing market share in basic telephone
services.
Following the July 1998 deregulation of local and domestic and
international long distance, competition in these services increased due to the
arrival of new entrants, including communications carriers that also provide
services in other countries. We believe that the incumbent communications
service providers have established customer relationships, as well as other
capabilities and resources to expand their current service offerings. The
existing service providers include local carriers, wireless telephone operators,
providers of data services, cable television network operators and operators of
existing private network infrastructure, such as utilities and railroads.
CHILE. Chile's communications market is extremely competitive. Chile
opened its local and long distance markets to competition in 1994, with the only
constraint being a four-year long distance market share cap imposed on Chile's
former local services monopoly, Compania de Telecomunicaciones de Chile.
Currently, five communications groups provide both local and long distance
services. Three of them also provide data services. There are three other
licensed providers of local telephone services and four other licensed providers
of domestic and international long distance services. We believe that our main
competitors in Chile in data and Internet services and in long distance and
local services, Compania de Telecomunicaciones de Chile and Entel, have
significantly greater market share than FirstCom, which entered in the market in
1996.
COLOMBIA. Colombia's communications market has been dominated by the
incumbent long distance operator, TELECOM (Empresa Nacional de
Telecomunicaciones). However, TELECOM has limited local network presence
compared with Empresa de Telecomunicaciones de Santafe de Bogota, Empresas
Publicas de Medellin and EMCATEL, in Bogota, Medellin and Cali, respectively.
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There are several companies that provide value-added services to corporate
customers, although their traditional focus has been domestic satellite-based
services. In the metropolitan areas, specifically in Bogota, there appears to be
a limited number of high-speed communication service providers. However, there
has been increased competition in Bogota from Emtelco and Teledatos in the
provision of connection from customers' locations to the principal networks over
which communications travel.
We believe that our main competitors in Colombia in data and Internet
services are TELECOM and Impsat. In long distance and local services, we believe
that our main competitors are TELECOM, Empresa de Telecomunicaciones de Santafe
de Bogota and Empresas Publicas de Medellin. FirstCom, which entered the market
in 1999, when it acquired Teleductos S.A., a last mile facilities provider, has
a significantly smaller share of these markets.
We compete in the Colombian telecommunications market by providing
customers a competitively priced, modern service offering consisting of local
access and Internet data services. We also compete on the basis of our network
quality, customer responsiveness, and reputation for innovation. We believe that
we are well-positioned to take advantage of the unsatisfied demand for advanced
communications services due to Colombia's limited-capacity communications
infrastructure and the increasing demand for such services from business
customers.
PERU. Telefonica del Peru dominates Peru's communications market.
Telefonica del Peru was formed by the merger in 1994 of the former local
telephone service incumbent, Compania Peruana de Telefonos, and ENTEL, the
former long distance telephone service incumbent. Telefonica del Peru is owned
by Telefonica de Espana S.A. BellSouth, which formerly operated as Tele2000, is
also an important competitor. Bellsouth provides cellular, public pay phone and
cable television services in Lima and other Peruvian cities. BellSouth also owns
and operate a small fiber optic loop over which it offers frame relay services.
FirstCom has a relatively small market share, having entered into the market in
1998.
Following the August 1998 deregulation of local and domestic and
international long distance telephony, competition in these services is arising
from a variety of new entrants. They include communications carriers that
provide services in other countries as well as companies currently providing
services in other industries previously liberalized in Peru. In addition to the
public switched long distance concession granted to FirstCom, other entities,
including BellSouth, have been granted such a concession. We believe that we are
well-positioned to take advantage of the unsatisfied demand for advanced
communications services due to Peru's limited-capacity communications
infrastructure and the increasing demand for such services from business
customers.
REGULATION AND LICENSES
ARGENTINA. The Argentine government's liberalization of the
telecommunications sector began in 1989 with the restructuring of ENTEL (Empresa
Nacional de Telecomunicaciones), the state-owned monopoly telecommunications
operator, into two regional telecommunications service providers. Two consortia
purchased these regional providers: Telecom Argentina (Telecom Italia and France
Telecom) which operates in the northern region of Argentina and Telefonica de
Argentina (Telefonica de Espana and financial partners) which operates in the
southern region of the country. The exclusivity in basic telephone services
enjoyed by the incumbents ended in 1999 when two consortia headed by Movicom
(Compania de Radio Comunicaciones Moviles S.A. (a BellSouth affiliate)) and CTI
(Compania de Telefonos del Interior S.A. (a GTE Mobile Communication
International affiliate)) respectively, were authorized to offer nationwide
local and long distance services.
In March 1998, the Argentine government announced a liberalization plan for
the telecommunications market, which will result in the full liberalization of
services by November 2000. The following companies have been granted licenses
for the provision of local and long distance telephone services and are
presently allowed to offer those services: AT&T Argentina (which we acquired in
June 2000), Impsat S.A. and Comsat S.A. Techtel S.A., MetroRED S.A. and Diveo
S.A. have been granted licenses for the provision of local and long distance
telephone services beginning in November 2000.
The Argentine data sector was not included in the exclusivity granted to
the incumbents. Any telecommunications provider may apply for licenses to
provide data services. At least eight companies,
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including Telefonica de Argentina, Telecom Soluciones, AT&T Argentina and
Impsat, have recognized the opportunity and the growth potential of this market
and have initiated operations using terrestrial and satellite-based access
platforms.
BRAZIL. Telecommunications and postal services in Brazil are regulated by
the Ministry of Communications pursuant to the Telecommunications Law of 1962,
as amended. Brazil's telecommunications laws were significantly revised in
September 1997 when the Brazilian legislature enacted the General
Telecommunications Law. This law authorized the creation of ANATEL, which is an
independent agency that regulates all aspects of telecommunications services,
except radio and television broadcasting, including the granting of licenses
under the General Telecommunications Law.
On May 12, 1998, ANATEL granted Promon Ltda. two nation-wide unlimited term
non-exclusive licenses: a Specialized Circuit Service License and a Specialized
Network Service License. Both licenses were transferred from Promon to Netstream
on June 7, 1999. These licenses permit the construction of the network
infrastructure and the development of fixed point-to-point and
point-to-multipoint systems to provide corporate voice, data and video
communications services using terrestrial links to closed user groups. In
Brazil, "closed user group" is a natural person, legal entity or group of
natural persons or legal entities performing a "specific activity," such as, for
example, an automotive manufacturer and its dealer network. The licenses do not
permit us to provide services open to public correspondence, which means that
we--like other alternative service providers in Brazil--are not permitted to
deliver traffic originating off-network to other points off-network. However, we
are able to originate and terminate traffic going to, or coming from points that
are not on our network. We believe that our licenses permit us to provide our
integrated portfolio of advanced and basic services to our business customers in
Brazil.
The Brazilian telecommunication market is currently in a transition from a
regulated duopoly in fixed switched public telephone services and cellular
telecommunications services to full liberalization and competition. Until
December 31, 2001, only the former Telebras companies and respective mirror
companies may provide fixed switched public telephone services. Restrictions as
to the number of providers of fixed switched public telephone services are
scheduled to cease as of January 1, 2002. ANATEL has not yet publicized specific
legal, technical and financial requirements for the issuance of future fixed
switched public telephone service authorizations after 2001. However, we expect
that these requirements may set high standards and that companies already
operating in the Brazilian market, such as us, will be in a better position to
satisfy these standards than a telecommunications carrier that is organized
after full liberalization of the market.
CHILE. The Ley General de Telecomunicaciones, Law No. 18.168 (1982) and
various decrees issued by the Ministry of Transportation and Telecommunications
and other Chilean governmental authorities constitute the legal and regulatory
framework for providing services in Chile.
In 1994, the Chilean telecommunications law was amended to promote greater
competition in the communications sector and to establish a framework for a
multicarrier dialing system. The most significant amendments were:
-- in the case of local telephone carriers, only their affiliates or
other related companies, rather than the local telephone carriers
themselves, can now provide public long distance services; and
-- the establishment of all carriers' maximum market shares in the
domestic long distance market for a four-year period and in the
international long distance market for three years, each period
measured from the inception of the multicarrier dialing system.
Companies that carry traffic above these units will be subject to
substantial financial penalties and the Chilean Undersecretary of
Telecommunications may suspend their service.
The Chilean telecommunications law also requires providers of public
telephone services to conform to a multicarrier system in which end-users,
rather than local telephone carriers, will determine on a call-by-call or
contractual basis the long distance carrier they want to use. In addition, long
distance carriers are authorized to establish direct connections to end users
through their own networks.
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The Chilean telecommunications law provides for substantial fines, the
suspension of service and other penalties for violations of the multicarrier
dialing system. The routing of calls by a local telephone company to a long
distance carrier other than the carrier selected by the end user or the
obstruction or delay of an interconnection between the local telephone carrier
and any long distance carrier would constitute violations, and the local
telephone carrier may be required to indemnify the provider of long distance
services for any such violations.
COLOMBIA. The principal components of Colombia's regulation of
communications services include Decree 1990 issued in 1990, Law 142 enacted in
1994 and various other decrees issued by Colombian governmental authorities.
These laws and the governmental authorities that regulate the communications
industry constitute the legal and regulatory framework for providing services in
Colombia.
The Ministry of Communications regulates certain areas of the
communications sector, including the administration, regulation and control of
radioelectric spectrum and frequencies and the physical infrastructure in
Colombia. Law 142 was issued to develop policies and regulations related to
certain public services and includes the regulation of local and long distance
public switched fixed telephone services, both national and international. Law
142 created the Superintendency of Public Services and the Commission for the
Regulation of Telecommunications. The Superintendency oversees the management
and performance of utilities and has the power to impose sanctions for
non-compliance with regulations. The Commission performs the regulatory function
within the communications industry with the stated purpose of promoting
competition and improving efficiency and quality of service.
Colombian law also obligates all network operators to make their networks
available for interconnection with other networks.
PERU. The principal features of Peruvian regulation of communications
services include the General Telecommunications Law, the General Regulation to
the Telecommunications Law and the Regulation for the Organization for
Supervision of Private Investments in Telecommunications.
The Peruvian telecommunications law sets out the basic framework for the
provision and regulation of communications services, and has the stated
objective of providing a competitive market in communications. The law grants
the Peruvian government the ability to oversee communications services through
the Ministry of Transportation, Communications, Housing and Construction. The
Ministry has the authority to:
-- grant, renew and cancel concessions, authorizations, permits and
licenses;
-- approve communications policy;
-- manage the electric spectrum and approve the assignment of
frequencies; and
-- discontinue the rendering of value added services offered by
concessionaires when such services cause any damage or harm to the
public communications network.
EMPLOYEES
As of March 31, 2000, we had a total of 917 employees.
We believe that our future success depends in large part on our continued
ability to attract and retain highly skilled and qualified personnel. We believe
that we offer prospective employees competitive compensation and benefits as
well as the opportunity to work with advanced technology in a high-growth
company. However, we cannot assure you that we will be able to attract and
retain an adequate number of qualified employees to meet our hiring objectives.
As is the case throughout the countries where we operate, we also regularly use
the services of contract technicians for the installation and maintenance of our
network. We have no unionized employees and believe that our relations with our
employees are good.
LEGAL MATTERS
Neither we nor any of our subsidiaries is a party to any material legal
proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table lists the persons who serve as our directors and
executive officers, their ages and their positions.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Patricio E. Northland................ 45 Chairman of the Board, President and Chief Executive
Officer
John A. Haigh........................ 46 Director
Edward M. Dwyer...................... 44 Director
Timothy A. Murray.................... 43 Director
John C. Petrillo..................... 51 Director
Gary R. Weis......................... 53 Director
Carlos A. Andre...................... 38 Chief Executive Officer--Brazil
Thomas Canfield...................... 44 General Counsel and Secretary
Carlos Fernandez..................... 43 Chief Executive Officer--Chile
Carlos Ferrer........................ 35 Chief Executive Officer--Colombia
Jose Gandullia....................... 55 Chief Executive Officer--Peru
Rodrigo Garcia....................... 35 Vice President--Network Services
Edgardo J. Lertora................... 56 Vice President--Corporate Communications and Brand
Strategy
Marco A. Northland................... 42 Vice President--Product and Business Services
Jay A. Pierce........................ 41 Vice President--Sales and Customer Care
Jorge M. Rodriguez................... 31 Vice President--Corporate Operations
Alejandro Osvaldo Rossi.............. 39 Chief Executive Officer--Argentina
Marie Santana........................ 49 Vice President--Human Resources
Fernando Vicuna...................... 45 Chief Information Officer
</TABLE>
Each director will hold office until his or her successor has been duly
elected and qualified, or until his or her death, resignation or removal.
The following is biographical information for our directors and executive
officers:
Patricio E. Northland has been our Chairman of the board of directors and
Chief Executive Officer since the FirstCom merger. Mr. Northland has over
sixteen years of experience as an international communications executive and
entrepreneur. Mr. Northland was Chairman of the board of directors, President
and Chief Executive Officer of FirstCom from November 1996 until the FirstCom
merger. Born in Chile, Mr. Northland is a U.S. citizen. In 1991, Mr. Northland
founded AmericaTel corporation, a Miami-based international communications
carrier providing satellite-based voice, data and fax communications services to
corporate customers throughout Latin America. Prior to his involvement with
AmericaTel, Mr. Northland held key management positions with PanamSat and
IntelSat. In 1996, Mr. Northland sold his interest in AmericaTel to Entel.
John A. Haigh was named a director of AT&T Latin America in December 1999.
Since May 1999, Mr. Haigh has been President of the International Ventures
Organization for AT&T Corp., which includes AT&T Corp.'s entire portfolio of
international in-country ventures. Beginning in July 1996, when he first joined
AT&T Corp., Mr. Haigh was Vice President of Corporate Strategy and Business
Development. From 1991 through 1996, Mr. Haigh provided consulting services to
AT&T Corp. as a consultant at Mercer Management Consulting, where he had worked
since 1983, in areas such as corporate and communications services strategy.
Edward M. Dwyer was named a director of AT&T Latin America in May 2000. Mr.
Dwyer became Treasurer of AT&T Corp. in May 1997. He had been Chief Financial
Officer of AT&T Capital Corp. since November 1989.
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Timothy L. Murray was named a director of AT&T Latin America in May 2000.
Since February 2000, Mr. Murray has been a Senior Vice President, Business
Operations, of AT&T Corp. He previously was Vice President of AT&T Business
Network Services from December 1996 and Vice President of AT&T Corp., Middle
Market Sales starting in December 1994. Prior to that, he was a Marketing Vice
President of AT&T Corp.
John C. Petrillo was named a director of AT&T Latin America in June 2000.
Mr. Petrillo has held various positions with AT&T Corp. since 1993, most
recently as Executive Vice President of Corporate Strategy and Business
Development, in which capacity he is responsible for overall business strategy
and the development of AT&T Corp.'s online service and electronic messaging
businesses.
Gary R. Weis was named a director of AT&T Latin America in May 2000. Since
May 1999, he has been Senior Vice President of AT&T Business Services, Global
Operations. Prior to joining AT&T Corp., Mr. Weis was at IBM, where he was a
General Manager responsible for global services and network services since 1994.
Carlos A. Andre has been the chief executive officer of AT&T Latin
America--Brazil since May 2000. Previously, from June 1995, Mr. Andre was at
Oracle do Brasil Sistemas Ltda. where he started as a Sales Director and later
became Chief Executive Officer. In August 1992, he helped launch Brazilian
operations for Novell. Prior to joining Novell, Mr. Andre helped found Unilog, a
company that develops, sells and implements human resources, logistic and
administration software.
Thomas C. Canfield has been our General Counsel and Secretary since the
FirstCom merger. Mr. Canfield became General Counsel of FirstCom in May 2000.
Prior to joining FirstCom, Mr. Canfield was counsel in the New York office of
Debevoise & Plimpton where he practiced for nine years in the area of
international business transactions, particularly in Latin America.
Carlos Fernandez has been Chief Executive Officer of AT&T Latin
America--Chile since the FirstCom merger. Prior to the merger, he was chief
executive officer of FirstCom Chile S.A. since March 1998. Prior to joining
FirstCom, Mr. Fernandez had over seventeen years of experience as an
international communications executive with IBM Chile. From 1981 to 1997, Mr.
Fernandez held various positions, including, director of IBM Chile, corporate
and business affairs manager and commercial manager.
Carlos Ferrer has been Chief Executive Officer of AT&T Latin
America--Colombia since the FirstCom merger. Prior to the merger, he was Chief
Executive Officer--Colombia of FirstCom since August 1999. From August 1995 to
July 1999, Mr. Ferrer worked as Chief Operating Officer for Emtelco S.A. Prior
to joining Emtelco, Mr. Ferrer held key positions at Celsa and Empresas Publicas
de Medellin.
Jose Gandullia has been Chief Executive Officer of AT&T Latin America--Peru
since the FirstCom merger. Prior to the merger, he was Chief Executive Officer
of FirstCom--Peru since April 1999 and its Chief Financial Officer from October
1998 to April 1999. Prior to joining FirstCom, Mr. Gandullia served as General
Manager of Los Portales Consorcio Hotelero, S.A. From 1991 to 1997, he served as
Executive Director of Kong Corporate Group in Guatemala. Mr. Gandullia has 20
years of experience in international communications, having held management
positions in the United States, Venezuela, Mexico, Peru and Central America.
Rodrigo Garcia has been our Vice President of Network Services since the
FirstCom merger. Prior to the FirstCom merger, he was
Vice-President--Engineering of FirstCom and an Engineering and Development
Director of FirstCom Networks, S.A., a subsidiary of FirstCom Chile S.A. He was
a technical manager for Hewster Chile S.A., now known as FirstCom Networks S.A,
since 1992. Prior to joining FirstCom, Mr. Garcia served as telecommunications
advisor to the Department of Interior of Chile and network administrator for the
Presidency of the Republic of Chile.
Edgardo J. Lertora has been our Vice President of Corporate Communications
and Brand Strategy since the FirstCom merger. Mr. Lertora has over 25 years of
experience in sales, marketing, communications and public affairs throughout
Latin America, Asia and Africa. In 1992, Mr. Lertora joined AT&T Corp. as Public
Relations and Marketing Communications--Vice President for Latin America and
Africa. Prior to his joining AT&T Corp., Mr. Lertora held an executive
management position at DuPont.
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Marco A. Northland has been our Vice President of Product Marketing and
Business Development since the FirstCom merger. Prior to the FirstCom merger, he
was Vice-President of Product Marketing and Business Development of FirstCom
since June 1999. He previously was Vice-President--Internet Services and
Business Development and acting Chief Executive Officer of FirstCom's Colombian
operations. In 1997, Mr. Northland founded @Phone, S.A., a start up
telecommunications/Internet company based in Lima, Peru. Prior to founding
@Phone, Mr. Northland was Vice President of Marketing, Sales and Business
Development of AmericaTel from 1991. Mr. Northland has also held executive
positions with Panamsat and Hughes Network Systems. Mr. Marco A. Northland is
the brother of Mr. Patricio E. Northland.
Jay A. Pierce has been our Vice President of Sales and Customer Care since
the merger. Prior to the FirstCom merger, he was Senior Vice President of Sales
for FirstCom since March 2000. Prior to joining FirstCom, Mr. Pierce held
various positions at Johnson & Johnson Professional Group Latin America. He had
been a Vice President/General Manager there since 1998 and previously served as
a Managing Director.
Jorge M. Rodriguez has been our Vice President of Corporate Operations
since March 2000. From January 1999 to February 2000, Mr. Rodriguez was the
Revenue Integrity Director of AT&T Corp. Prior to that, he held various
management positions at AT&T Corp., where he worked for more than ten years,
including as Director of Business Planning and Operations from November 1996 to
January 1998 and National Sales and Marketing Manager from October 1995 to
October 1996.
Alejandro O. Rossi is Chief Executive Officer of AT&T Argentina S.A.
(formerly named Keytech LD). He had been Chief Executive Officer of Keytech LD
prior to its acquisition by AT&T Latin America. Prior to joining Keytech LD, Mr.
Rossi was an assistant General Manager at ING Barings from March 1996 to April
1998. From October 1993 to February 1996, he was a Vice President, Investment
Banking at Goldman Sachs.
Marie Santana has been our Vice President of Human Resources since the
FirstCom merger. Prior to the FirstCom merger, she was Vice President of Human
Resources for International Operations for AT&T Corp. since July 1999. From
April 1996 to 1999, she served as Vice-President for International Human
Resources for the Caribbean, Latin America, Brazil, Mexico, Canada and
U.S.-based international employees for AT&T Corp. Prior to that, after having
held various other human resources management positions with AT&T Corp., Ms.
Santana was Director of Global Human Resources for AT&T Corp. in Mexico from
December 1994 to April 1996.
Fernando Vicuna has been our Chief Information Officer since the FirstCom
merger. Prior to the FirstCom merger, he was Chief Information Officer at
FirstCom since January 2000. Prior to joining FirstCom, Mr. Vicuna had served as
Sales Manager and Technology Advisor to management at Telco since 1994.
BOARD COMMITTEES
The three disinterested directors on AT&T Latin America's board will also
serve on an audit committee and designated board members will also serve on a
compensation committee.
EMPLOYMENT AGREEMENTS
Mr. Northland executed a five-year employment agreement (automatically
renewable thereafter in one year increments) with us that became effective upon
the completion of the FirstCom merger. Under this agreement, Mr. Northland is
entitled to receive:
-- an annual base salary of $510,000;
-- an annual performance bonus that may range from 0% to 200% of base
salary (with a target bonus of 100% of base salary), that will be
determined based upon the satisfaction of performance criteria to be
established by the compensation committee of our board of directors;
and
-- a retention bonus of $500,000 payable on each six-month period after
the closing date up to the third anniversary of Mr. Northland's
initial employment with us.
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The employment agreement also entitles Mr. Northland to participate in a
deferred compensation plan to be adopted by us and in employee benefit plans and
programs that are no less favorable than the plans and programs FirstCom
currently provides.
If Mr. Northland's employment is terminated by us other than for "cause,"
or if Mr. Northland terminates his employment for "good reason," he will be
entitled to severance of two times his annual base salary and annual bonus as
well as a pro rata annual bonus for the year in which his employment terminated.
In addition his retention bonus will be immediately payable and all options and
restricted shares will vest.
Pursuant to the employment agreement, we will indemnify Mr. Northland for
certain proceedings brought against him by reason of the fact that he is or was
our director, officer or employee or served as such (at the request of us) with
respect to another company. In addition, Mr. Northland agreed not to compete
against us during his employment and thereafter for two years.
If we undergo a change of control, the retention bonus will be immediately
payable and the options and restricted shares will immediately vest in full. If
the benefits to which Mr. Northland is entitled are subject to an excise tax
(pursuant to section 4999 of the Internal Revenue Code), and the benefits
subject to the excise tax exceed 110% of the amount of benefits that could be
paid that would not give rise to the excise tax, then he will be entitled to a
"gross-up" payment in an amount sufficient to make him whole after the
imposition of the excise tax.
COMPENSATION OF NAMED EXECUTIVE OFFICERS
On December 31, 1999, we had officers but no employees. None of our
officers received any compensation for services rendered to us. We had no
retirement, incentive, bonus, stock-based or other employee benefit plans. On
December 31, 1999, no person who will serve as a director or an executive
officer had received any compensation for services rendered to us.
LONG-TERM INCENTIVE PLAN
Following the FirstCom merger, we expect that our board of directors will
adopt and subsequently submit to its stockholders for their approval a long-term
incentive plan. The purpose of the plan will be to encourage eligible
participants to acquire a proprietary and vested interest in our growth and, to
generate an increased incentive to contribute to our future success and
prosperity through meaningful ownership of our Class A common stock. This should
enhance our value for the benefit of all stockholders, and enhance our ability
to attract and retain individuals of exceptional managerial talent. The terms of
the plan have not been finalized but material provisions of the intended plan
are summarized below.
TYPES OF AWARDS. The plan will provide for the award of:
-- stock options, including incentive stock options within the meaning
of Section 422 of the Internal Revenue Code;
-- stock appreciation rights;
-- restricted stock and restricted units;
-- performance stock and performance units;
-- deferred stock units;
-- cash performance bonuses; and
-- other awards as the compensation committee of the board of directors
may from time to time determine.
ELIGIBILITY. Any of our directors, officers or employees or any of our
affiliates, including any prospective employee, and any consultant or contractor
to us or any of our affiliates selected by the compensation committee will be
eligible for awards. The number of participants in the plan will vary from year
to year.
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SHARES SUBJECT TO THE LONG TERM INCENTIVE PLAN. Initially, approximately
15% of our total outstanding shares of Class A common stock upon completion of
the FirstCom merger will be authorized to be issued under the plan. On each
January 1st of the fifth year through the tenth year in which the plan is in
effect, the number of shares authorized to be issued under the plan will be
increased by 3% of the total outstanding shares on December 31 of the prior
year. If shares subject to an award under the plan are no longer subject to that
award as a result of forfeiture or if an award otherwise terminates without a
payment being made to the participant in the form of Class A common stock, the
shares will again be available for future award under the plan. If a participant
tenders shares to exercise any award, or if we withhold shares to pay
withholding taxes, only the net number of shares issued to the participant will
be counted against the number of shares reserved for awards under the plan. If
there is a change in the number or kind of outstanding shares of Class A common
stock by reason of any recapitalization, reorganization, merger, consolidation,
stock split or any similar change affecting the Class A common stock, the
compensation committee will make appropriate adjustments to the type and number
of shares covered by awards then outstanding under the plan, the exercise or
reference price of outstanding awards and the shares that remain available for
award under the plan.
LIMITATIONS ON AWARDS. The maximum number of shares of our Class A common
stock with respect to which we may grant awards to any one person in a calendar
year will be 3,000,000. The maximum cash award that we may award to any
individual in a calendar year will be $2,000,000.
ADMINISTRATION. The compensation committee will administer the plan. It
will be authorized to delegate its authority except to the extent that it
relates to the compensation of our chief executive officer, our four other most
highly compensated executive officers or any other individual whose compensation
the board of directors or compensation committee believes may become subject to
Section 162(m) of the Internal Revenue Code. The compensation committee will
have the authority to construe, interpret and implement the plan and any
agreements evidencing any awards under the plan, and to prescribe, amend and
rescind rules and regulations relating to the plan. The determination of the
compensation committee on all matters relating to the plan or any award
agreement will be final and binding.
STOCK OPTIONS. The compensation committee will be authorized to grant
options to purchase shares of common stock that are either "qualified," which
includes those awards that satisfy the requirements of Section 422 of the
Internal Revenue Code for incentive stock options, or "nonqualified," which
includes those awards that are not intended to satisfy the requirements of
Section 422 of the Internal Revenue Code. These awards will be subject to such
terms and conditions, if any, as the compensation committee deems appropriate.
Under the terms of the intended plan, the exercise price of the options will,
unless the compensation committee determines otherwise, not be less than the
fair market value of the common stock at the time of grant. The options will
generally have a term of ten years, unless the compensation committee specifies
a shorter term, and will vest and become exercisable at such times and subject
to such conditions as the compensation committee will determine.
We may authorize the compensation committee to permit a participant to
deliver shares of Class A common stock to exercise an option. The compensation
committee may provide that, if a participant does so when the market value of
the common stock exceeds the exercise price of the option, he or she will be
automatically granted new "reload options" for the number of shares delivered to
exercise the option. Reload options will be subject to the same terms and
conditions as the related option except that the exercise price will be the fair
market value on the date the reload option is granted and such reload options
will not be exercisable for six months.
STOCK APPRECIATION RIGHTS. The compensation committee will be authorized
to grant stock appreciation rights either alone or in addition to other awards
granted under the intended plan. These awards will be subject to such terms and
conditions, if any, as the compensation committee deems appropriate. Under the
terms of the intended plan, the reference price of a stock appreciation right
will, unless the compensation committee determines otherwise, not be less than
the fair market value of the stock on the date of grant. Upon exercise of a
stock appreciation right, a participant will receive an amount in cash, its
equivalent or stock that is equal to the fair market value on the date of
exercise over the reference price. Stock appreciation rights will generally have
a term of ten years, unless the compensation committee specifies a shorter term,
and will vest and
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become exercisable at such times and subject to such conditions as the
compensation committee will determine.
RESTRICTED STOCK AND RESTRICTED UNITS. The compensation committee will be
authorized to award restricted stock and restricted units. For purposes of the
intended plan, restricted stock will be an award of common stock and a
restricted unit will be a contractual right to receive common stock or cash
based on the fair market value of common stock. These awards will be subject to
such terms and conditions, if any, as the compensation committee deems
appropriate. Restricted stock and restricted units will generally become vested
and nonforfeitable and the restriction period will lapse at such times and
subject to such conditions as the compensation committee will determine.
PERFORMANCE STOCK AND PERFORMANCE UNITS. The compensation committee will
also be authorized to award performance stock and performance units. For
purposes of the intended plan, performance stock will be an award of common
stock and a performance unit will be a contractual right to receive common stock
or cash based on fair market value of common stock. These awards will be
contingent upon the attainment, in whole or in part, of certain performance
objectives over a period to be determined by the compensation committee. The
performance objectives may include cash generation targets, profits, revenue and
market share targets, profitability targets as measured through return ratios,
shareholder returns and economic value added or other similar measure of profit.
The performance objectives may be measured on an absolute basis versus
predetermined targets, a relative basis versus peer companies or an external
index. With regard to a particular performance period, the compensation
committee will have the discretion, subject to the plan's terms, to determine
the terms and conditions of awards, including the performance objectives to be
achieved during the performance measurement period and the determination of
whether and to what degree the specified objectives have been attained.
DEFERRED STOCK. The compensation committee will also be authorized to
award deferred stock units, which confer upon a participant the right to receive
shares of common stock at the end of a specified deferral period. In addition, a
participant in the plan may elect to receive deferred stock units in lieu of
annual compensation and/or annual bonus, and the committee may grant to each
individual who makes such an election supplemental deferred stock units. The
committee will determine when deferred stock units will vest.
CASH PERFORMANCE BONUS. The compensation committee will also be authorized
to award short-term or long-term cash performance bonuses to our chief executive
officer, our four other most highly compensated executive officers or any other
individual whose compensation the board of directors or compensation committee
believes may become subject to Section 162(m) of the Internal Revenue Code.
These awards may be contingent upon the attainment, in whole or in part, of
certain performance objectives over a period to be determined by the
compensation committee. The performance objectives may include cash generation
targets, profits, revenue and market share targets, profitability targets as
measured through return ratios, shareholder returns and economic value added or
similar measure of economic profit. The performance objectives may be measured
on an absolute basis versus predetermined targets, a relative basis versus peer
companies or an external index. With regard to a particular performance period,
the compensation committee will have the discretion, subject to the plan's
terms, to determine the terms and conditions of awards, including the
performance objectives to be achieved during the performance measurement period
and the determination of whether and to what degree the specified objectives
have been attained. If a participant's employment terminates because of death,
disability, early retirement (with the compensation committee's consent) or
normal retirement, he or she will be entitled to a prorated portion of the
annual bonus for that part of the year that he or she was still employed by the
company.
DIVIDEND EQUIVALENTS. The compensation committee will determine whether
participants will be entitled to receive either currently or at a future date,
dividends or other distributions paid with respect to awards and, if and to the
extent determined by the compensation committee, either will be credited with or
receive currently an amount equal to dividends paid with respect to the
corresponding number of shares covered by awards.
NONTRANSFERABILITY OF AWARDS. Awards under the plan will generally not be
assignable or transferable other than by will or by the laws of descent and
distribution, and all awards and rights will be exercisable
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during the life of the participant only by the participant or his or her legal
representative. The compensation committee may, upon such terms and conditions
as it determines appropriate, permit transfers to the participant's family
members or to entities of which the participant or his or her family members are
the sole beneficiaries or owners.
STATUS OF PARTICIPANTS. The participants in the plan will be our unsecured
general creditors and any of our affiliates. Unless otherwise provided in an
award agreement, a participant will have no rights as a stockholder with respect
to any shares covered by any award until the underlying shares are delivered. An
award will not confer on a participant any right to continued employment. Unless
otherwise required by law or determined by the compensation committee, awards
under the plan will not be taken into account for purposes of any other
compensation or benefit plan or arrangement of us and any of our affiliates.
TAX WITHHOLDING. We and any of our affiliates will be entitled to withhold
from any payment any required withholding or other tax, and may require that the
participant provide sufficient funds to us and any of our affiliates to satisfy
any required withholding tax obligations before any delivery of shares or other
payment to the participant. The compensation committee may permit a participant
to satisfy any required withholding tax obligations by delivering shares of
common stock previously owned by the participant or by withholding a number of
shares of common stock otherwise deliverable to the participant, in each case
having a fair market value at the time equal to the amount of the required
withholding taxes, and upon such other terms and conditions as the compensation
committee determines appropriate.
TERM AND AMENDMENT. The intended plan will have a ten year term. The board
of directors or the compensation committee will be authorized to amend, suspend
or terminate the plan. The expiration of the term of the plan, or any amendment,
suspension or termination will not adversely affect any outstanding award held
by a participant without the consent of the participant.
FEDERAL INCOME TAX CONSEQUENCES. The following is a brief description of
the material U.S. federal income tax consequences that may arise with respect to
awards under the intended plan.
The grant of an option will give rise to no tax consequences for the
participant or for us or any of our affiliates. Upon exercising 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 we and any of
our affiliates 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 we and any of our affiliates will not be entitled to
any tax deduction with respect to an incentive stock option if the participant
holds the shares for the applicable periods specified in the Internal Revenue
Code.
With respect to other awards, upon the payment of cash or the issuance of
shares or other property that is either not restricted as to transferability or
not subject to a substantial risk of forfeiture, the participant will generally
recognize ordinary income equal to the cash or the fair market value of shares
or other property delivered. We and any of our affiliates will be entitled to a
deduction in an amount equal to the ordinary income recognized by the
participant.
CHANGE OF CONTROL. Under the terms of the intended plan, if there is a
change of control, all awards that are not then vested or for which the
restrictions have not yet lapsed will, unless otherwise determined by the
compensation committee, either vest and any restrictions or limitations will
lapse or be assumed or replaced by the acquiring entity. If the awards are
assumed by the acquiring entity and the participant's employment is terminated
within 18 months after the change of control, the awards will immediately vest
and any restrictions or limitations will lapse. For these purposes, a "change of
control" means the occurrence of any of the following events:
-- the members of our board of directors at the beginning of any two
year period, referred to as incumbent directors, cease for any reason
other than death or disability to constitute at least a majority of
the board of directors, provided that any director whose election, or
nomination for election by the company's stockholders, was approved
by a vote of at least a majority of the members of the board of
directors then still in office who were Incumbent Directors, other
than as a result of a
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proxy contest, or any agreement arising out of an actual or
threatened proxy contest, will be treated as an Incumbent Director;
-- any person, excluding AT&T Corp., us, any of our or their affiliates
or any of our or their employee benefit plans, becomes the
"beneficial owner" (as defined in Rule 13(d)(3) or 14(d)(2) under the
Securities Exchange Act) of our securities representing more than the
greater of 35% of the combined voting power of our company's then
outstanding securities or the percentage share then held by AT&T
Corp. or its affiliates; or
-- provided such transaction is consummated, our stockholders approve a
definitive agreement for the merger or other business combination of
us with or into another corporation (other than AT&T Corp., or any of
its affiliates), or the sale or other disposition of all or
substantially all of our assets to any other entity (other than AT&T
Corp. or any of its affiliates), a majority of the directors of which
were not our directors immediately prior to the merger and in which
our stockholders immediately prior to the effective date of such
merger own a percentage of the voting power in such corporation that
is less than one-half of the percentage of the voting power they
owned in us immediately prior to such transaction.
STOCKHOLDER APPROVAL. AT&T Corp. informed us that it will vote to approve
the long-term incentive plan.
As of July 31, 2000, we had agreed to grant options to purchase
approximately 1,417,500 shares of our Class A common stock under the long-term
incentive plan to our current and future employees and those of our
subsidiaries.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
REGIONAL VEHICLE AGREEMENT WITH AT&T CORP.
We entered into a "regional vehicle agreement" with AT&T Corp. at the time
of the FirstCom merger. The regional vehicle agreement is an exhibit to the
registration statement of which this prospectus is a part. This section
describes the material terms of the regional vehicle agreement and related
provisions of our certificate of incorporation.
Purpose The parties to the FirstCom merger agreement
contemplate that we will serve as AT&T Corp.'s
strategic vehicle for in-country investments in our
region to provide high-speed broadband connections
and designated communications services to business
customers, to the extent set forth in the regional
vehicle agreement. The parties defined the overall
scope and nature of our operations in the regional
vehicle agreement as well as in our certificate of
incorporation.
Scope The regional vehicle agreement and the certificate
of incorporation define:
-- where in Latin America we may operate;
-- what communications services we may provide
and in some cases, to whom those services may
be provided; and
-- the conditions under which AT&T Corp. and its
affiliates may compete with us.
Other Commercial
Arrangements The regional vehicle agreement also addresses
commercial arrangements between AT&T Corp. and its
affiliates and ventures, on the one hand, and
ourselves, on the other hand. These affiliates and
ventures include AT&T Global Network Services and
the Concert global venture between AT&T Corp. and
British Telecommunications plc.
Term The regional vehicle agreement has an indefinite
term and in general will terminate only by mutual
agreement of ourselves and AT&T Corp. However, AT&T
Corp. may terminate the regional vehicle agreement
at any time after the termination of the service
mark license agreement with AT&T Corp.
OUR REGION. Our certificate of incorporation permits us to operate only in
the countries of South America and the Caribbean, plus Panama but excluding
Cuba. In addition, the regional vehicle agreement restricts us from operating in
Venezuela.
OUR SERVICES. Our certificate of incorporation limits our business to the
provision of telecommunications services. The regional vehicle agreement and our
certificate of incorporation permit us to provide the services described in this
prospectus under "Business--Growth Strategy" and "Business--AT&T Latin America".
The following is a description of the services we are permitted to provide
as well as limitations on our services:
PERMITTED SERVICES. We may provide the following services:
-- long distance;
-- 1-800/toll-free;
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-- local voice delivered through fixed lines;
-- Internet access;
-- e-commerce or electronic commerce;
-- fixed wireless for connection to networks;
-- video conferencing services;
-- web hosting, which involves providing or managing equipment to
operate an Internet web site;
-- voice over Internet Protocol, which involves the transmission of
voice over an inter-networking standard that enables communication
across the Internet regardless of the hardware or software used;
-- AT&T calling card services, and AT&T Direct(R) services, which allow
callers to access AT&T networks from points throughout the world;
-- dedicated line services, which involve the leasing of network lines
expressly for connecting two or more users. These dedicated lines
establish a permanent circuit dedicated solely to the use of the
particular customer;
-- switched digital services, which allow users to establish end-to-end
digital connections over shared facilities on an as-needed basis,
similar in concept to making a telephone call; and
-- virtual network services, which involve the connection of customer
networks to an operator's network to create an overall capability for
voice and data services that acts functionally like a network owned
or operated exclusively by that customer.
We may also provide data services using the following protocols for
transmitting data over a communications network:
-- packet X.25, an older protocol designed for transmitting data files
in pieces or "packets" over analog communications networks that were
originally designed for voice traffic;
-- frame relay, a newer protocol designed for transmission of data over
digital networks in packets of varying length; and
-- asynchronous transfer mode, an even newer protocol, designed for
transmitting data in fixed-size packets or "cells" to enable networks
to accommodate many different transmission systems and permit
transmission of a mix of voice, data and video.
PROHIBITED SERVICES. The regional vehicle agreement limits our ability to
provide some services. We may not provide:
-- mobile wireless/personal communications services;
-- cable telephone or cable services, which include telephone, data and
video services, as well as Internet access, delivered through
networks typically used to deliver cable television; or
-- cross-border transport services between two or more countries to
international carriers and select services involving the arrangement,
management and delivery of termination of international
communications traffic.
In addition, we may not provide solutions services, such as outsourcing
professional services and systems integration. Outsourcing professional services
include:
-- providing professional services relating to network architecture
validation, implementation, operations and life cycle management,
which include confirming that a network's design works efficiently,
installing and testing network equipment and managing the need for
change to the network;
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-- business process consulting and migration planning and
implementation, which include planning to ensure that a customer's
network properly supports the customer's objectives and planning for
and implementing changes to that network; and
-- ownership and acquisition of assets from and on behalf of customers
related to providing outsourcing professional services.
Systems integration involves:
-- advising clients how best to use information technology to achieve
their ends and to re-engineer business processes to make
organizations work more effectively;
-- specifying, designing or building integrated business systems for or
on behalf of clients;
-- managing the change to those systems for or on behalf of clients;
-- supporting, maintaining, enhancing, operating or further developing
those systems for or on behalf of clients, providing program or
project management and integration of customer-defined individual
customer solutions; and
-- providing other related services required or requested by clients in
connection with the services listed above.
Systems integration services do not include the underlying capability to
provide services.
MANAGED NETWORK SERVICES. Although we may not provide solutions services,
we may provide managed network services to companies other than multi-national
corporations reserved for Concert by AT&T Corp. and British Telecom. Managed
network services include providing:
-- services to a customer that consist solely of providing and
maintaining the elements of a customer's wide area communications
network, which is a network connecting two or more customer sites,
each of which may operate an internal local area network;
-- services to the extent relating to a customer's wide area
communications network, directly related planning, design,
installation, maintenance and ongoing support functions; and
-- equipment on the customers' premises at the interface between a wide
area communications network and the remainder of the customer's
networking environment insofar as that equipment facilitates:
-- the maintenance of the customer's wide area communication
services;
-- the recording of performance data with respect to the customer's
wide area communications services;
-- the provisioning of new wide area communications services to the
customer or changes in the parameters of these services; or
-- the integration of multiple wide area communications services,
excluding in the case of the first two items listed in this
paragraph any such service or equipment that materially extends
services beyond the interface described above further into the
customer's non-wide communications network.
We do not believe that this restriction on our providing managed network
services to multinational customers reserved for Concert will materially affect
our ability to implement our growth strategy. We plan to generate revenues by
supplying our services to Concert for resale to those customers in connection
with Concert's provision of managed network services to its customers.
To the extent we provide services under the AT&T Latin America brand or
other AT&T Corp. brands, there are service limitations in the service mark
license agreement with AT&T Corp., which are described below.
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COMPETITION BY AT&T CORP. The regional vehicle agreement limits the
ability of AT&T Corp. and its subsidiaries to compete with us. It also places
obligations on AT&T Corp. if it acquires our competitors with specific
characteristics, as described below.
The limitations on competition and the obligations of AT&T Corp. relating
to the acquisition of competitors discussed below do not apply to Concert or
companies related to the AT&T Global Network Services companies, AT&T Corp.'s
Liberty Media group or AT&T Corp.'s acquisition of MediaOne or to any person in
which any of those companies has an equity interest.
In addition, restrictions relating to competition with us do not apply to:
-- services using assets owned or controlled by the AT&T Global Network
Services companies; or
-- services provided by AT&T Corp. or its subsidiaries in connection
with providing managed network services or outsourcing professional
services.
Outsourcing professional services include the provision of professional services
relating to network architecture validation, implementation, operations and life
cycle management. These services include business process consulting, migration
planning and implementation, but not managed network services. Outsourcing
professional services also include the ownership and acquisition of assets from
and on behalf of customers related to the provision of outsourcing professional
services.
COMPETITIVE SERVICES. Except as described above, AT&T Corp. and its
existing subsidiaries may not offer customers a number of services in our region
unless they are obtained from us. These services include:
-- long distance;
-- 1-800/toll-free;
-- local voice delivered through fixed lines;
-- Internet access;
-- dedicated line services, which involve the leasing of network lines
expressly for connecting two or more users. These dedicated lines
establish a permanent circuit dedicated solely to the use of the
particular customer;
-- switched digital services, which allow users to establish end-to-end
digital connections over shared facilities on an as-needed basis,
similar in concept to making a telephone call; and
-- virtual network services, which involve a connection of customer
networks to an operator's network to create an overall capability for
voice and data services that acts functionally like a network owned
or operated exclusively by that customer.
These services also include data services using the following protocols for
transmitting data over a communications network:
-- packet X.25, an older protocol designed for transmitting data files
in pieces or "packets" over analog communications networks that were
originally designed for voice traffic;
-- frame relay, a newer protocol designed for transmission of data over
digital in packets of varying length; and
-- asynchronous transfer mode, an even newer protocol designed for
transmission of data in fixed-size packets or "cells" that enable
networks to accommodate many different transmission systems and
permit transmission of a mix of voice, data and video.
REGIONAL ACQUISITIONS. AT&T Corp. and its subsidiaries may acquire our
competitors. However, except as described below, if that competitor earned more
than half of its revenues in the previous fiscal year in our
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region of operations from the services described under the heading "Competitive
Services" on page 82, AT&T Corp. or its relevant subsidiary would be required
either to:
-- cause that competitor to cease offering those services; or
-- offer to sell to us for cash at fair market value the portion of the
competitor's business that primarily relates to those services in our
region of operations.
That offer must be made within either eighteen or thirty months of the
acquisition of the competitor, depending on how much of the competitor's
business is derived from AT&T Latin America's region. No offer to purchase is
required if it would:
-- violate any law or a pre-existing contractual obligation of the
competitor;
-- violate a contract that is binding on any material assets of the
competitor;
-- result in a tax on an AT&T Corp. entity that is material in relation
to the price paid for that portion of the business; or
-- in the good faith determination of the board of directors of the
relevant AT&T Corp. entity, violate its fiduciary duties to minority
shareholders of the relevant company.
If we do not accept such an offer for a competitive business, the acquired
competitor may compete with us.
OUR RELATIONSHIP WITH CONCERT AND RELATED RESTRICTIONS ON OUR BUSINESS
The regional vehicle agreement outlines some of the ways the parties expect
us to interact with AT&T Corp.'s Concert global venture with British
Telecommunications. We intend to supply services to Concert and Concert's
customers and to distribute Concert's services to our own customers.
The Concert global venture focuses on cross-border transport of
communications services to large business customers and to other carriers. We
believe that our business and Concert's business complement one another, because
we will focus on providing services within a particular country, rather than
providing services between countries.
We plan to offer customers a portfolio of communications services that meet
their end-to-end needs, including cross-border services. However, we will
generally not provide those cross-border services over our own networks.
Instead, we will purchase the cross-border components of the services we offer
customers from other providers, such as Concert. The regional vehicle agreement
also contemplates the following arrangements:
Supplying Services to
Concert We expect to be a preferred supplier of our
in-country communications services to Concert in
accordance with the agreements between AT&T Corp.
and British Telecommunications governing the
Concert joint venture. We are currently discussing
with Concert the nature and extent of this
preferred supplier relationship.
Distributing Concert
Services AT&T Corp. will request that Concert appoint us as
a distributor of Concert's services in our region.
The regional vehicle agreement requires that we
purchase from Concert our requirements for select
services involving the arrangement, management and
delivery of termination of international
communications traffic, if Concert provides those
services on commercially reasonable terms. We must
also purchase from Concert select communications
services between or among two or more countries
that are provided or targeted to businesses and to
their employees as such, on commercially reasonable
terms. We are currently discussing with Concert the
nature and extent of these purchasing arrangements.
RESTRICTIONS ON OUR BUSINESS RELATED TO CONCERT. Additional restrictions
on our business would apply if we and our subsidiaries receive more than an
aggregate of $150 million revenues in any year from providing
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services over cross-border networks in which we have an equity interest. The
maximum revenue figure represents an amount of this type of revenues
significantly higher than our growth strategy contemplates to generate from
these services. That is because we do not expect that the cross-border networks
in which we will have an equity interest will be material.
The additional restrictions that would be placed on us if our cross-border
revenues exceed $150 million would prohibit us from offering, selling or
distributing to multinational corporations reserved for Concert by AT&T Corp.
and British Telecommunications, except through Concert, communication services,
which consist of:
-- those services and applications, including enhanced services and
applications, that involve the transmission of voice, data, sound,
music, still and moving image or video and other elements by fixed
media, or radio or other wave signal;
-- any similar or substitute service available or offered from time to
time; and
-- the business of developing, designing or offering content-based
applications.
The additional restrictions would also prohibit us from:
-- offering, distributing or providing to any customers select
communications services between countries that are provided or
targeted to businesses and to their employees in their capacity as
employees, except through Concert; and
-- owning, operating, leasing or managing facilities predominantly used
to provide services between or among two or more countries.
COMMERCIAL ARRANGEMENTS WITH AT&T GLOBAL NETWORK SERVICES AND AT&T CORP.
The regional vehicle agreement contemplates the following arrangements with
AT&T Global Network Services:
Supplying Services to the
AT&T
Global Network Services
Companies We will be a preferred supplier of our services to
the AT&T Global Network Services companies.
Preferred supplier means that the AT&T Global
Network Services companies will purchase services
from us in preference to other parties that are not
preferred suppliers of the AT&T Global Network
Services companies. We must, however, be able to
provide the services on terms and conditions and
standards at least as favorable regarding price,
quality and service as the AT&T Global Network
Services companies could obtain in an arm's length
transaction.
Distributing Services of
the
AT&T Global Network
Services
Companies Promptly after the merger, AT&T Corp. will cause
the appropriate AT&T Global Network Services
companies to discuss possible arrangements for us
to distribute their services in our region. Except
as described below, we will be an exclusive
distributor of AT&T Global Network Services in at
least one country in our region. However, as a
distributor we must be able to meet the performance
and service level requirements of AT&T Global
Network Services. Any distribution arrangements may
not affect the ability of (1) any person to comply
with obligations under agreements relating to AT&T
Corp.'s purchase of the global network from IBM or
(2) any other AT&T Corp. affiliate to:
-- distribute AT&T Global Network Services
directly to customers in our region;
-- have its employees market or sell AT&T Global
Network Services to
-- customers in our region; or
-- appoint remarketers or global value added
resellers of AT&T Global Network Services
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POSSIBLE INTEGRATION OF OPERATIONS. We recently entered into a non-binding
memorandum of understanding with AT&T Corp. and FirstCom relating to possible
collaboration among ourselves, AT&T Global Network Services--Latin America and
AT&T Corp.'s Solutions division in Latin America. Under the memorandum of
understanding, the parties have formed a collaboration committee. The
collaboration committee will consider the desirability of AT&T Global Network
Services -- Latin America and other AT&T Corp. subsidiaries transferring assets,
contracts and licenses in our region to us. The collaboration committee also
will consider bringing over AT&T Global Network Services -- Latin America
personnel to us. It also will consider the possibility of management services
arrangements and supply and other commercial contracts among the companies
relating to any transferred assets or contracts.
No agreement on any of these matters has been reached. Any transactions
would be subject to the negotiation of definitive agreements, approval by the
relevant boards of directors, including ours, and receipt of governmental or
regulatory approvals.
SUPPLYING SERVICES TO AT&T CORP. AND ITS OTHER SUBSIDIARIES. We will be a
preferred supplier of the services described under the heading "Competitive
Services" on page 82 in our region to AT&T Corp. and its wholly owned
subsidiaries, except to the extent those companies are required to purchase
services from Concert. Preferred supplier means that the purchaser will purchase
the relevant services from us instead of other parties that are not their
preferred suppliers. We must, however, be able to provide the services on terms
and conditions and standards at least as favorable regarding price, quality and
service as the particular AT&T Corp. entity could obtain in an arm's length
transaction.
SERVICE MARK LICENSE AGREEMENT WITH AT&T CORP.
AT&T Corp. has entered into a service mark license agreement with us that
will become effective when the merger is completed. The form of the service mark
license agreement is an exhibit to the registration statement of which this
prospectus forms a part.
SERVICE MARKS. AT&T Corp. will license service marks, including "AT&T" and
the AT&T with a fanciful globe design mark, to us for our use in the provision
of our services in our region. A list of these service marks is attached to the
service mark license agreement. We may also use the "AT&T" mark as part of our
trade and corporate names so long as at least half of the licensed
services--namely, those grossing the highest revenue--meet service
specifications provided by AT&T Corp. We may sublicense the marks to entities we
control that meet service specifications and assume all our obligations under
the service mark license agreement other than the obligation to pay a brand fee.
We may not use any mark other than a mark licensed by AT&T Corp. for the
services described under the heading "Services" above without AT&T Corp.'s
consent.
BRAND FEE. During the term of the service mark license agreement, we will
pay a fee to AT&T Corp. every six months equal to the greater of $2.5 million
and a designated percentage of our gross revenues. Initially the designated
percentage of gross revenues will be 4%. This percentage will decrease to 3.25%
in the third year of the initial term and to 2.5% in the final two years of the
initial term. AT&T Corp. has agreed to spend this fee to monitor use of the
licensed marks by us in our region and to provide a communications director and
other staff employed by AT&T Corp. who will manage and monitor the licensed
marks in conjunction with one of our officers.
TERM; TERMINATION. The initial term of the license will be for five years
from the date of completion of the merger. The agreement will automatically
renew for an additional five years if we are not in material default or breach
of the license agreement. AT&T Corp. may terminate the license prior to the end
of its term if AT&T Corp. no longer owns shares having voting control of our
company or if we misuse the marks or otherwise materially breach our obligations
under the service mark license agreement and are not able to correct the breach
in a timely fashion.
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CREDIT FACILITY
A subsidiary of AT&T Corp. has provided a revolving credit facility of up
to $100 million principal amount to us having the following material terms:
-- an annual interest rate equal to the 90-day London Inter-Bank Offered
Rate, or LIBOR, plus 3.75%, payable quarterly;
-- mandatory prepayment by the borrower out of any proceeds from
issuances of either debt or equity in the capital markets or through
bank financings;
-- final maturity two years after closing of the FirstCom merger;
-- restrictions on permitted capital expenditures, debt, liens and
disposal of assets by the borrower; and
-- at the AT&T Corp. subsidiary's request, security in shares of our
operating subsidiaries and their assets.
OUR SHAREHOLDERS' AGREEMENT WITH SL PARTICIPACOES
We are party to a shareholders' agreement with SL Participacoes, an
affiliate of Promon, which owns 10% of our currently outstanding capital stock,
in the form of Class A Common shares. The shareholders' agreement includes the
following terms:
REGISTRATION RIGHTS. SL Participacoes may require us on one occasion to
register the shares of Class A common stock owned by SL Participacoes and its
permitted transferees after the completion of this offering. SL Participacoes
and its permitted transferees also have unlimited "piggyback" registration
rights, permitting them to include their Class A shares in registration
statements filed by us. These "piggyback" registration rights do not apply in
connection with this offering or the offering of other securities solely for our
account, a business combination transaction, issuances under employee benefit
plans or exchange offer or an offer solely to existing stockholders or
employees. We must pay the costs associated with all of these registrations. The
exercise of these registration rights is subject to notice requirements, timing
restrictions and volume limitations which may be imposed by the underwriters of
an offering.
During the 60-day period beginning December 30, 2001, SL Participacoes and
its permitted transferees that are affiliates of Promon may require AT&T Corp.
or its designee to purchase the Class A shares purchased by SL Participacoes in
December 1999 at a price per share equal to the original purchase price paid,
adjusted for stock splits, stock dividends, recapitalizations and similar
transactions, plus accrued interest at an interest rate equal to the 12-month
London Inter-Bank Offered Rate.
OUR SHAREHOLDERS' AGREEMENT WITH FORMER AT&T ARGENTINA SHAREHOLDERS
We entered into a shareholders' agreement with the former shareholders of
AT&T Argentina (formerly named Keytech LD S.A.) in connection with the
acquisition of AT&T Argentina. That shareholders' agreement includes the
following terms:
REGISTRATION RIGHTS. Under the shareholders agreement, the former AT&T
Argentina shareholders may require us on one occasion to register the shares of
Class A common stock owned by the former shareholders of AT&T Argentina and
their permitted transferees after the completion of this offering. Those
shareholders and their respective permitted transferees will also have unlimited
"piggyback" registration rights, permitting them to include their Class A shares
in registration statements filed by us. These "piggyback" rights do not apply to
this offering or to any other offering of securities solely for our account, a
business combination transaction, issuances under employee benefit plans or
exchange offer or an offer solely to existing stockholders or employees. We must
pay the costs associated with all of these registrations. The exercise of these
registration rights is subject to notice requirements, timing restrictions and
volume limitations which may be imposed by the underwriters of an offering.
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PRINCIPAL STOCKHOLDERS
The following table sets forth, as of [ ] both on an actual
basis and after giving effect to this offering, information regarding the
beneficial ownership of our common stock by:
-- each person that is known by us to own beneficially more than five
percent of our outstanding shares;
-- each of our directors and named executive officers who own our
shares; and
-- all current directors and executive officers as a group.
The table also sets forth the voting power for each of these persons and
groups as of [ ] an actual basis and after giving effect to this
offering. With respect to the percentage of voting power set forth in the
following table:
-- each holder of Class A common stock is entitled to one vote per
share; and
-- each holder of Class B common stock is entitled to ten votes per
share.
<TABLE>
<CAPTION>
EXPECTED
POST-
PRE-OFFERING EXPECTED EXPECTED POST- OFFERING
PRE-OFFERING PERCENTAGE POST- OFFERING PERCENTAGE
PRE-OFFERING PERCENTAGE OF OF OFFERING PERCENTAGE OF OF
NUMBER OF SHARES TOTAL VOTING NUMBER OF SHARES TOTAL VOTING
SHARES BENEFICIALLY POWER ON A SHARES BENEFICIALLY POWER ON A
NAME AND ADDRESS OF BENEFICIALLY OWNED/ FULLY-DILUTED BENEFICIALLY OWNED/ FULLY-DILUTED
BENEFICIAL OWNER OWNED ECONOMIC INTEREST BASIS OWNED ECONOMIC INTEREST BASIS
------------------------- ----------------- ----------------- ------------- ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
AT&T Corp.(1)............ shares of Class B
common stock
SL Participacoes(2)...... shares of Class A
common stock
Patricio E.
Northland(3)...........
Other directors and
executive officers.....
All directors and
executive officers as a
group..................
</TABLE>
------------
* Less than 1%
(1) Includes the shares owned by ATTLA Holding Corp., a wholly-owned subsidiary
of AT&T Corp. The address of AT&T Corp. and ATTLA Holding Corp. is 295 North
Maple Avenue, Basking Ridge, New Jersey 07920.
(2) The address of SL Participacoes, an affiliate of Promon Ltda., is Avenida
Juscelino Kubitschek, 1830, 14o. andar, Torre 4, CEP 04543-900, Sao Paulo
SP, Brazil.
(3) Includes [ ] of our shares that may be purchased upon the exercise of
outstanding stock options. The address of Mr. Northland is 220 Alhambra
Circle, Suite 910, Coral Gables, Florida 33134.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITY
For a description of our $100 million credit facility with a subsidiary of
AT&T Corp., see "Certain Relationships and Related Transactions--Credit
Facility."
FIRSTCOM 14% SENIOR NOTES DUE 2007
In connection with the FirstCom merger, we have required FirstCom to
complete a tender offer for its outstanding $150 million principal amount 14%
Senior Secured Notes due 2007 and, as part of that tender offer, to obtain the
consent of holders of at least a majority in principal amount of the outstanding
notes to certain amendments to the covenants of FirstCom relating to the notes.
We intend to finance the completion of that tender offer though the issuance of
our Series B redeemable preferred stock to AT&T Corp. For a description of the
terms of the Series B preferred stock, see "Description of Capital Stock--Series
B Preferred Stock".
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DESCRIPTION OF CAPITAL STOCK
The following is a discussion of the material terms of our Class A common
stock and other capital stock. For a more detailed description, see the forms of
our amended and restated certificate of incorporation and bylaws attached as
exhibits to the registration statement of which this prospectus forms a part,
and to the applicable provisions of Delaware law.
AUTHORIZED CAPITAL STOCK
We are authorized to issue 460 million shares of capital stock, consisting
of 300 million shares of Class A common stock, par value $.0001 per share, 150
million shares of Class B common stock, par value $0.0001 per share, and 10
million shares of preferred stock, par value $.001 per share.
COMMON STOCK
VOTING RIGHTS. Holders of our Class A common stock have one vote per
share, and holders of Class B common stock have ten votes per share, on all
matters to be voted on by stockholders, including the election of directors.
Generally, except as required by law, all matters to be voted on by
stockholders must be approved by a majority of the votes that holders of Class A
and Class B shares present in person or represented by proxy are entitled to
cast, voting together as a single class, subject to any voting rights granted to
holders of any of our preferred stock. Except as otherwise provided by law or in
our certificate of incorporation, and subject to any voting rights granted to
holders of any outstanding preferred stock, amendments to our certificate of
incorporation need the approval of a majority of the votes entitled to be cast
by all holders of Class A and Class B shares voting as a single class.
Amendments that would alter or change the relative powers, preferences or
special rights of the Class A shares or the Class B shares in an adverse manner,
however, also must be approved by a majority of the votes entitled to be cast by
the holders of the class so affected, voting as a separate class. Separate class
votes are not required for amendments to decrease or increase the authorized
shares of any class so long as adequate shares are reserved for issuance upon
conversion of the Class B shares or any shares of preferred stock. Stockholders
may not act by written consent.
DIVIDENDS. Holders of our Class A and Class B shares share equally on a
per share basis in any dividend declared by the board of directors, subject to
any preferential rights of any outstanding preferred stock. Dividends to holders
of shares of Class A common stock or Class B common stock consisting of shares
of common stock or options or other securities convertible into shares of common
stock may be paid only in shares of Class A common stock or options or other
securities convertible into Class A common stock.
We may not split, reclassify, subdivide or combine shares of either class
of common stock without at the same time proportionally reclassifying,
subdividing or combining shares of the other class.
ISSUANCE OF SHARES OF CLASS B COMMON STOCK, OPTIONS OR WARRANTS. We may
not issue additional shares of Class B common stock, or issue options, rights or
warrants to subscribe for additional shares of Class B common stock, except in
connection with a pro rata offer to all holders of our common stock of rights to
purchase additional shares of the class of common stock held by them. The Class
A shares and the Class B shares will be treated equally with respect to any
offer we make to holders of common stock of options, rights or warrants to
subscribe for any of our other capital stock.
MERGER OR CONSOLIDATION. In the event of a merger or consolidation, the
holders of Class A shares and Class B shares will be entitled to receive the
same per share consideration, if any.
CONVERSION OF CLASS B SHARES. Class B shares are convertible into Class A
shares on a share-for-share basis at the option of the holder at any time, or
automatically upon transfer to a person or entity which is not a permitted
transferee. Permitted transferees include AT&T Corp. and any person or entity in
which it owns directly or indirectly 50% or more of the equity securities.
LIQUIDATION. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of our company, subject to the rights of any shares of
preferred stock, our net assets available for distribution to
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holders of equity securities will be distributed pro rata to the holders of
shares of common stock. The holders of shares of Class A common stock and Class
B common stock will be entitled to any of those distributions on an equal basis.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of our common stock do not have any
preemptive rights under the certificate of incorporation, bylaws or Delaware law
to subscribe for any additional shares of, or other obligations convertible into
or exercisable for shares of, our capital stock in connection with any future
issuance by us. No shares of common stock are subject to redemption.
NASDAQ QUOTATION. Shares of our Class A common stock are quoted on the
Nasdaq National Market under the trading symbol "ATTL." Our shares of Class B
common stock will not be separately listed or traded.
PREFERRED STOCK
GENERALLY. Our board of directors, without approval of our stockholders,
may issue a number of shares of preferred stock in one or more series that does
not together with the shares of existing outstanding preferred stock exceed the
amount established by the certificate of incorporation, which currently is
10,000,000 shares. The board of directors may fix the numbers of shares of each
series and the designation, powers, preferences and rights and the
qualifications, limitations and restrictions of the shares of each series.
The specific matters that the board of directors may determine include the
following:
-- the designation of each series;
-- the voting rights, if any, of each series;
-- the amount of any dividends;
-- redemption rights, if any, of each series;
-- the amount payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of our affairs;
-- rights and terms of any conversion or exchange;
-- dividend, distribution, redemption or purchase limitations and
restrictions relating to other capital stock, if any, while any
shares of such series are outstanding;
-- restrictions on the creation of indebtedness or the issuance of
shares of the same series or any other series; and
-- the ranking of a series compared to other classes or series as to the
payment of dividends, the distribution of assets and all other
matters.
SERIES A CONVERTIBLE PREFERRED STOCK. Upon completion of the merger, each
outstanding FirstCom Series A convertible preferred share converted into a share
of our Series A convertible preferred stock.
Rights of the holders of our shares of our Series A convertible preferred
stock include:
Conversion. Shares of our Series A convertible preferred stock will
be convertible at the option of the holder into one share of Class A common
stock, subject to adjustment. The shares of Series A convertible preferred
stock will automatically convert at any time after the second anniversary
of the merger, provided that the closing trading price of shares of our
Class A common stock is greater than $15 for thirty consecutive trading
days.
Dividends. Holders of our Series A convertible preferred stock
receive in-kind stock dividends at the annual rate of 15%, payable
quarterly until June 30, 2001, and are entitled to receive other dividends
paid from time to time to common shareholders and all accrued and unpaid
dividends.
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Liquidation. Upon any voluntary or involuntary liquidation,
dissolution or winding up, or specified changes of control, holders of our
shares of Series A convertible preferred stock will be entitled to receive
$8.00, plus all accrued and unpaid dividends.
Voting. Holders of shares of Series A convertible preferred stock
will be entitled to one vote for each share of our Series A common stock
into which the share of Series A convertible preferred stock is
convertible. As of the merger, this exchange ratio will be one-for-one and
the holders of shares of Series A convertible preferred stock will be
entitled to one vote per share.
Special Required Approval. The certificate of designation for the
Series A convertible preferred stock provides that without the approval of
75% of the outstanding shares of Series A convertible preferred stock,
voting together as a class, we may not:
-- amend, repeal, alter or waive our certificate of incorporation or
bylaws if it would have a material adverse effect on the rights,
preferences or privileges of the Series A convertible preferred
stock;
-- authorize or issue any new or existing capital stock (including
securities convertible or exchangeable into capital stock) with
superior or on parity preferences or priorities or rights as to
dividends, liquidation preference, assets or voting, or preemptive
rights;
-- redeem, purchase or otherwise acquire any of our shares other than
the Series A convertible preferred stock; and
-- authorize or pay dividends or other distributions on any of our
shares other than the Series A convertible preferred stock.
Redemption by AT&T Latin America. We may redeem all of outstanding
shares of Series A convertible preferred stock at any time after July 30,
2001 for an amount that would result in the holders of the Series A
convertible preferred stock receiving a 25% internal rate of return on
their original investment.
Redemption by Holders. Holders of shares of Series A convertible
preferred stock at any time will be able to redeem any portion of their
outstanding shares at a price equal to $8.00, plus all accrued and unpaid
dividends. There will be no restrictions on the repurchase or redemption of
shares of Series A convertible preferred stock during any period in which
we do not declare dividends on time.
15% SERIES B PREFERRED STOCK. In connection with the financing of the
FirstCom tender offer and consent solicitation for FirstCom's 14% senior notes
due 2007, we issued shares of our 15% Series B preferred stock to a subsidiary
of AT&T Corp, which are non-participating and non-convertible.
Rights of the holders of shares of Series B preferred stock include:
Dividends. Holders of shares of 15% Series B preferred stock will be
entitled to receive dividends at an annual rate of 15%, payable
semi-annually.
Liquidation. Upon any voluntary or involuntary liquidation,
dissolution or winding up, holders of shares of 15% Series B preferred
stock are entitled to receive their investment, plus all accrued and unpaid
dividends.
Redemption. The 15% Series B preferred stock is redeemable, at our
option or the option of the holder, at any time beginning on the fourth
anniversary of the issue date at a redemption price equal to the
liquidation value.
Repurchase upon a change of control. We are obligated to offer to
repurchase shares of the 15% Series B preferred stock upon a change of
control of our company at a redemption price equal to 101% of the
liquidation value.
Voting. Holders of the 15% Series B preferred stock are generally not
entitled to vote on any matter required or permitted to be voted upon by
our stockholders. However, in specified circumstances, the
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holders of 15% Series B preferred stock, voting as a separate class, will
be entitled to elect two members of our board of directors. These
circumstances are if we:
-- have not paid cash dividends on the shares of 15% Series B
preferred stock for three or more semi-annual dividend periods;
-- fail to discharge any redemption obligation with respect to the
15% Series B preferred stock;
-- fail to make an offer to purchase 15% Series B preferred stock
following a change of control; or
-- breach other material provisions of the 15% Series B preferred
stock.
Special Required Approval. The certificate of designation for the 15%
Series B preferred stock provides that without the approval of a majority
of the outstanding shares of 15% Series B preferred stock, voting together
as a class, we may not:
-- authorize or issue any 15% Series B preferred stock, any stock
that is senior or equal in priority to the 15% Series B preferred
stock or any security exchangeable or convertible into a stock
that does not rank below the 15% Series B preferred stock, or
reclassify any security into a stock that does not rank below;
-- amend, alter or revoke our certificate of incorporation or bylaws
if it would modify the rights, preferences or privileges of the
15% Series B preferred stock; or
-- amend or modify the rights, preferences or privileges of the
Series A convertible preferred stock if it would have an adverse
effect on the holders of the 15% Series B preferred stock.
PROVISIONS OF AT&T LATIN AMERICA'S CERTIFICATE OF INCORPORATION AND BYLAWS THAT
COULD DELAY, DEFER OR PREVENT A CHANGE OF CONTROL
Some provisions of our certificate of incorporation and bylaws could delay,
defer or prevent a change of control that might be otherwise beneficial to a
stockholder. These provisions include:
-- unequal voting rights per share between the shares of Class A common
stock and shares of Class B common stock, which are held by AT&T
Corp.;
-- a prohibition on stockholder action by written consent;
-- advance notice requirements for stockholder proposals for special
meetings; and
-- the authority of the board of directors to issue without shareholder
approval shares of preferred stock with such terms as the board may
determine.
OTHER PROVISIONS OF AT&T LATIN AMERICA'S CERTIFICATE OF INCORPORATION AND BYLAWS
BOARD OF DIRECTORS; DISINTERESTED DIRECTORS. We have nine directors,
including three disinterested directors. Disinterested directors are people who
are not:
-- directors, officers or employees of AT&T Corp. or any of its
affiliates; or
-- our officers or employees.
The total number of our directors may be increased, but only if approved by:
-- the existing disinterested directors, if the total number of
disinterested directors is fewer than five; or
-- at least 80% of the disinterested directors, if the total number of
disinterested directors is five or more.
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BOARD POLICY. Our board of directors has adopted a policy relating to
specified corporate opportunities. This policy provides that AT&T Corp. and its
affiliates will only be required to make a corporate opportunity available to us
if it:
-- directly relates to the services that we may provide under the
regional vehicle agreement;
-- directly relates to our region;
-- can, in the good faith judgment of AT&T Corp., be financed by us
without the issuance of additional debt or equity to AT&T Corp. or
one of its affiliates; and
-- has been presented to:
-- one of our officers or directors, who is not also an officer or
director of AT&T Corp. or one of its affiliates;
-- one of our officers or directors, who is also an officer or
director of AT&T Corp. or one of its affiliates, specifically in
his or her capacity as our officer or director; or
-- a senior employee of AT&T Corp., specifically for consideration by
us.
The board policy provides that AT&T Corp. and its affiliates need not
present to us any opportunity other than those described above and AT&T Corp.
and its affiliates may pursue, or direct to any other person, any opportunity
presented to, and not pursued by, our board of directors.
This board policy may not be amended without the approval of a majority of
our disinterested directors.
TRANSACTIONS WITH AT&T CORP. AFFILIATES. Our bylaws provide that
transactions between us and AT&T Corp. or its affiliates will not be void or
voidable solely because any directors or officers of AT&T Corp. or the relevant
affiliate are present at or participate in our board of directors or committee
meeting that approves the transaction or solely because his or their votes are
counted for the approval, if:
-- the material facts about the transaction are disclosed or known to
our board of directors or relevant committee and the board of
directors or, alternatively, that committee, and a majority of our
disinterested directors have approved of it;
-- the transaction is approved by the holders of a majority of our
outstanding shares entitled to vote on the transaction that are not
owned by AT&T Corp. or one of its affiliates, other than our
controlled subsidiaries, voting together as a single class;
-- the transaction is approved in accordance with arrangements,
standards or guidelines that were approved as set forth above; or
-- the transaction is fair to us at the time we enter into it.
Our directors who are not disinterested directors may be counted in
determining the quorum for any approvals of our board of directors or its
committees that are made in accordance with the requirements listed above. Our
shares owned by AT&T Corp. or its affiliates, other than ourselves or our
controlled subsidiaries, may be counted in determining quorum for any approvals
by our stockholders that are made in accordance with the requirements described
above.
93
<PAGE> 95
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, [ ] shares of Class A common stock
will be issued and outstanding, assuming the underwriters do not exercise their
option to purchase an additional 5,250,000 shares of Class A common stock. In
addition, [ ] shares of Class A common stock will be issuable upon the
conversion of our Series A convertible preferred stock and outstanding options.
Of the total number of our shares of Class A common stock issued or
issuable as described above, [ ] shares will be eligible for immediate
public resale following the later of their issuance and the completion of this
offering, except for any such shares held by our affiliates as defined in Rule
144 under the Securities Act of 1933, as amended. Shares issued to our
affiliates may only be sold in compliance with Rule 144 under the Securities Act
of 1933, as amended, unless registered under the Securities Act pursuant to
demand or piggyback registration rights.
We, along with our directors and executive officers and certain other
stockholders, will agree pursuant to the underwriting agreement and other
agreements that we will not sell any Class A common stock without the prior
consent of Morgan Stanley & Co. Incorporated for a period of [ ] days from the
date of this prospectus. Approximately [ ] additional shares will
be available for sale following the expiration of the [ ]-day lock-up period.
The sale of a substantial number of shares of Class A common stock, or the
perception that such sales could occur, could adversely affect prevailing market
prices for the Class A common stock. In addition, any such sale or perception
could make it more difficult for us to sell equity securities or equity-related
securities in the future at a time and price that we deem appropriate.
94
<PAGE> 96
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,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc.
and Salomon Smith Barney, Inc. are acting as representatives, have severally
agreed to purchase, and AT&T Latin America has agreed to sell to them,
severally, the number of shares of Class A common stock 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..........
J.P. Morgan Securities Inc..................................
Salomon Smith Barney Inc....................................
-----------
Total............................................. 35,000,000
===========
</TABLE>
The underwriters are offering the shares of Class A common stock subject to
their acceptance of the shares from AT&T Latin America 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 Class A 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 Class A 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 Class A
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 Class A common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.
AT&T Latin America has granted to the underwriters an option, exercisable
for 30 days from the date of this prospectus, to purchase up to an aggregate of
5,250,000 additional shares of Class A 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 over-allotments, if any, made in connection with the offering of the
shares of Class A 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
Class A common stock as the number listed next to the underwriter's name in this
preceding table bears to the total number of shares of Class A 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 AT&T Latin America would be
$[ ].
The underwriters have informed AT&T Latin America 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.
Each of AT&T Latin America and the directors, executive officers and
certain other stockholders of AT&T Latin America 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 [ ] 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
95
<PAGE> 97
directly or indirectly, any shares of Class A common stock or any securities
convertible into or exercisable or exchangeable for Class A 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
Class A common stock;
whether any transaction described above is to be settled by delivery of Class A
common stock or such other securities, in cash or otherwise.
The restrictions described in this paragraph do not apply to:
-- the sale of shares of Class A common stock to the underwriters;
-- the issuance by AT&T Latin America of shares of Class A 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 than AT&T Latin America relating to
shares of Class A 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 Class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A common stock. Specifically, the underwriters may
over-allot in connection with the offering, creating a short position in the
Class A common stock for their own account. In addition, to cover
over-allotments or to stabilize the price of the Class A common stock, the
underwriters may bid for, and purchase, shares of Class A common stock in the
open market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the Class A common stock
in the offering, if the syndicate repurchases previously distributed Class A
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 Class A 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.
From time to time, Morgan Stanley & Co. Incorporated has provided, and
continues to provide, investment banking services to either AT&T Latin America
or its principal shareholder, AT&T Corp.
AT&T Latin America and the underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of Class A common stock offered by this
prospectus will be passed upon by Debevoise & Plimpton, New York, New York,
counsel to AT&T Latin America. Certain legal matters in connection with the
Class A common stock offered by this prospectus will be passed upon for the
underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The financial statements of AT&T Latin America Corp. as of December 31,
1999 and for the period from inception (October 13, 1999) through December 31,
1999 included in this prospectus have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on their authority
as experts in accounting and auditing.
The financial statements of FirstCom Corporation included in this
prospectus for the year ended December 31, 1997, have been included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
their authority as experts in accounting and auditing.
96
<PAGE> 98
Ernst & Young LLP, independent certified public accountants, have audited
FirstCom's consolidated financial statements for the years ended December 31,
1999 and 1998, as set forth in their report, which is included in this
prospectus and elsewhere in the registration statement. FirstCom's consolidated
financial statements are so included in reliance on Ernst & Young LLP's report,
given on their authority as experts in accounting and auditing.
Ernst & Young Auditores Independentes S.C., independent auditors, have
audited the Netstream Telecom Ltda. financial statements at September 30, 1999
and December 31, 1998, and for the nine months ended September 30, 1999 and the
eleven months ended December 31, 1998, as set forth in their report. The
Netstream Telecom Ltda. financial statements are included in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young Auditores
Independentes S.C.'s report, given on their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for this
offering, and this prospectus is part of that registration statement. For
further information on us, you should refer to our registration statement and
its exhibits. This prospectus summarizes material provisions of contracts and
other documents that we refer you to. Since the prospectus may not contain all
the information that you may find important, you should review the full text of
these documents. We have included copies of these documents as exhibits to our
registration statement.
We file reports, proxy statements and other information with the SEC under
the Exchange Act. Please call the SEC at 1-800-SEC-0330 for further information
on accessing these documents and on the public reference rooms. You may read and
copy this information at the following SEC locations:
Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
New York Regional Office
7 World Trade Center
Suite 1300
New York, New York 10048
Chicago Regional Office
Citicorp Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates.
The SEC also maintains an Internet world wide web site that contains
reports, proxy statements and other information about issuers, including
FirstCom and AT&T Corp., which file electronically with the SEC. The address of
that site is http://www.sec.gov. You can also inspect reports, proxy statements
and other information about FirstCom at the offices of the Nasdaq Stock Market,
20 Broad Street, New York, New York 10005.
The information contained in this document speaks only as of its date
unless the information specifically indicates that another date applies.
97
<PAGE> 99
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AT&T LATIN AMERICA CORP
Unaudited Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999..................................... F-2
Unaudited Consolidated Statement of Operations for the
three-month period ended March 31, 2000................... F-3
Unaudited Consolidated Statements of Shareholders' Equity
for the three-month period ended March 31, 2000........... F-4
Unaudited Consolidated Statement of Cash Flows for the
three-month period ended March 31, 2000................... F-5
Notes to Unaudited Consolidated Financial Statements........ F-6
Report of Independent Accountants........................... F-8
Audited Financial Statements
Consolidated Balance Sheet as of December 31, 1999........ F-9
Consolidated Statement of Operations for the period from
October 13, 1999 (date of inception) through December
31, 1999............................................... F-10
Consolidated Statement of Shareholders' Equity for the
period from October 13, 1999 (date of inception)
through December 31, 1999.............................. F-11
Consolidated Statement of Cash Flows for the period from
October 13, 1999 (date of inception) through December
31, 1999............................................... F-12
Notes to Consolidated Financial Statements................ F-13
NETSTREAM TELECOM LTDA
Report of Independent Auditors.............................. F-19
Audited Financial Statements
Balance Sheets as of September 30, 1999 and December 31,
1998................................................... F-20
Statements of Operations for the nine months ended
September 30, 1999 and eleven months ended December 31,
1998................................................... F-21
Statements of Quotaholders' Equity for the nine months
ended September 30, 1999 and eleven months ended
December 31, 1998...................................... F-22
Statements of Cash Flows for the nine months ended
September 30, 1999 and eleven months ended December 31,
1998................................................... F-23
Notes to Financial Statements............................. F-24
FIRSTCOM CORPORATION
Report of Independent Certified Public Accountants.......... F-29
Report of Independent Accountants........................... F-30
Audited Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-31
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997...................... F-32
Consolidated Statement of Stockholders Equity/(Deficit)
for the years ended December 31, 1999, 1998, and
1997................................................... F-33
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998, and 1997...................... F-35
Notes to Consolidated Financial Statements................ F-36
</TABLE>
F-1
<PAGE> 100
AT&T LATIN AMERICA CORP.
UNAUDITED CONSOLIDATED BALANCE SHEETS
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
AS OF MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 279 $ 24,223
Account receivable........................................ 3,606 1,286
Prepaid expenses and recoverable taxes.................... 3,872 2,109
Investments............................................... 30,636 27,078
Other receivables......................................... 30 118
-------- --------
Total current assets................................... 38,423 54,814
Plan and equipment, net................................... 86,051 68,269
Goodwill and other intangible assets, net................. 259,764 261,345
-------- --------
Total assets........................................... $384,238 $384,428
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 3,184 $ 1,414
Current portion of obligations under capital leases....... 340 317
Trade accounts payable.................................... 7,281 5,339
Social charges payable.................................... 1,182 865
Other current liabilities................................. 6,426 161
Employee bonus............................................ 1,990 531
-------- --------
Total current liabilities.............................. 20,403 8,627
Non-current portion of obligations under capital leases..... 411 383
Deferred tax liability...................................... 1,624 1,624
Commitments and contingencies (Note 4)...................... -- --
-------- --------
Total liabilities...................................... 22,438 10,634
-------- --------
Shareholders' equity:
Common stock.............................................. -- --
Additional paid-in capital................................ 376,566 376,566
Accumulated deficit....................................... (15,341) (4,124)
Accumulated other comprehensive income.................... 575 1,352
-------- --------
Total shareholders' equity............................. 361,800 373,794
Total liabilities and shareholders' equity............. $384,238 $384,428
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 101
AT&T LATIN AMERICA CORP.
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2000
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<S> <C>
REVENUE..................................................... $ 4,364
Operating costs and expenses:
Cost of revenues.......................................... 6,921
Selling, general and administrative....................... 4,232
Depreciation and amortization............................. 6,160
--------
Total operating costs and expenses..................... 17,313
--------
Loss from operations................................... (12,949)
Other interest income....................................... 1,018
Foreign exchange gain, net.................................. 714
--------
Net loss............................................... $(11,217)
--------
Basic and diluted loss per share............................ $(280.43)
--------
Weighted average shares outstanding......................... 40,000
--------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 102
AT&T LATIN AMERICA CORP.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2000
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
COMMON ADDITIONAL ACCUMULATED OTHER TOTAL
NUMBER STOCK AT PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
OF SHARES PAR CAPITAL DEFICIT INCOME EQUITY
--------- -------- ---------- ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999.................... 40,000 $ -- $376,566 $ (4,124) $1,352 $373,794
Currency translation
adjustments............. (777) (777)
Net loss for the period... (11,217) (11,217)
------ ---- -------- -------- ------ --------
Comprehensive net loss.... (11,217) (777) (11,994)
------ ---- -------- -------- ------ --------
Balance at March 31,
2000.................... 40,000 $ -- $376,566 $(15,341) $ 575 $361,800
------ ---- -------- -------- ------ --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 103
AT&T LATIN AMERICA CORP.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2000
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<S> <C>
Cash flows from operating activities:
Net Loss.................................................. $(11,217)
Adjustments to reconcile net loss cash provided by
operating activities:
Depreciation and amortization expense.................. 6,160
Other.................................................. (777)
Changes in operating assets and liabilities:
Accounts receivable.................................... (2,320)
Recoverable taxes...................................... (1,763)
Other receivables...................................... 88
Trade accounts payable................................. 1,942
Payroll and related charges............................ 1,776
Other current liabilities.............................. 6,266
--------
Net cash provided by operating activities............ 155
--------
Cash flows from investing activities:
Investments in short-term securities...................... (3,558)
Purchases of property and equipment....................... (19,853)
Goodwill and other intangible assets...................... (2,458)
--------
Net cash used in investing activities................ (25,869)
--------
Cash flows from financing activities:
Short-term debt........................................ 1,770
--------
Net cash provided by financing activities............ 1,770
--------
Net decrease in cash................................. (23,944)
Cash at beginning of period................................. 24,223
--------
Cash at end of period................................ $ 279
--------
Supplemental information on cash disclosures:
Interest paid............................................. $ --
--------
Taxes paid................................................ $ --
--------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 104
AT&T LATIN AMERICA CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by AT&T Latin America Corp. ("the Company"). The foregoing statements
contain all adjustments, consisting only of normal recurring adjustments which
are, in the opinion of the Company's management, necessary to present fairly the
consolidated financial position of the Company as of March 31, 2000 and the
consolidated results of its operations and its consolidated cash flows for the
three-month period ended March 31, 2000. Result of operations for the three
months ended March 31, 2000 are not necessarily indicative of the results of
operations for the full year.
Certain information and footnote disclosure normally included in financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to the instructions, rules
and regulations prescribed by the Securities and Exchange Commission ("the
Commission"). Although the Company believes the disclosures provided are
adequate to make the information presented not misleading, it strongly
recommends that these unaudited condensed consolidated financial statements be
read in conjunction with the audited consolidated financial statements and the
footnotes for the year ended December 31, 1999.
2. PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
MARCH 31,
DESCRIPTION 2000
------------------------------------------------------------ ---------
<S> <C>
Switching equipment......................................... $ 2,576
Transmission equipment...................................... 34,085
Cables...................................................... 3,271
Underground installation.................................... 25,884
Other plant and equipment................................... 12,438
Construction in progress.................................... 715
Client network deployment................................... 12,035
-------
91,004
Less accumulated depreciation and amortization......... 4,953
-------
Plant and equipment, net............................... $86,051
-------
</TABLE>
Depreciation expense related to the plant and property was $2,121 for the
three-month period ended March 31, 2000.
3. ACQUISITION AGREEMENT
On February 23, 2000, the Company agreed to acquire 100% of Keytech LD,
S.A., a development stage broadband communications company based in Argentina.
As of December 31, 1999, Keytech's net loss and total assets were approximately
$1,554 and $2,322, respectively. The purchase price for Keytech LD is 1,178,689
shares of the Company's Class A common stock (of which 550,000 shares will be
placed in escrow to cover indemnity obligations of the seller), plus $5 million
in cash. The Company will also pay up to an additional $1.5 million to the
Keytech LD shareholders one year after the acquisition if business milestones
specified in the stock purchase agreement are accomplished. The Company believes
this transaction to be immaterial.
F-6
<PAGE> 105
AT&T LATIN AMERICA CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
In accordance with the legislation in force in Brazil, tax registers
related to federal, state and municipal taxes are subject to examination by the
respective tax authorities from 5 to 30 years.
In March 2000, Netstream entered into an import financing loan with
Dresdner Bank with principal amount of $1,755 at an interest rate of 0.8% plus
LIBOR for one year.
In the normal course of business, the Company may be subject to
proceedings, lawsuits and other claims. Although there can be no assurance that
the Company will prevail in every case, management does not believe that the
ultimate disposition of known legal contingencies will have a material effect on
the Company's financial condition, results of operations or cash flows.
F-7
<PAGE> 106
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
AT&T Latin America Corp.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of AT&T
Latin America Corp. and its subsidiaries (the "Company") at December 31, 1999,
and the results of their operations and their cash flows for the period from
inception (October 13, 1999) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 25, 2000
F-8
<PAGE> 107
AT&T LATIN AMERICA CORP.
CONSOLIDATED BALANCE SHEET
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)........................ $ 24,223
Account receivable........................................ 1,286
Recoverable taxes......................................... 2,109
Investments............................................... 27,078
Other receivables......................................... 118
--------
Total current assets................................... 54,814
Plant and equipment, net (Notes 2 and 3).................... 68,269
Goodwill and other intangible assets, net (Notes 2 and 4)... 261,345
--------
Total assets........................................... $384,428
--------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 1,414
Current portion of obligations under capital leases....... 317
Trade accounts payable.................................... 5,339
Social charges payable.................................... 865
Other current liabilities................................. 161
Employee bonus............................................ 531
--------
Total current liabilities.............................. 8,627
--------
Non-current portion of obligations under capital leases..... 383
Deferred tax liability...................................... 1,624
Commitments and contingencies (Note 7)...................... --
--------
Total liabilities...................................... 10,634
--------
Shareholders' equity:
Common stock.............................................. --
Additional paid-in capital................................ 376,566
Accumulated deficit....................................... (4,124)
Accumulated other comprehensive income.................... 1,352
--------
Total shareholders' equity............................. 373,794
Total liabilities and shareholders' equity............. $384,428
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE> 108
AT&T LATIN AMERICA CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
OCTOBER 13, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<S> <C>
Revenue..................................................... $ 802
Operating costs and expenses:
Cost of revenues.......................................... 865
Selling, general and administrative....................... 2,164
Depreciation and amortization............................. 1,707
--------
Total operating costs and expenses..................... 4,736
--------
Loss from operations................................... (3,934)
Foreign exchange loss....................................... 190
--------
Net Loss............................................... $ (4,124)
--------
Basic and diluted loss per share............................ $(103.10)
--------
Weighted average shares outstanding......................... 40,000
--------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE> 109
AT&T LATIN AMERICA CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
OCTOBER 13, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
NUMBER OF COMMON PAID-IN ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES SHARES CAPITAL DEFICIT INCOME EQUITY
--------- ------ ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Original share
issuance............ 1,000 $-- $ -- $ -- $ -- $ --
Additional capital
increase............ 39,000 -- 376,566 -- -- 376,566
Currency translation
adjustments......... 1,352 1,352
Net loss for the
period.............. (4,124) (4,124)
------ -- -------- ------- ------ --------
Comprehensive net
loss................ (2,772)
------ -- -------- ------- ------ --------
Balances at December
31, 1999............ 40,000 $-- $376,566 $(4,124) $1,352 $373,794
------ -- -------- ------- ------ --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE> 110
AT&T LATIN AMERICA CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
OCTOBER 13, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (4,124)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense.................. 1,707
Interest, net.......................................... 87
Changes in operating assets and liabilities:
Accounts receivable.................................... (415)
Recoverable taxes...................................... (82)
Other receivables...................................... (11)
Trade accounts payable................................. 2,777
Payroll and related charges............................ 284
Other current liabilities.............................. (309)
Taxes payable.......................................... 103
---------
Net cash provided by operating activities............ 17
---------
Cash flows from investing activities:
Investments in short-term securities...................... (27,078)
Purchases of property and equipment....................... (6,422)
Acquisition of Netstream, net of cash acquired............ (320,287)
---------
Net cash used in investing activities................ (353,787)
---------
Cash flows from financing activities:
Short-term debt........................................... 1,414
Capital infusion.......................................... 376,566
---------
Net cash provided by financing activities............ 377,980
Net increase in cash................................. 24,210
Cash at inception........................................... 13
Cash at end of year.................................. $ 24,223
---------
Supplemental information on cash disclosures:
Interest paid............................................. $ --
---------
Taxes paid................................................ $ --
---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 111
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA
1. ORGANIZATION AND BASIS OF PRESENTATION
AT&T Latin America Corp. ("the Company" or "ATTLA") was incorporated on
October 13, 1999, organized under the laws of the State of Delaware. ATTLA is
currently a provider of broadband communications services mainly to business and
government customers throughout Brazil. However, the Company's target regions
also include most countries in South America and the Caribbean.
Through its operating subsidiary, Netstream Telecom Ltda. ("Netstream"),
ATTLA provides data, voice, video conferencing, Internet and electronic commerce
services to its Brazilian markets.
The consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles and include the results of
Netstream for the period December 8 through December 31, 1999 and any activity
in the various holding companies within the ATTLA company structure. (See Note
4, Acquisition and Intangible Assets, for additional information related to the
Netstream acquisition.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from the estimates, The most
significant estimates relate to the useful lives of the property and equipment
and intangible assets, including goodwill.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit and securities, held by
major financial institutions with favorable credit ratings, with original
maturities of three months or less.
PLANT AND EQUIPMENT
Plant and equipment are stated on the basis of cost. Construction,
engineering and labor costs directly related to the development of the Company's
networks are capitalized. The Company begins depreciating these costs when the
networks become commercially operational. Plant and equipment are depreciated
using the straight-line method over estimated useful lives as follows:
<TABLE>
<S> <C>
Switching equipment......................................... 5
Transmission equipment...................................... 7
Cables...................................................... 10
Underground installation.................................... 25
Other plant and equipment................................... 3 to 10
</TABLE>
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of assets acquired from
Netstream over the fair value at the date of acquisition and is being amortized
using the straight-line method over 20 years. Amortization expense related to
goodwill was $1,073 in 1999.
Intangible assets, which are recorded at cost, include a contract with
America On-Line Brazil and the work force in place. Amortization is provided by
the straight-line method over three years. Amortization expense related to the
intangible assets was $122 in 1999.
F-13
<PAGE> 112
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAX
The Company is not a separate taxable entity for Federal and state income
tax purposes and the results of the Company's operations are included in the
Federal and state tax returns of AT&T Corp. and its affiliates. In these
financial statements, the Company has provided for income taxes as if it were a
separate taxpayer.
Deferred income taxes have been accounted for under the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes", whereby deferred
taxes and liabilities are established for the differences between the financial
reporting and income tax basis of assets and liabilities, as well as net
operating losses and tax credit carryforwards. Deferred tax assets are reduced
by a valuation allowance when in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
FOREIGN CURRENCY TRANSACTIONS
The Company accounts for foreign currency transactions in accordance with
Financial Accounting Standards Board (FASB) Statement No. 52, "Foreign Currency
Translation". The Company and its foreign operating subsidiary's functional
currency is the U.S. dollar. Foreign currency transactions are transactions
denominated in a currency other than the entity's functional currency. Foreign
currency transactions may produce receivables or payables that are fixed in
terms of the amount of foreign currency that will be received or paid. A change
in exchange rates between the functional currency and the currency in which a
transaction is denominated increases or decreases the expected amount of
functional currency cash flows upon settlement of the transaction. That increase
or decrease in expected functional currency cash flows is a foreign currency
transaction gain or loss (measured from the transaction date or the most recent
intervening balance sheet date, whichever is later) that is included in
determining net income for the period in which the exchange rate changes.
REVENUE RECOGNITION
Revenues are recognized as services are provided.
ADVERTISING AND PROMOTIONAL COSTS
Advertising and promotional costs are expensed as incurred and were $56 for
the initial operating period from October 13, through December 31, 1999.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are calculated in accordance with FASB Statement
No. 128, "Earnings Per Share".
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable and accounts payable
approximated fair value based on the short maturity of these financial
instruments.
F-14
<PAGE> 113
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
DESCRIPTION DECEMBER 31, 1999
------------------------------------------------------------ -----------------
<S> <C>
Switching equipment......................................... $ 2,223
Transmission equipment...................................... 24,243
Cables...................................................... 2,350
Underground installation.................................... 19,821
Other plant and equipment................................... 17,311
Construction in Progress.................................... 5,368
-------
71,316
Less accumulated depreciation and amortization............ 3,047
-------
Plant and equipment, net............................... $68,269
=======
</TABLE>
Depreciation expense related to the plant and property was $512 in 1999.
4. ACQUISITION AND INTANGIBLE ASSETS
On December 8, 1999, AT&T Corp. acquired 100% of the issued and outstanding
capital stock of Netstream Telecom Ltda. ("Netstream") pursuant to a cash
purchase agreement. Netstream was in the development stage until May 1999, when
it began providing service in Brazil's two largest cities, Rio de Janeiro and
Sao Paulo. The Company plans to extend services to other Brazilian cities in
2000. Netstream operates under specialized circuit and network services licenses
provided by the Brazilian National Telecommunicacoes Agency (Agencia Nacional de
Telecomunicacoes or "ANATEL"), which are granted for an indefinite term.
Netstream was originally formed in February 1998 as a division of Promon
Tecnologia S.A. ("Promon"), a Brazilian engineering company. The Netstream
division of Promon primarily consisted of certain general and administrative
costs incurred in connection with the commencement of operations. Netstream was
formed on July 14, 1998 as a wholly owned subsidiary of Promon and the Netstream
division of Promon was subsequently transferred. Promon and other affiliated
companies provided various financing and management services for Netstream.
On August 20, 1999, the owners of Netstream entered into a definitive sale
agreement with an indirect wholly owned subsidiary of AT&T Corp., for the sale
of 100% of the capital of Netstream, including settlement of the due to Promon
and other affiliates' outstanding balances, This transaction required approval
by ANATEL which was granted on November 12, 1999.
The Netstream transaction closed on December 8, 1999. ATTLA accounted for
the acquisition under the purchase method of accounting for financial reporting
purposes. Accordingly, the purchase price of $322,500 has been allocated to the
identifiable assets and liabilities based on fair values at the acquisition
date. The excess of the purchase price over the value of the identifiable net
assets in the amount of $257,600 and $4,900 has been classified as goodwill and
other intangibles, respectively. Goodwill is amortized on a straight-line basis
over 20 years. The other intangible assets represent the fair value of a
contract with America On-Line Brazil of $3,600 and the work force in place of
$1,300 that are amortized on a straight-line basis over three years.
ATTLA evaluates the amortization period and the carrying value of
intangibles, including goodwill, on a periodic basis, including evaluating the
performance of the underlying business which gave rise to such amount to
determine whether events or circumstances warrant revised estimates of useful
lives or whether impairment exists. In performing the review of recoverability,
ATTLA estimates future undiscounted cash flows expected to result from the use
of the asset and its eventual disposition. If the sum of the expected
F-15
<PAGE> 114
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
undiscounted future cash flows is less than the carrying amount, an impairment
is recognized based on the difference between the estimated fair value and the
carrying value. Management believes that no impairment existed at December 31,
1999.
The net purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Working capital, other than cash............................ $ (1,000)
Property and equipment...................................... 61,000
Goodwill and other intangibles.............................. 262,500
--------
Purchase price, net of cash received................... $322,500
========
</TABLE>
The results of operations of ATTLA include the operating results of
Netstream for the period from December 8 through December 31, 1999. The pro
forma results of operations for the current period as though the companies had
been combined at the beginning of the period are as follows:
<TABLE>
<CAPTION>
UNAUDITED
---------
<S> <C>
Revenues, net............................................... $ 1,993
Net loss.................................................... (36,961)
Net loss per share.......................................... (924)
</TABLE>
5. INCOME TAXES
As of December 31, 1999, the components of the tax effects of temporary
differences that give rise to the deferred income tax assets/(liabilities) are
as follows:
<TABLE>
<CAPTION>
NON-CURRENT
-----------
<S> <C>
Net operating loss carryforwards............................ $ 1,771
Pre-operating expenses deferred for tax purposes............ 4,489
Capital leases.............................................. 78
Intangible assets........................................... (1,775)
-------
4,563
Less: valuation allowance................................... (6,187)
-------
Net deferred tax liability............................. $(1,624)
=======
</TABLE>
The deferred tax assets have been fully offset by a valuation allowance
resulting from the uncertainty surrounding the future realization of the net
deferred tax asset.
Income tax expense for the initial operating period from October 13, 1999
through December 31, 1999 differed from the amounts computed by applying the
applicable statutory income tax rate in which the Company operates as a result
of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Statutory federal tax provision/(benefit)................ $(1,402)
State and local taxes expense............................ 3
Non deductible goodwill.................................. 364
-------
Unutilized foreign losses................................ $(1,035)
-------
Net income tax provision (benefit)....................... $ (12)
=======
</TABLE>
F-16
<PAGE> 115
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31,1999, the Company has foreign net operating loss
carryforwards of approximately $5,366 million. These carryforwards are available
to offset up to 30% future taxable income and do not expire.
6. RELATED PARTY TRANSACTIONS
DUE TO AFFILIATED COMPANIES
Loans from affiliated companies, which result from the acquisition of plant
and equipment and payment of expenses by the affiliates on behalf of the
Company, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
SLE Participacoes S.A.................................... $149
----
</TABLE>
Promon and its subsidiaries act as general contractor for the construction
and installation of Netstream's broadband network.
The following amounts were charged to Netstream by Promon and are included
in plant and equipment:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Engineering services..................................... $276
Construction management fee.............................. 24
</TABLE>
Engineering services and certain general and administrative expenses are
charged to Netstream at cost. Construction management fees charged to Netstream
are based on rates similar to those charged by Promon to unrelated companies for
similar services. General and administrative expenses charged by Promon during
the period were immaterial.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment and facilities under noncancelable
lease arrangements. Future minimum payments under capital leases and operating
leases with initial terms of one year or more at December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------------------------------------------------- ------- ---------
<S> <C> <C>
2000................................................... $362 8,625
2001................................................... 366 591
2002................................................... 11 504
2003................................................... -- 429
2004................................................... -- 202
---- -------
Total minimum lease payments........................... 739 $10,351
-------
Less amount representing interest...................... (94)
----
Present value of net minimum lease payments,
including current maturities of $294.............. $645
----
</TABLE>
Operating leases includes $8,024 minimum obligation on fines for
interruption on leased line contracts, signed with several telecommunications
companies in Brazil. These contracts expire from 1 to 3 years and the fines vary
up to 50% of the total payments until the end of the contract.
F-17
<PAGE> 116
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Plant and equipment includes the following amounts for capitalized leases:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Equipment................................................ $ 521
Less allowances for amortization......................... (128)
-----
$ 393
=====
</TABLE>
Rent expense for the initial operating period from October 13 through
December 31, 1999 was $97.
OTHER
In accordance with the legislation in force in Brazil, tax registers
related to federal, state and municipal taxes are subject to examination by the
respective tax authorities from 5 to 30 years.
Commitments for construction or purchase of plant and equipment
approximated $1,759 at December 31, 1999.
In December 1999, Netstream entered into an import financing loan with
Dresdner Bank with principal amount of $1,414 at a 7.28% fixed rate interest for
one year.
In the normal course of business, the Company may be subject to
proceedings, lawsuits and other claims. Although there can be no assurance that
the Company will prevail in every case, management does not believe that the
ultimate disposition of known legal contingencies will have a material effect on
the Company's financial condition, results of operations or cash flows.
8. SUBSEQUENT EVENTS
On February 23, 2000, the Company agreed to acquire 100% of Keytech LD,
S.A., a development stage broadband communications company based in Argentina.
As of September 30, 1999, Keytech's net loss and total assets were approximately
$1,000 and $1,800, respectively. The purchase price for Keytech LD is 1,178,689
shares of the Company's Class A common stock (of which 550,000 shares will be
placed in escrow to cover indemnity obligations of the seller), plus $5 million
in cash. The Company will also pay up to an additional $1.5 million to the
Keytech LD shareholders one year after the acquisition if certain business
milestones specified in the stock purchase agreement are accomplished. The
Company believes this transaction to be immaterial.
F-18
<PAGE> 117
REPORT OF INDEPENDENT AUDITORS
The Quotaholders
Netstream Telecom Ltda.
We have audited the accompanying balance sheets of Netstream Telecom Ltda.
as of September 30, 1999 and December 31, 1998, and the related statements of
operations, quotaholders' equity, and cash flows for the nine months ended
September 30, 1999 and the eleven months ended December 31, 1998. 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 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 financial position of Netstream Telecom Ltda. at
September 30, 1999 and December 31, 1998, and the results of its operations and
its cash flows for the nine months ended September 30, 1999 and the eleven
months ended December 31, 1998 in conformity with accounting principles
generally accepted in the United States of America.
Ernst & Young Auditores Independentes S.C.
PEDRO L. SIQUEIRA FARAH
Partner
Sao Paulo, Brazil
November 26, 1999
F-19
<PAGE> 118
NETSTREAM TELECOM LTDA.
BALANCE SHEETS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 29 $ 2
Account receivable........................................ 284 --
Recoverable taxes......................................... 1,855 65
Other receivables......................................... 141 271
-------- -------
Total current assets........................................ 2,309 338
-------- -------
Plant and equipment, net.................................... 47,484 12,212
Recoverable taxes........................................... -- 430
-------- -------
Total assets........................................... $ 49,793 $12,980
======== =======
LIABILITIES AND QUOTAHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases....... $ 307 $ 137
Trade accounts payable:
Plant and equipment.................................... 1,977 --
Other.................................................. 330 392
Social charges payable.................................... 681 185
Other current liabilities................................. 744 37
Due to affiliated companies............................... 29,400 13,267
-------- -------
Total current liabilities................................... 33,439 14,018
-------- -------
Non-current liabilities:
Obligations under capital leases.......................... 375 457
-------- -------
Commitments and contingencies (Note 6)
Quotaholders' equity:
Capital, par value R $1.00, authorized and outstanding
quotas--50,000,000 in 1999 and 1,264,127 in 1998....... 26,540 1,082
Additional paid-in capital................................ 2,309 831
Accumulated deficit....................................... (15,443) (3,442)
Accumulated other comprehensive income.................... 2,573 34
-------- -------
15,979 (1,495)
-------- -------
Total liabilities and quotaholders' equity............. $ 49,793 $12,980
======== =======
</TABLE>
See accompanying notes.
F-20
<PAGE> 119
NETSTREAM TELECOM LTDA.
STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
AND ELEVEN MONTHS ENDED DECEMBER 31, 1998
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT QUOTA AND PER QUOTA DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Gross revenue............................................... $ 533 $ --
Sales taxes................................................. (138) --
---------- ----------
Net revenue................................................. 395 --
---------- ----------
Operating costs and expenses:
Cost of revenues.......................................... 1,768 --
Selling, general and administrative....................... 9,691 3,848
Depreciation and amortization............................. 1,511 --
---------- ----------
12,970 3,848
---------- ----------
Loss from operations........................................ 12,575 3,848
Foreign exchange loss....................................... 254 6
Interest expense............................................ 51 --
---------- ----------
Loss before income taxes.................................... 12,880 3,854
Income tax benefit.......................................... 879 412
---------- ----------
Net loss.................................................... $ 12,001 $ 3,442
========== ==========
Basic loss per quota........................................ $ 5.13 $ 2.72
========== ==========
Weighted average quotas outstanding......................... 2,339,183 1,264,127
========== ==========
</TABLE>
See accompanying notes.
F-21
<PAGE> 120
NETSTREAM TELECOM LTDA.
STATEMENTS OF QUOTAHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
AND ELEVEN MONTHS ENDED DECEMBER 31, 1998
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT QUOTA AND PER QUOTA DATA)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
NUMBER OF PAID-IN ACCUMULATED COMPREHENSIVE QUOTAHOLDERS'
QUOTAS CAPITAL CAPITAL DEFICIT INCOME EQUITY
---------- ------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ORIGINAL QUOTA ISSUANCE......... 1,264,127 $ 1,082 $ -- $ -- -- $ 1,082
Additional capital increase..... -- -- 831 -- -- 831
Net loss........................ -- -- -- (3,442) -- (3,442)
Currency translation
adjustments................... -- -- -- -- 34 34
--------
Comprehensive loss.............. -- -- -- -- -- (3,408)
---------- ------- ------ -------- ------ --------
BALANCE AT DECEMBER 31, 1998.... 1,264,127 1,082 831 (3,442) 34 (1,495)
Capital increase on September
24, 1999...................... 48,735,873 25,458 -- -- -- 25,458
Additional capital increase..... -- -- 1,478 -- -- 1,478
Net loss........................ -- -- -- (12,001) -- (12,001)
Currency translation
adjustments................... -- -- -- -- 2,539 2,539
--------
Comprehensive loss.............. -- -- -- -- -- (9,462)
---------- ------- ------ -------- ------ --------
BALANCES AT SEPTEMBER 30,
1999.......................... 50,000,000 $26,540 $2,309 $(15,443) $2,573 $ 15,979
========== ======= ====== ======== ====== ========
</TABLE>
F-22
<PAGE> 121
NETSTREAM TELECOM LTDA.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
AND ELEVEN MONTHS ENDED DECEMBER 31, 1998
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(12,001) $(3,442)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization expense.................. 1,511 --
Unrealized foreign exchange loss....................... 235 6
Expenses contributed by affiliated company............. 1,478 831
Changes in operating assets and liabilities:..............
Accounts receivable.................................... (362) --
Other current liabilities.............................. 37 (278)
Trade accounts payable................................. 106 403
Social charges payable................................. 721 190
Other current liabilities.............................. 352 38
Due to affiliated companies............................ 7,950 2,245
-------- -------
Net cash provided by (used in) operating activities.... 27 (7)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Initial capital contribution.............................. -- 9
-------- -------
Net cash provided by investing activities.............. 9
-------- -------
Net increase in cash........................................ 27 2
Cash at beginning of period................................. 2 --
-------- -------
Cash at end of period....................................... $ 29 $ 2
======== =======
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING
ACTIVITIES
Plant and equipment and recoverable taxes acquired through
increase in due to affiliated companies................... $ 51,065 $12,260
======== =======
Plant and equipment acquired through capital leases......... 135 524
======== =======
Increase in capital through conversion of due to affiliated
companies balances........................................ 25,458 1,073
======== =======
Plant and equipment included in current liabilities......... 3,093 --
======== =======
Capital lease payment financed through due to affiliated
companies................................................. $ 46 $ --
======== =======
</TABLE>
See accompanying notes
F-23
<PAGE> 122
NETSTREAM TELECOM LTDA.
NOTES TO FINANCIAL STATEMENTS
(EXPRESSED IN THOUSANDS OF U.S. DOLLARS)
1. ORGANIZATION AND BASIS OF PRESENTATION
Netstream Telecom Ltda. ("the Company" or "Netstream") is a limited
liability company organized under the laws of Brazil. The Company provides
broadband telecommunication services to business and government customers in
Brazil. The Company was in the development stage until May 1999, when it began
providing service in Brazil's two largest cities, Rio de Janeiro and Sao Paulo.
The Company plans to extend services to other Brazilian cities, including Belo
Horizonte, Brasilia, Campinas, Curitiba, Porto Alegre and Salvador, in 1999 and
2000. The Company operates under specialized circuit and network services
licenses provided by the Brazilian National Telecommunications Agency (Agencia
Nacional de Telecomunicacoes or "ANATEL"), which are granted for an indefinite
term.
Netstream was originally formed in February 1998 as a division of Promon
Tecnologia S.A. ("Promon"), a Brazilian engineering company. The Netstream
division of Promon primarily consisted of certain general and administrative
costs incurred in connection with the start-up of operations. The Company was
formed on July 14, 1998 as a wholly owned subsidiary of Promon and the Netstream
division of Promon was subsequently transferred to the Company. Promon and other
affiliated companies provide various financing and management services for the
Company. See related party transactions Note 5.
Promon is controlled by Promon Ltda., a limited liability company owned by
certain individuals (the "Controlling Owners"), along with minority interests
held by the current and former employees of Promon or its other affiliates. Such
individuals and current and former employees are referred to herein as the
"Owners".
On August 20, 1999, the Controlling Owners entered into a definitive sale
agreement with an indirect wholly owned subsidiary of AT&T Corp. for the sale of
100% of the capital of the Company, including settlement of the due to Promon
and other affiliates' outstanding balances. This transaction requires approval
by ANATEL. Such approval was granted on November 12, 1999. This transaction is
expected to close during December 1999.
In connection with the sale agreement, SL Participacoes S.A. was created to
hold the direct ownership interests of the Owners. On September 24, 1999, the
capital of the Company was increased through the conversion of Netstream's
liabilities to Promon into 48.7 million quotas. As of September 30, 1999, the
Company's capital consisted of 50,000,000 registered quotas of R$1.00 each, of
which one quota is held by Promon Ltda. and the remainder are held by SL
Participacoes S.A.
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America and include the
combined results of the Company and the Netstream division of Promon.
Substantially all transactions of the Company were funded by Promon through
the due to affiliates account. The cash flow statement reflects only the cash
receipts and disbursements which were effected through Netstream's bank account.
Other transactions which were effected through Promon's bank accounts are
considered non-cash transactions and are reported as supplemental information to
the cash flow statement.
Additional paid-in-capital of $1,478 and $831 in 1999 and 1998,
respectively, represents certain general and administrative costs absorbed by
Promon on behalf of the Company, net of the related income tax benefits of $879
and $412 which will be realized by Promon.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Currency translation
The financial statements have been translated into U.S. dollars from the
Company's functional currency, the Brazilian Real, in accordance with Financial
Accounting Standards Board (FASB) Statement No. 52,
F-24
<PAGE> 123
NETSTREAM TELECOM LTDA.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
"Foreign Currency Translation." Assets and liabilities have been translated
using exchange rates in effect at the balance sheet dates. Statement of
operations amounts have been translated using average exchange rates for the
reporting periods. Translation gains and losses are included in accumulated
other comprehensive income within quotaholders' equity.
b) 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 in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
c) Plant and equipment
Plant and equipment are stated on the basis of cost. Construction,
engineering and labor costs directly related to the development of the Company's
networks are capitalized. The Company begins depreciating these costs when the
networks become commercially operational. Plant and equipment are depreciated
using the straight-line method over estimated useful lives as follows:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Switching equipment......................................... 5
Transmission equipment...................................... 7
Cables...................................................... 10
Underground installation.................................... 25
Other plant and equipment................................... 3 to 10
</TABLE>
d) Income taxes
Income and social contribution taxes have been provided using the liability
method in accordance with FASB Statement No. 109, "Accounting for Income Taxes."
e) Revenue recognition
Revenues are recognized as services are provided.
f) Advertising and promotional costs
Advertising and promotional costs are expensed as incurred and were $739
and $450 in 1999 and 1998, respectively.
g) Earnings (loss) per quota
Earnings (loss) per quota are calculated in accordance with FASB Statement
No. 128, "Earnings Per Share."
h) Fair value of financial instruments
The carrying amount of cash, accounts receivable and accounts payable
approximated fair value based on the short maturity of these financial
instruments. The fair value of the due to affiliated companies' balances is not
estimable as the timing and manner of settlement is uncertain in the absence of
the successful completion of the sale agreement referred to in Note 1.
F-25
<PAGE> 124
NETSTREAM TELECOM LTDA.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
DESCRIPTION 1999 1998
------------------------------------------------------ ------------- ------------
<S> <C> <C>
Switching equipment................................... $ 2,160 $ --
Transmission equipment................................ 17,281 --
Cables................................................ 2,053 --
Underground installation.............................. 15,772 --
Other plant and equipment............................. 10,470 --
Construction in progress.............................. 1,259 12,212
------- -------
48,995 12,212
Less accumulated depreciation and amortization........ 1,511 --
------- -------
Plant and equipment, net.............................. $47,484 $12,212
======= =======
</TABLE>
4. INCOME TAXES
The Company is subject to income taxes but has not incurred a liability for
such taxes due to losses incurred. At September 30, 1999 the Company has tax
loss carryforwards of approximately $269. These carryforwards are available to
offset up to 30% future taxable income in any given year and do not expire.
The tax effects of temporary differences that give rise to deferred tax
assets are presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Net operating loss carryforwards...................... $ 89 $ --
Pre-operating expenses deferred for tax purposes...... 2,692 839
Depreciation.......................................... 446 --
Capital leases........................................ 84 --
------- -----
3,311 839
Less: valuation allowance............................. (3,311) (839)
------- -----
Net deferred tax asset................................ $ -- $ --
======= =====
</TABLE>
The deferred tax assets have been fully offset by a valuation allowance
resulting from the uncertainty surrounding the future realization of the net
deferred tax asset.
Income tax expense for the periods ended September 30, 1999 and December
31, 1998 differed from the amounts computed by applying the applicable statutory
income tax rate in which the Company operates as a result of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Computed "expected" tax benefit....................... $ 4,766 $1,271
Effect of increase in social contribution rate........ (515) --
Increase in valuation allowance....................... (3,376) (839)
Other................................................. 4 (20)
------- ------
$ 879 $ 412
======= ======
</TABLE>
F-26
<PAGE> 125
NETSTREAM TELECOM LTDA.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. RELATED PARTY TRANSACTIONS
a) Due to affiliated companies
Loans from affiliated companies, which result from the acquisition of plant
and equipment and payment of expenses by the affiliates on behalf of the
Company, are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Promon Tecnologia S.A. ............................... $ 7,204 $ --
Promon Engenharia Ltda. .............................. 663 --
Promon Eletronica Ltda. .............................. 21,384 13,267
SL Participacoes S.A. ................................ 149 --
------- -------
$29,400 $13,267
======= =======
</TABLE>
Loans from affiliated companies are non interest bearing and are due to be
repaid by December 31, 1999. Repayment is expected to occur in connection with
the closing of the sale of the Company referred to in Note 1. In the absence of
this closing prior to December 31, 1999, the affiliated companies have indicated
they will extend the repayment terms of the above balances to December 31, 2000.
(b) Plant and equipment acquisitions and operating expenses
Promon and its subsidiaries act as general contractor for the construction
and installation of Netstream's broadband network and also have incurred certain
operating expenses on Netstream's behalf.
The following amounts were charged to Netstream by Promon and are included
in plant and equipment and recoverable taxes:
<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Purchases of property and equipment, including
value-added taxes................................... $41,782 $11,819
Engineering services.................................. 1,534 441
Construction management fee........................... 7,749 --
</TABLE>
Substantially all of the operating expenses of Netstream were funded
through the due to affiliated companies' balances.
The purchases of property and equipment, including value-added taxes,
engineering services and the operating expenses were charged to Netstream at
cost. Construction management fees changed to Netstream were based on rates
similar to those charged by Promon to unrelated companies for similar services.
General and administrative expenses include finance, legal, facilities and
systems. These expenses were allocated to the Company based on utilization or
other methods which management believes to be reasonable.
F-27
<PAGE> 126
NETSTREAM TELECOM LTDA.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment and facilities under noncancelable
lease arrangements. Future minimum payments under capital leases and operating
leases with initial terms of one year or more at September 30, 1999 were as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FOR THE 12 MONTH PERIODS ENDED SEPTEMBER 30, LEASES LEASES
------------------------------------------------------------ ------- ---------
<S> <C> <C>
2000........................................................ $ 331 $ 593
2001........................................................ 366 567
2002........................................................ 103 515
2003........................................................ -- 439
2004........................................................ -- 265
2005........................................................ -- 11
----- ------
Total minimum lease payments................................ 800 $2,390
======
Less amount representing interest........................... (118)
-----
Present value of net minimum lease payments, including
current maturities of $307................................ $ 682
=====
</TABLE>
Installments under the capital leases are indexed to the U.S. dollar.
Plant and equipment includes the following amounts for capitalized leases:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Equipment............................................. $504 $588
Less allowances for amortization...................... (78) --
---- ----
$426 $588
==== ====
</TABLE>
Rent expense for the periods ended September 30, 1999 and December 31, 1998
was $276 and $123, respectively.
OTHER
In accordance with the legislation in force in Brazil, tax registers
related to federal, state and municipal taxes are subject to examination by the
respective tax authorities for 5 to 30 years.
Commitments for construction or purchase of plant and equipment
approximated $8,552 at September 30, 1999.
In the normal course of business, the Company may be subject to
proceedings, lawsuits and other claims. Although there can be no assurance that
the Company will prevail in every case, management does not believe that the
ultimate disposition of known legal contingencies will have a material effect on
the Company's financial condition, results of operations or cash flows.
F-28
<PAGE> 127
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
FirstCom Corporation
We have audited the accompanying consolidated balance sheets of FirstCom
Corporation as of December 31, 1999 and 1998 and the related consolidated
statements of operations and stockholders' equity(deficit) and cash flows for
each of the two years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 consolidated financial position of FirstCom
Corporation at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Miami, Florida
February 14, 2000
F-29
<PAGE> 128
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of FirstCom Corporation
In our opinion, the consolidated statements of income, of cash flows and of
changes in stockholders' equity for the year ended December 31, 1997 present
fairly, in all material respects, the results of operations and cash flows of
FirstCom Corporation and its subsidiaries for the year ended December 31, 1997,
in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of FirstCom
Corporation for any period subsequent to December 31, 1997.
As described in Note 4, during 1996 the Company had transactions and
relationships with related parties. Because of these relationships, it is
possible that the terms of these transactions may not be the same as those that
would result from transactions among unrelated parties.
The Company has restated its financial statements for the years ended
December 31, 1997 and 1996 to reflect the effect of revising the price per share
of Company common stock issued in connection with the May 1996 acquisition of
FirstCom Peru (formerly Resetel S.A.) from $2.25 to $5.99 per share.
/s/ PricewaterhouseCoopers
Miami, Florida
March 2, 1998, except as
to restatement described above
which is as of August 6, 1998
F-30
<PAGE> 129
FIRSTCOM CORPORATION
CONSOLIDATED BALANCE SHEETS
THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 12,986 $ 8,892
Restricted cash........................................... 645 22,599
Restricted investments.................................... 20,440 19,670
Accounts receivable, net of allowance for doubtful
accounts of $1,134 and $953 in 1999 and 1998,
respectively........................................... 11,041 6,935
Prepaid expenses and other current assets................. 2,775 624
-------- --------
Total current assets.............................. 47,887 58,720
Restricted investments...................................... -- 20,021
Property, plant, and equipment, net......................... 92,469 45,901
Intangible assets, net...................................... 17,704 15,765
Deferred financing costs and other assets................... 14,050 14,437
-------- --------
Total assets...................................... $172,110 $154,884
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Vendor financing, current................................. $ 814 $ 254
Lease obligations, current................................ 70 136
Accounts payable.......................................... 12,653 8,238
Accrued interest.......................................... 3,716 3,695
Other accrued expenses.................................... 5,334 1,963
Deferred income taxes..................................... 302 --
Other current liabilities................................. 1,325 471
-------- --------
Total current liabilities......................... 24,214 14,757
Senior notes, net........................................... 133,197 132,338
Vendor financing............................................ 4,050 1,337
Lease obligations, less current portion..................... 142 238
Deferred income taxes....................................... 2,228 --
Other Liabilities........................................... 2,247 --
-------- --------
Total liabilities................................. 166,078 148,670
Minority interest........................................... 3,012 --
Redeemable Preferred Stock, $.001 par value, authorized
10,000,000 shares, issued and outstanding 1,345,507 shares
as of December 31, 1999................................... 11,720 --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.001 par value, authorized 50,000,000 shares,
issued and outstanding 26,858,526 and 19,084,300 shares as
of December 31, 1999 and 1998, respectively............... 27 19
Additional paid in capital.................................. 68,476 31,737
Warrants.................................................... 26,737 26,737
Accumulated deficit......................................... (95,057) (51,475)
Cumulative translation adjustments.......................... (238) (238)
-------- --------
(55) 6,780
Shareholder loans........................................... (8,645) (606)
-------- --------
Total stockholders' equity (deficit).............. (8,700) 6,174
-------- --------
Total liabilities and stockholders' equity
(deficit)........................................ $172,110 $154,844
</TABLE>
See accompanying notes.
F-31
<PAGE> 130
FIRSTCOM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Long Distance........................................... $ 24,318 $ 16,445 $ --
Internet and data....................................... 14,038 1,697 1,130
----------- ----------- -----------
38,356 18,142 1,130
OPERATING EXPENSES:
Cost of revenues:
Long Distance......................................... 16,361 12,379 --
Internet and data..................................... 5,644 1,700 1,203
----------- ----------- -----------
22,005 14,079 1,203
Selling, general and administrative..................... 25,698 12,293 4,678
Non-cash compensation and consulting expenses (selling,
general, and administrative).......................... 353 175 4,640
Depreciation and amortization........................... 10,211 2,237 1,201
Merger expense.......................................... 1,008 -- --
----------- ----------- -----------
59,275 28,784 11,722
----------- ----------- -----------
Loss from operations.................................... (20,919) (10,642) (10,592)
Interest expense........................................ (22,552) (19,578) (6,521)
Interest income......................................... 2,286 5,448 1,315
Other income/(expense), net............................. (84) (550) (68)
----------- ----------- -----------
Net loss before income taxes and minority interest
expense............................................... (41,269) (25,322) (15,866)
Income taxes............................................ 170 -- --
----------- ----------- -----------
Net loss before minority interest expense............... (41,439) (25,322) (15,866)
Minority interest expense............................... 33 -- --
----------- ----------- -----------
Net Loss................................................ $ (41,472) $ (25,322) $ (15,866)
Net basic and diluted loss per share.................... $ (1.94) $ (1.33) $ (0.95)
Weighted average common shares outstanding.............. 21,354,012 19,084,300 16,667,719
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-32
<PAGE> 131
FIRSTCOM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIT)
THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN
SHARES AMOUNTS CAPITAL WARRANTS
---------- ------- ---------- --------
<S> <C> <C> <C> <C>
Balances at January 1, 1997....................... 16,152,518 $ 16 $23,168 $ --
Conversion of debt................................ 1,101,782 1 1,993 --
Beneficial conversion feature..................... -- -- 810 --
Reversal of beneficial conversion feature upon
redemption of debt.............................. -- -- (344) --
Stock issued to a former director in connection
with the FirstCom Long Distance acquisition..... 100,000 -- 205 --
Stock issued as compensation to officers and
former directors................................ 1,350,000 2 3,756 --
Stock option grants to officers and former
directors....................................... -- -- 882 --
Conversion of liabilities......................... 80,000 -- 240 --
Stock issued for past financial assistance........ 300,000 -- 852 --
Warrants to purchase common stock................. -- -- -- 26,737
Currency translation adjustment................... -- -- -- --
Net loss.......................................... -- -- -- --
---------- ---- ------- -------
Total comprehensive net loss............ -- -- -- --
---------- ---- ------- -------
Balances at December 31, 1997..................... 19,084,300 19 31,562 26,737
Shareholder loans................................. -- -- -- --
Stock Option Grants to non-employees.............. -- -- 175 --
Net loss and comprehensive net loss............... -- -- -- --
---------- ---- ------- -------
Balances at December 31, 1998..................... 19,084,300 19 31,737 26,737
Exercise of stock options and warrants............ 6,374,226 6 23,015 --
Stock options vested.............................. -- -- 353 --
Common Stock issued with the acquisition of
FirstCom Colombia............................... 100,000 -- 279 --
Common Stock sold to Executive Officer............ 800,000 1 8,559 --
Promissory Note Conversion........................ 500,000 1 4,533 --
Forgiveness of Shareholder Loans.................. -- -- -- --
Preferred Stock PIK Dividend...................... -- -- -- --
Accretion of Preferred Stock...................... -- -- -- --
Net Loss and comprehensive net loss............... -- -- -- --
---------- ---- ------- -------
Balances at December 31, 1999..................... 26,858,526 $ 27 $68,476 $26,737
---------- ---- ------- -------
</TABLE>
F-33
<PAGE> 132
FIRSTCOM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIT) -- (CONTINUED)
THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA
<TABLE>
<CAPTION>
CUMULATIVE
ACCUMULATED TRANSLATION SHAREHOLDER
DEFICIT ADJUSTMENT LOANS TOTAL
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Balances at January 1, 1997.................. $(10,287) $ (78) $ -- $ 12,819
Conversion of debt........................... -- -- -- 1,994
Beneficial conversion feature................ -- -- -- 810
Reversal of beneficial conversion feature
upon redemption of debt.................... -- -- -- (344)
Stock issued to a former director in
connection with the FirstCom Long Distance
acquisition................................ -- -- -- 205
Stock issued as compensation to officers and
former directors........................... -- -- -- 3,758
Stock option grants to officers and former
directors.................................. -- -- -- 882
Conversion of liabilities.................... -- -- -- 240
Stock issued for past financial assistance... -- -- -- 852
Warrants to purchase common stock............ -- -- -- 26,737
Currency translation adjustment.............. -- (160) -- (160)
Net loss..................................... (15,866) -- -- (15,866)
-------- ----- ------- --------
Total comprehensive net loss....... -- -- -- (16,026)
-------- ----- ------- --------
Balances at December 31, 1997................ (26,153) (238) -- 31,927
Shareholder loans............................ -- -- (606) (606)
Stock Option Grants to non-employees......... -- -- -- 175
Net loss and comprehensive net loss.......... (25,322) -- -- (25,322)
-------- ----- ------- --------
Balances at December 31, 1998................ (51,475) (238) (606) 6,174
Exercise of stock options and warrants....... -- -- -- 23,021
Stock options vested......................... -- -- -- 353
Common Stock issued with the acquisition of
FirstCom Colombia.......................... -- -- -- 279
Common Stock sold to Executive Officer....... -- -- (8,560) --
Promissory Note Conversion................... -- -- -- 4,534
Forgiveness of Shareholder Loans............. -- -- 606 606
Preferred Stock PIK Dividend................. (764) -- -- (764)
Accretion of Preferred Stock................. (1,346) -- -- (1,346)
Interest on Shareholder Loan................. -- -- (85) (85)
Net Loss..................................... (41,472) -- -- (41,472)
-------- ----- ------- --------
Balances at December 31, 1999................ $(95,057) $(238) $(8,645) $ (8,700)
</TABLE>
See accompanying notes.
F-34
<PAGE> 133
FIRSTCOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THOUSANDS OF US DOLLARS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(41,472) $(25,322) $(15,866)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense..................... 10,211 2,237 1,201
Deferred income taxes..................................... (448) -- --
Amortization of deferred financing costs and original
issues discounts........................................ 1,541 1,279 518
Accrued income on restricted investments.................. (1,750) (2,799) (583)
Beneficial conversion features on convertible debentures,
net..................................................... -- -- 466
Capitalized interest related to network construction...... (1,532) (2,955) (712)
Services exchanged for common stock....................... -- -- 852
Non-cash compensation and consulting expense.............. 853 175 4,640
Interest converted to equity.............................. -- -- 45
Accrued interest on shareholder loan...................... (85) -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... (3,364) (4,291) (29)
Prepaid expenses and other current assets............... (1,527) 645 (258)
Other assets............................................ 590 (203) (64)
Accounts payable and accrued expenses................... 5,108 2,560 4,602
Due to related parties.................................. -- (263) (179)
Other current liabilities............................... 434 548 (105)
-------- -------- --------
Net cash used in operating activities..................... (31,941) (28,389) (5,472)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of telecommunications network...................... (33,124) (34,674) (2,763)
Reduction of (increase in) restricted cash.................. 21,955 38,429 (61,028)
Acquisition of FirstCom Long Distance, net.................. -- -- (5,799)
Acquisition of FirstCom Internet, net....................... -- (1,528) --
Acquisition of FirstCom Colombia, net....................... (4,779) -- --
-------- -------- --------
Net cash provided by (used in) investing activities......... (15,948) 2,227 (69,590)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of (increase in) restricted investments........... 21,000 21,000 (57,309)
Repayment of convertible debentures......................... -- (1,550) --
Shareholder Loans........................................... 606 (606) --
Net proceeds from vendor financing.......................... 2,435 1,591 --
Issuance of Senior Notes.................................... -- -- 150,000
Deferred financing costs.................................... -- -- (7,000)
Proceeds from convertible debentures........................ -- -- 3,500
Exercise of stock options................................... 23,021 -- --
(Payments under) proceeds from leasing obligations.......... (144) (317) 84
Net change in bank debt and promissory notes................ (4,545) -- --
Redeemable preferred stock issued........................... 9,610 -- --
-------- -------- --------
Net cash provided by financing activities................... 51,983 20,118 89,275
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 4,094 (6,044) 14,213
-------- -------- --------
Cash and cash equivalents at beginning of year.............. 8,892 14,936 723
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 12,986 $ 8,892 $ 14,936
Supplemental Cash Flow Disclosure:
Cash paid for interest.................................... $ 22,348 $ 21,000 $ 545
Supplemental noncash disclosure:
Promissory notes issued in connection with the acquisition
of FirstCom Colombia, S.A............................... $ 7,000 -- --
Amount recorded for common stock issued in acquisition of
FirstCom Colombia, S.A.................................. $ 279 -- --
Common stock issued in payment of outstanding promissory
notes................................................... $ 5,000 -- --
Shareholder loan forgiven................................. $ 606 -- --
</TABLE>
During 1999, 1998 and 1997, the Company capitalized $1,532; $2,955 and $712 of
interest costs related to the construction of a fiber optic network.
See accompanying notes.
F-35
<PAGE> 134
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA
1. ORGANIZATION AND BUSINESS FORMATION
FirstCom Corporation ("the Company"), is a provider of telecommunications
services in Chile, Peru and Colombia. Historically, the Company has developed
its operations in Latin America through the acquisition of holding and operating
companies that own licenses, concessions or rights-of-way in what the Company
believes to be attractive markets. The Company operates in Chile as FirstCom
Networks, S.A. ("FirstCom Networks"), FirstCom Long Distance, S.A. ("FirstCom
Long Distance"), and FirstCom Internet, S.A. ("FirstCom Internet"), in Peru as
FirstCom, S.A. ("FirstCom Peru"), and in Colombia as FirstCom Colombia, S.A.
("FirstCom Colombia", formerly "Teleductos").
Although separate legal entities, the Company operates its Chilean
subsidiaries as one functional entity, providing seamless service delivery of
integrated telecommunication solutions to its Chilean customers. Services
provided by the Company to businesses in Santiago include: (i) high speed data
transmission (ii) domestic and international long distance services, (iii)
internet access services on a dial-up and dedicated access basis, as well as
related value-added services such as webhosting and corporate e-mail. FirstCom
Peru provides integrated telecommunication solutions to its customers,
including: (i) high-speed data transmission, (ii) dedicated internet access and
(iii) domestic and international long distance telephony services. FirstCom
Colombia provides multinational, national and local businesses with high speed
data services and dedicated internet access in the cities of Bogota and Cali,
Colombia.
PROPOSED MERGER WITH AT&T LATIN AMERICA CORP.
On November 1, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with AT&T ("AT&T"), AT&T Latin America Corp.
(formerly Kiri Inc.), an indirect wholly-owned subsidiary of AT&T ("AT&T Latin
America"), and Frantis, Inc., a Delaware corporation ("Frantis"). The Merger
Agreement provides for the merger (the "Merger") of the Company with and into
Frantis, which is a direct wholly owned subsidiary of AT&T Latin America Corp.
Pursuant to the Merger, which is subject to approval of the Company's
shareholders, among other conditions, shareholders of the Company will receive
(i) one share of Class A common stock ("Class A Shares") of AT&T Latin America
in exchange for each share of common stock of the Company; and (ii) one share of
Series A convertible preferred stock of AT&T Latin America in exchange for each
share of Series A Preferred Stock, of the Company.
Upon consummation of the Merger, on a fully-diluted basis, the former
shareholders of the Company will own approximately 34% of the common stock of
AT&T Latin America in the form of Class A Shares.
The closing of the Merger Agreement is subject to certain conditions,
including, but not limited to, the contribution by the stockholders of AT&T
Latin America (other than the stockholders of the Company) to AT&T Latin America
of a total of not less than $70 million in cash equity (including the $50
million contributed to date), the provision by AT&T of a $100 million revolving
credit facility to AT&T Latin America and, if requested by AT&T, the successful
completion of a tender offer for the Company's 14% Notes due 2007. The Company
believes it is likely that AT&T will request the Company to initiate a tender
offer for the Notes. Further, the Merger is subject to the approval of the
Merger by the Company's shareholders and certain regulatory approvals.
The Merger Agreement contains provisions restricting the conduct of the
Company's business until the Merger is closed or the Merger Agreement is
terminated. With certain exceptions, these provisions prohibit the Company from,
among other things, issuing capital stock, declaring dividends, disposing of a
material amount of assets, making material capital expenditures, incurring
indebtedness, entering into or amending its organizational documents, in each
case without the consent of AT&T.
F-36
<PAGE> 135
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITIONS OF BUSINESSES
During the three years ended December 31, 1999, the Company made the
following acquisitions, each of which was accounted for as a purchase. The
consolidated financial statements include the operating results from the
effective date of acquisition.
Acquisition of Firstcom Long Distance
On December 17, 1997, the Company acquired 100% of FirstCom Long Distance's
outstanding stock for $5,799 in cash, net of cash acquired. In addition, the
Company incurred other direct acquisition costs totaling approximately $300,
which includes the fair market value of 100,000 shares of Company Common Stock
paid to a former director of the Company for his services in facilitating the
transaction.
The excess purchase price, of approximately $6,200, over the fair value of
the net assets acquired has been allocated to FirstCom Long Distance's telephone
carrier concession. The Company has accounted for the acquisition of FirstCom
Long Distance as if it occurred on December 31, 1997.
Acquisition of Firstcom Internet
On October 7, 1998 the Company acquired 99.9% of FirstCom Internet, S.A.'s
outstanding stock for $1,528 in cash, net of cash acquired. Goodwill of
approximately $1,400 was recorded representing the excess cost over the fair
value of net assets acquired in the transaction.
Acquisition of Firstcom Colombia
On February 2, 1999, the Company acquired 51% of FirstCom Colombia S.A.'s
outstanding stock for a total purchase price of approximately $12,000,
consisting of, $4,779 in cash, net of cash acquired, $7,000 in short-term
promissory notes, and 100,000 shares of the Company's common stock with a fair
value of $279. The promissory notes bear interest at 5% per annum and mature at
various dates through February 2000. The excess purchase price over the fair
value of the assets acquired of approximately $2,978 was allocated to goodwill
and is being amortized over 20 years. Also on February 2, 1999, the Company
purchased additional shares from FirstCom Colombia for $3,091, which increased
its ownership to 76%. On August 4, 1999 the Company converted the then
outstanding $5,000 principal balance of the Promissory Notes into 500,000 shares
of the Company's common stock. During November 1999, the Company purchased
additional shares from FirstCom Colombia for $3,800. As a result of this
purchase the Company's ownership in FirstCom Colombia increased to 86%.
Other Related Acquisition Disclosures -- Unaudited
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition of FirstCom Long Distance, FirstCom Internet
and FirstCom Colombia had occurred at the beginning of the periods presented,
and do not purport to be indicative of the results that actually would have
occurred if the acquisitions had been consummated on those dates or of results
which may occur in the future:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
<S> <C> <C>
Revenue..................................................... $38,756 $25,428
Net loss.................................................... (41,440) (26,333)
Net loss per share.......................................... $ (1.94) $ (1.38)
</TABLE>
F-37
<PAGE> 136
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the intangible assets resulting from the
Company's acquisitions:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
------------------ USEFUL
1999 1998 LIFE
------- ------- ----------------
<S> <C> <C> <C>
Satellite transmission rights................... $ 1,166 $ 1,166 10 years
Concessions..................................... 13,870 13,870 20 years
Goodwill........................................ 5,708 2,730 10-20 years
------- -------
20,744 17,766
Less: accumulated amortization.................. (3,040) (2,001)
------- -------
$17,704 $15,765
------- -------
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED ITEMS
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
Through December 31, 1997, the Company's subsidiaries used the following
functional currency: FirstCom Peru-Peruvian sole, FirstCom Networks -Chilean
peso. As such, assets and liabilities are translated at end-of-period exchange
rates. Income, expense and cash flows are translated at weighted average
exchange rates for the period. The resulting currency translation adjustments
are accumulated and reported as a component of stockholders' equity.
As a result of (1) the Company's U.S. dollar denominated senior note
financing during October 1997, (2) the acquisition of FirstCom Long Distance on
December 17, 1997 and (3) the fact that FirstCom Long Distance and FirstCom
Networks operate as one functional entity of which FirstCom Long Distance
represents the majority of the operations, effective January 1, 1998 the
Company's Chilean subsidiaries began using the U.S. dollar as their functional
currency. This change did not have a significant impact on the Company's results
of operations.
Effective January 1, 1998 the Company's Peruvian subsidiary, FirstCom Peru,
began using the U.S. dollar as its functional currency. Although, through
December 31, 1997 FirstCom Peru incorrectly used the local currency as its
functional currency, the impact of using the U.S. Dollar as FirstCom Peru's
functional currency on prior periods is not significant. This change did not
have a significant impact on the Company's results of operations.
Included in other expense in 1999 and 1998 is approximately $448 and $500,
respectively, of foreign exchange losses resulting from the translation into
U.S. dollars of the Company's subsidiaries financial statements.
In 1999, FirstCom Colombia used the U.S. dollar as its functional currency.
RECLASSIFICATIONS
Certain amounts in the 1998 consolidated financial statements were
reclassified to conform with the 1999 presentation.
F-38
<PAGE> 137
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of
credit risk are primarily cash and cash equivalents, restricted cash, restricted
investments and accounts receivable.
The Company places its cash and cash equivalents, restricted cash, and
restricted investments with high-quality institutions. The majority of accounts
receivable are due from commercial telecommunications customers. Credit is
extended based on evaluation of the customer's financial condition and generally
collateral is not required. Anticipated credit losses are provided for in the
consolidated financial statements and have been within management's
expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, restricted cash, accounts
receivable and accounts payable approximated fair value based on the short
maturity of these financial instruments. As of December 31, 1999 and 1998 the
carrying amount of debt, excluding the Senior Notes, and capital leases
approximated fair value based on the prevailing market rates currently available
to the Company for similar financial instruments. The fair value of the Senior
Notes at December 31, 1999 was $154,500. As of December 31, 1998 the carrying
amount of the Senior Notes approximated fair value.
CASH AND CASH EQUIVALENTS
The Company considers all certificates of deposit and highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
RESTRICTED CASH AND INVESTMENTS
Restricted cash represents proceeds from the senior note offering (see Note
3) to be used, in accordance with the terms of the related Indenture Agreement
("Indenture"), primarily for the purchase of telecommunications equipment in
Peru and Chile. Restricted investments are U.S. Treasury Notes that are
restricted for the repayment of interest on the senior notes, and are stated at
amortized cost, which approximated fair value at December 31, 1999. These
investments mature at various dates through October 2000. Management designated
these investments as held-to-maturity.
PROPERTY, PLANT & EQUIPMENT
Property, plant, and equipment is recorded at cost and is depreciated using
the straight-line method over the estimated useful life of the related assets.
Construction, engineering, interest and labor costs directly related to the
development of the Company's networks are capitalized. The Company begins
depreciating these costs when the networks become commercially operational.
Property, plant, and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ ESTIMATED USEFUL
1999 1998 LIFE
------- ------- ----------------
<S> <C> <C> <C>
Telecommunications equipment.................... $94,356 $15,837 5 to 20 years
Telecommunications equipment pending
installation and construction in progress..... 1,260 27,635 --
Office equipment and furniture.................. 8,363 5,104 3 to 7 years
------- -------
103,979 48,576
Less: accumulated depreciation.................. (11,510) (2,675)
------- -------
Property, plant, and equipment, net............. $92,469 $45,901
------- -------
</TABLE>
F-39
<PAGE> 138
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the carrying amount of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Measurement of any impairment would
include a comparison of estimated future cash flows to be generated during the
remaining life of each long-lived asset to its net carrying value. When such
evaluation results in a deficiency, the asset is written down to its estimated
fair value.
ACCOUNTING ESTIMATES
The preparation of financial statements require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
OTHER ACCRUED EXPENSES
Other accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1999 1998
------ ------
<S> <C> <C>
Telecommunication equipment................................. $ -- $ 749
Accrued compensation........................................ 4,680 1,214
Other....................................................... 654 --
------ ------
$5,334 $1,963
------ ------
</TABLE>
COMMON STOCK EXCHANGED FOR OTHER THAN CASH
Common stock exchanged for services provided by employees and former
directors and as inducements to make loans have been recorded as compensation or
interest expense and additional paid in capital based on the fair value of the
common stock at the date of grant. The grant date fair value of the common stock
was based on the NASDAQ trading price.
REVENUE RECOGNITION
Revenues from telecommunication services are recognized as services are
provided. The Company enters into operating agreements with telecommunications
carriers in the United States under which international long distance traffic is
both delivered to the United States and received in Chile and Peru. The Company
has recorded the revenue and cost of revenue related to this exchange of traffic
with other carriers on a net basis (see note 7).
ADVERTISING COSTS
Advertising costs, included in selling, general and administrative
expenses, are expensed as incurred and were $3,661, $1,664 and $0 for 1999, 1998
and 1997, respectively.
NET LOSS PER SHARE
The computation of net loss per share of common stock is computed by
dividing net loss for the year by the weighted average number of shares
outstanding during the year. The weighted average number of shares outstanding
for the years ended December 31, 1999, 1998 and 1997 excludes 10.8 million, 16.7
million, and 15.6 million, respectively, of antidilutive stock options and
warrants.
F-40
<PAGE> 139
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method which requires the recognition of related expense on the grant date when
the exercise price of the stock option granted is less than the fair value of
the underlying common stock. Additionally, the Company provides pro forma
disclosure of net loss and loss per share as if the fair value based method had
been applied in measuring compensation expense for stock options granted in 1999
and 1998.
The policy of the Company has been to grant options at an exercise price
equal to the average price of the Company's common stock for the five days
preceding the date of the grant. Had compensation costs for the Company's stock
option grants been determined based on the fair value at the grant dates of
options granted consistent with the fair value based method, the Company's loss
and loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C> <C>
Net loss............................................ As Reported $(41,472) $(25,322)
Net loss............................................ Pro forma $(55,415) $(28,031)
Net loss per share.................................. As Reported $ (1.94) $ (1.33)
Net loss per share.................................. Pro forma $ (2.60) $ (1.47)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions; volatility of 90%, risk-free interest rate of 6.00%, zero dividend
yield and expected lives ranging from 3 to 6 years. The weighted average fair
value of stock options granted during 1997 (i) with a strike price equivalent to
the grant date fair value of the underlying common stock was $2.60, and (ii)
with a strike price less than the grant date fair value of the underlying common
stock was $2.26. The weighted average fair value of stock options granted during
1998 was $0.81. The weighted average fair value of stock options granted during
1999 was $6.82.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
The Company is subject to federal, state and foreign income taxes. At
December 31, 1999 the Company has net tax operating loss carryforwards of
approximately $59,000 for U.S. income tax purposes and approximately $46,900 for
foreign income tax purposes. These carryforwards are available to offset future
taxable income, if any, and expire for U.S. income tax purposes in the years
2007 through 2018. The foreign net operating loss carryforwards related (1) to
Peru of $15,300 expire in the years 2000 through 2003 and (2) to Chile of
$31,600 do not expire.
F-41
<PAGE> 140
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and liability are presented below:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
DEFERRED TAX ASSET:
Net operating loss carryforwards............................ $29,059 $16,153
Accounts receivable......................................... 626 469
Accrued Expenses............................................ 138 --
Non-cash compensation....................................... 370 372
------- -------
30,193 16,994
Less: valuation allowance................................... (30,112) (16,994)
------- -------
Net deferred tax asset...................................... $ 81 $ --
------- -------
DEFERRED TAX LIABILITY:
Property, Plant and Equipment............................... $(2,611) --
------- -------
Net Deferred Tax Liability.................................. $(2,530) $ --
------- -------
</TABLE>
The following table shows the principal reasons for the difference between
the effective income tax rate and the U.S. federal statutory income tax rate:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
U.S. Federal statutory income tax rate................... 35% 35% 35%
-------- ------- -------
Federal tax at statutory income tax rate................. $(14,445) $(8,863) $(5,553)
Foreign rate differential................................ 1,497 1,569 624
Increase in valuation allowance.......................... 13,118 7,294 4,929
-------- ------- -------
Provision for income taxes............................... 170 -- --
-------- ------- -------
</TABLE>
1999 income tax expense includes current foreign income taxes of $618 and
deferred foreign income taxes of $(448).
The domestic and foreign components of net loss are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Domestic............................................... $(26,065) $(18,613) $(12,636)
Foreign................................................ (15,407) (6,709) (3,230)
-------- -------- --------
$(41,472) $(25,322) $(15,866)
-------- -------- --------
</TABLE>
The deferred tax assets have been substantially offset by a valuation
allowance resulting from the uncertainty surrounding the future realization of
the net operating loss carryforwards.
SEGMENT REPORTING
Based on its organizational structure, the Company operates in six
reportable segments, combined by type of services and geographical areas: long
distance and Internet/data in Chile, long distance and Internet/data in Peru,
Internet/data in Colombia, and corporate activities. The Company's reportable
segments represent business units that primarily offer similar products and
services; however, the business units are managed separately due to the
geographic dispersion of their operations.
The Company's chief operating decision maker utilizes revenue information
in assessing performance and making overall operating decisions and resource
allocations. Communications services are generally provided utilizing the
Company's fiber optic networks, which do not make a distinction between the
types of services.
F-42
<PAGE> 141
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result, the Company does not allocate costs and expenses or assets by
segment. Profit and loss information is reported only on a country basis to the
chief operating decision maker and the Company's board of directors.
Revenues, EBITDA (earnings before interest, taxes, depreciation and
amortization), and total assets by segment for the years ending December 31,
1999, 1998 and 1997, respectively, are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
LONG DISTANCE REVENUES
Chile.................................................. $ 22,959 $ 16,445 $ --
Peru................................................... 1,359 0 --
Colombia............................................... -- -- --
Corporate.............................................. -- -- --
-------- -------- --------
$ 24,318 $ 16,445 $ 0
-------- -------- --------
INTERNET/DATA REVENUES
Chile.................................................. $ 5,525 $ 1,568 $ 1,130
Peru................................................... 1,316 129 --
Colombia............................................... 7,197 -- --
Corporate.............................................. -- -- --
-------- -------- --------
$ 14,038 $ 1,697 $ 1,130
-------- -------- --------
EBITDA
Chile.................................................. $ (1,385) $ (2,643) $ (1,580)
Peru................................................... (6,347) (1,738) (637)
Colombia............................................... 3,779 -- --
Corporate.............................................. (6,755) (4,024) (7,174)
-------- -------- --------
$(10,708) $ (8,405) $ (9,391)
-------- -------- --------
TOTAL ASSETS
Chile.................................................. $ 50,596 $ 35,055 $ 16,108
Peru................................................... 57,396 28,910 12,551
Colombia............................................... 29,288 -- --
Corporate.............................................. 34,830 90,879 148,277
-------- -------- --------
$172,110 $154,844 $176,936
-------- -------- --------
</TABLE>
Following is a reconciliation of EBITDA as, presented above, to loss from
operations as presented on the accompanying statement of operations:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
EBITDA................................................. $(10,708) $ (8,405) $ (9,391)
Less Depreciation and Amortization..................... 10,211 2,237 1,201
Loss from operations................................... $(20,919) $(10,642) $(10,592)
-------- -------- --------
</TABLE>
COMPREHENSIVE INCOME
During 1997, the Company had a $160 currency translation adjustment, which
is included in shareholders' equity. There are no other components of
comprehensive loss, other than the Company's net losses, for the years ending
December 31, 1998 and 1999.
F-43
<PAGE> 142
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Company
expects to adopt the new Statement effective January 1, 2000. The Statement will
require the recognition of all derivatives on the Company's consolidated balance
sheet at fair value. The Company does not anticipate that the adoption of this
Statement will have a significant effect on its results of operations or
financial position.
3. CAPITALIZATION
The Company has had transactions impacting its capitalization during the
past three years. The following information, in addition to the disclosures in
Note 4 -- Related Party Transactions and Note 5 -- Stock Options and Warrants,
describes the most significant of these transactions.
CREDIT FACILITIES
During December 1999, one of the Companies Chilean subsidiaries obtained a
$1,400 working capital revolving credit facility (the "Working Capital
Facility") from a local bank. The Working Capital Facility is denominated in
UF's (a published inflation adjusted unit used in financing transaction in
Chile) and bears interest at the prevailing market rates at the time of each
draw down. As of December 31, 1999, there were no amounts outstanding under the
Working Capital Facility.
VENDOR FINANCING
On November 11, 1998 a subsidiary of the Company entered into a financing
arrangement (the "First Vendor Financing") with one of the Company's significant
equipment vendors. The terms of the First Vendor Financing are as follows: (i)
maximum amount available $10,000 (ii) interest rate of LIBOR plus 5.5%, (iii)
the Company may draw on the facility until December 31, 2000, (iv) draws under
the facility shall be repaid in 20 consecutive quarterly principal and interest
payments and (v) is collateralized by the equipment being financed. On July 28,
1999 the Company increased the maximum amount available under the First Vendor
Financing from $10,000 to $29,500. As of December 31, 1999 the Company had
$4,864 outstanding under the First Vendor Financing.
On December 24, 1998 a subsidiary of the Company entered into a financing
arrangement (the "Second Vendor Financing") with another one of the Company's
significant equipment vendors. The terms of the Second Vendor Financing are as
follows: (i) maximum amount available $10,000, (ii) interest rate of Libor plus
4%, (iii) the Company may draw on the facility until December 31, 2000, (iv)
draws under the facility shall be repaid in 20 consecutive quarterly principal
and interest payments beginning on March 31, 2001, (v) interest only quarterly
payments shall be made for each draw from the respective date of funding through
December 31, 2000 and (v) is collateralized by the equipment being financed. As
of December 31, 1999 the Company had no amounts outstanding under the Second
Vendor Financing.
SENIOR NOTE OFFERING
On October 27, 1997, the Company completed a private offering (the "Senior
Note Offering") pursuant to Rule 144A and Regulation S promulgated under the
U.S. Securities Act of 1933 of 150,000 Units, consisting of an aggregate of
$150,000 aggregate principal amount of 14% Senior Notes due October 27, 2007
("Senior Notes") and 5,250,000 warrants (the "Unit Warrants") to purchase
5,250,000 shares of Common Stock of the Company at an exercise price of $4.40
per share. In addition, UBS Securities LLC, the initial purchaser of the Units
in the Senior Note Offering, was granted 2,250,000 warrants (the "Initial
Warrants") to acquire 2,250,000 shares of Common Stock of the Company at an
exercise price of $4.40 per share. The
F-44
<PAGE> 143
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Unit Warrants are and the Initial Warrants are currently exercisable and both
expire on October 27, 2007. Interest is payable semi-annually beginning on April
1, 1998.
The fair value of the Unit Warrants which is approximately $18,500 is
reflected as an original issue discount on the Senior Notes. Additionally, the
Company incurred direct financing costs of approximately $14,900, including the
fair value of $7,900 of the Initial Warrants, as determined by an investment
bank. The original issue discount and direct financing costs are being amortized
to interest expense over ten years using the level yield method with an
effective interest rate of 18.9 percent. The fair value of the Unit Warrants and
Initial Warrants was determined by an investment banking firm using the
Black-Scholes option pricing model with the following assumptions: volatility of
90%, risk-free interest rate of 6.24%, zero dividend yield and an expected life
of 10 years.
The Senior Notes are redeemable on or after October 27, 2002 at the option
of the Company, in whole or in part from time to time, at specified redemption
prices declining annually to 100% of the principal amount on or after October
27, 2005, plus accrued and unpaid interest. Upon a change in control, the
Company is required to make an offer to purchase the Senior Notes at a purchase
price equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any. The Senior Notes contain certain restrictive covenants
that, among other things, limit the ability of the Company to incur additional
debt or issue preferred stock, pay dividends, enter into related party
transactions or make certain other restricted payments.
The net proceeds to the Company from the Senior Note Offering were
approximately $142,500, after deducting the underwriting discount and offering
expenses. Approximately $57,300 of the proceeds were used to purchase a
portfolio of securities that was deposited in escrow for payment of interest on
the Senior Notes through October 27, 2000 and, under certain circumstances, as
security for repayment of principal of the Senior Notes.
In addition to the deposit of a portion of the proceeds from the Senior
Note Offering to fund interest payments on the Senior Notes through October
2000, the Company deposited $62 million of the proceeds from the Senior Note
Offering in a separate account under a trustee's control pending application of
such funds by the Company for the payment of: (a) Permitted Expenditures; (b) in
the event of a Change in Control of the Company, the Change in Control Payment
and (c) in the event of a Special Offer to Purchase, or a Special Mandatory
Redemption, the purchase or redemption price in connection therewith.
CONVERTIBLE DEBENTURES
On February 3, 1997, the Company issued $1,500 aggregate principal amount
of 7% Convertible Debentures due February 3, 2000 and warrants to purchase an
aggregate 100,000 shares of the Company's Common Stock. Pursuant to the terms of
the 7% Convertible Debentures (i) the conversion price was equivalent to the
lesser of the fair value of the Company's common stock on the date the debt was
issued or 83% of the fair value of the Company's common stock at the date of
conversion, (ii) the Company was obligated to register with the SEC all shares
of common stock underlying the warrants and debentures, and (iii) the failure to
register such shares of common stock by June 30, 1997 would result in an
additional weekly interest charge of 0.1 percent on the outstanding principal
balance. On May 6, 1997 the Company issued $2,000 aggregate principal amount of
8% Convertible Debentures due April 30, 1998 and warrants to purchase an
aggregate 20,000 shares of the Company's Common Stock (collectively the
"Convertible Debentures"). Pursuant to the terms of the 8% Convertible
Debentures (i) the conversion price was equivalent to the lesser of the fair
value of the Company's common stock on the date the debt was issued or 80% of
the fair value of the Company's common stock on the date of conversion, (ii) the
Company was obligated to register with the SEC all shares of common stock
underlying the warrants and debentures, and (iii) the failure to register such
shares of common stock by August 6, 1997 would result in an additional cash
payment every 30 days thereafter of 3% of the original principal amount.
F-45
<PAGE> 144
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Convertible Debentures were issued with beneficial conversion features
due to the fact that the holders could convert the debt at any time prior to the
maturity at a conversion price less than the conversion date fair value of the
Company's common stock. As a result, the Company recorded $810 as interest cost
and additional paid in capital related to the value of the beneficial conversion
feature in 1997.
During 1997, the Company issued 1,101,782 shares of Common Stock in
connection with the conversion of $1,950 aggregate principal amount of the
Convertible Debentures, plus related accrued interest. Effective December 31,
1997 the Company entered into an agreement for early extinguishment of the
Company's remaining financial obligations related to the Convertible Debentures
for $2,600 in cash. The cash payment was made on January 5 and 8, 1998.
Such settlement, including the related loss on extinguishment of $255
classified as interest expense, has been accrued for as of December 31, 1997 and
related to the following items:
<TABLE>
<S> <C>
Outstanding principal....................................... $1,550
Accrued interest............................................ 128
Redemption premiums......................................... 335
Penalties................................................... 587
------
$2,600
------
</TABLE>
The above redemption premiums and penalties have been included in interest
expense in the accompanying statement of operations. As a result of such
settlement and redemption of outstanding principal, $344 of paid-in capital
related to the beneficial conversion feature was reversed.
PRIVATE ISSUANCES OF COMMON AND PREFERRED STOCK
During October 1999, Patricio E. Northland, the Company's chairman of the
board, president and chief executive officer purchased from the Company 800,000
restricted common shares of the Company and received options to purchase 2.2
million common shares of the Company. The purchase price per share for the
restricted common shares, and the exercise price per share of the options, was
$10.70. These options vest, subject to Mr. Northland's continued employment,
one-ninth on March 1, 2001 and three-ninths on each of March 1, 2002 and 2003,
and one-ninth on each of March 1, 2004 and 2005. The restricted shares are
subject to repurchase rights by the Company at $10.70 per share; the number of
these shares subject to that repurchase right is progressively reduced at the
same rate as the rate at which Mr. Northland's 2.2 million options vest. As of
December 31, 1999 the Company had a shareholder loan receivable from Mr.
Northland related to the 800,000 shares in the amount of $8,645, including
accrued interest. During January 2000 this shareholder loan receivable was paid
to the Company.
On June 30, 1999, the Company issued 1,250,000 shares of 15% Convertible
Redeemable Preferred Stock (the "Preferred Stock") for an aggregate amount of
$10 million. The Preferred Stock is convertible at any time at the option of the
holders into the Company's common stock on a one for one basis, subject to
adjustment. Beginning June 30, 2001, if the closing price of the Company's
common stock, as quoted on the NASDAQ Stock Market, exceeds $15 per share for 30
consecutive trading days, the Preferred Stock must be converted into the
Company's common stock. The holders of the Preferred Stock also have certain
preemptive, redemption, anti-dilution, tag along and registration rights.
During September 1997, the Company's Board of Directors authorized the
issuance of 850,000 shares of common stock to two officers and the Company
recognized related non-cash compensation expense of $2,338.
F-46
<PAGE> 145
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. RELATED PARTY TRANSACTIONS
TELECTRONIC S.A. AND MR. HERNAN STREETER
During the three years ended December 31, 1999, the Company entered into
certain transactions with Telectronic S.A. and its founders, Mr. George A.
Cargill and Mr. Eleazar Donoso. Mr. Cargill and Mr. Donoso are both Company
shareholders. Mr. Cargill has been a director of the Company since 1994.
During the two years ended December 31, 1997, the Company entered into
several transactions with Mr. Hernan Streeter. Mr. Streeter formerly served the
Company as its Chief Executive Officer and its Chairman of the Board.
The Company purchased approximately $104, $52, and $77 of certain
telecommunication equipment in 1999, 1998 and 1997, respectively, from
Telectronic, S.A.
On July 24, 1995, Mr. Donoso received 1,425,000 shares of Common Stock (the
"Donoso Shares") from the Company in exchange for his ownership interest in
Hewster Servicios Intermedio S.A., a company which was acquired by the Company,
in a transaction which was exempt from the registration requirements of the
Securities Act pursuant to Regulation S and Section 4(2) thereof. On September
14, 1995, Mr. Donoso loaned the Donoso Shares to Laura Investments, Ltd., a
company owned and controlled by Mr. Streeter.
From September 14, 1995 to March 1996, Laura Investments, Ltd. loaned the
Company an aggregate amount of $1,632. During March 1996, the Company converted
the original principal amount of $1,632 plus accrued interest of $7 into 839,235
shares of Common Stock which were registered in the name of Laura Investments,
Ltd. and issued in a transaction which was exempt from the registration
requirements of the Securities Act pursuant to Regulation S and Section 4(2)
thereof.
During September 1997, Laura Investments Ltd. agreed to transfer 839,235
shares of the Company's Common Stock to Mr. Donoso in an attempt to satisfy its
obligations to Mr. Donoso in connection with the transfer of the Donoso Shares
to Laura Investments, Ltd. which occurred on September 14, 1995. However, Mr.
Donoso claimed that the Company owed him additional shares of Common Stock in
consideration of the initial transaction between Mr. Donoso and Laura
Investments Ltd. on September 14, 1995 (or the equivalent monetary
consideration). The Company issued 300,000 shares of Common Stock to Mr. Donoso
in October 1997 in settlement of all outstanding claims by Mr. Donoso against
the Company. The Company recognized interest expense of $852 related to the
aggregate fair value of such shares of Common Stock issued to Mr. Donoso. This
transaction was exempt from the registration requirements of the Securities Act
pursuant to Sections 4(2) and 4(6) thereof.
During 1997, the Company issued and redeemed $200 of bridge notes from Mr.
Cargill. In connection with such bridge notes Mr. Cargill received 20,000
warrants to purchase the Company's common stock at an exercise price of $2.56
per warrant. The fair value, $21, of such warrants (determined using the
Black-Scholes option pricing model with the following assumptions: volatility of
90% risk free interest rate of 6.7%, zero dividend yield and expected life of
two years) was recorded as original issue discount and subsequently expensed
upon repayment of the bridge notes.
Mr. Streeter was the primary shareholder and General Manager of FirstCom
Long Distance, which was acquired by the Company during 1997. Prior to this
acquisition, the Company made sales of $162 to FirstCom Long Distance. Pursuant
to provisions of the FirstCom Long Distance purchase agreement, the Company paid
Mr. Streeter a consulting fee of $120 during 1998.
F-47
<PAGE> 146
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MAROON BELLS CAPITAL PARTNERS ("MBCP")
During the year ended December 31, 1997, the Company entered into certain
transactions with MBCP. Two former directors of the Company, Paul Moore and
Phillip Magiera, are principals in MBCP. MBCP provided certain consulting and
financial advisory services to the Company during 1997.
During 1997, the Company made expense reimbursements of $132 to MBCP and
its principals.
During 1997, the Company converted $316, plus accrued interest of $240 of
outstanding liabilities to MBCP into 80,000 shares of the Company's Common
Stock.
During October 1997, the Company entered into an agreement with MBCP and
its principals, Theodore Swindells, Paul Moore and Phillip Magiera, to
compensate them for services rendered to the Company. The services provided by
Messrs. Moore and Magiera related to their functions as directors of the
Company. Pursuant to such agreement, the Company made a cash payment to MBCP of
$500 at the closing of the Senior Note offering and issued to each of Messrs.
Moore and Magiera 250,000 shares of Common Stock and options to acquire 250,000
shares of Common Stock at an exercise price of $2.13 per share. The Company
recognized non-cash consulting expense related to (i) the grant date fair value
of the Common Stock of $1,420 and (ii) the intrinsic value of the stock options
of $355. Messrs. Moore and Magiera resigned from the Company's Board of
Directors effective as of the date of the agreement.
OTHER RELATED PARTY TRANSACTIONS
During April 1998 the Company loaned certain officers $606 (the
"Shareholder Loans") related to federal and state income tax liabilities arising
from shares of the Company's common stock granted to such officers during 1997.
The Shareholder Loans (i) bear an annual interest state of 7%, (ii) are due on
April 9, 2018 and (iii) are collateralized by 336,600 shares of the Company's
common stock.
During October 1999, the Shareholder Loans, including accrued and unpaid
interest were forgiven by the Company. As a result of the forgiveness, during
1999 the Company recorded compensation expense of $606.
The Company paid approximately $1,012 and $604 in legal fees in 1999 and
1998, respectively, to a law firm having a senior partner who is also a current
Director of the Company.
The Company's Colombian subsidiary, FirstCom Colombia, recorded revenue of
approximately $430 related to data transmission services provided to its
minority shareholder during 1999.
5. STOCK OPTIONS AND WARRANTS
On October 18, 1999, the Company adopted the 1999 Stock Option and
Restricted Stock Purchase Plan (the "Plan") which provides for the granting of
incentive and non qualified stock options to purchase shares of Common Stock of
the Company and the granting of rights to purchase shares of Common Stock on a
restricted stock basis to selected employees, officers and directors of the
Company and its subsidiaries. The Plan authorizes 3,000,000 shares of Common
Stock for issuance upon the exercise of stock options or rights to purchase
shares of Common Stock on a restricted stock basis, of which 2,745,000 common
shares have been granted as of December 31, 1999. The vesting period of the
stock options granted are established by a committee of the Board of Directors
(the "Committee"). The options granted vest ratably over a four year period with
the vesting beginning on the first anniversary of the date of grant. The
exercise price of common stock purchasable under a stock option shall be
determined by the Committee at the time of grant but shall not be less than 100%
of the fair market value of the underlying stock; nor shall the exercise price
be less than par value.
Under the terms of the Company's currently outstanding stock option
agreements, options have a maximum term ranging from five to ten years from the
date of the grant. The options vesting period varies
F-48
<PAGE> 147
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
from full vesting upon issuance of options to one forty eighth per month to the
end of the option term. A summary of the Company's stock option activity is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year....................... 8,499,584 $2.54 7,295,000 $2.73 3,625,000 $2.31
Granted.................... 3,917,000 9.32 1,708,334 1.61 3,670,000 3.15
Exercised.................. (1,526,685) 2.15 -- -- -- --
Cancelled.................. (546,399) 2.10 (503,750) 1.38 -- --
Outstanding at end of year... 10,343,500 $5.19 8,499,584 $2.55 7,295,000 $2.73
Options exercisable at
year-end................... 6,197,391 $3.08 6,335,918 $2.54 4,970,365 $2.50
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------
WEIGHTED ---------------------------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE EXERCISE
PRICE OUTSTANDING PRICE LIFE EXERCISABLE PRICE PRICE
-------- ----------- -------- ----------- ----------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
$1.01 190,000 $1.01 10 190,000 $1.01 $1.01
1.27 to 1.96 1,536,000 1.65 9 1,151,833 1.72 1.27 to 1.96
2.00 to 2.42 2,470,000 2.29 8 2,086,667 2.22 2.00 to 2.42
2.50 to 3.00 1,455,000 2.77 9 1,215,560 2.77 2.50 to 3.00
4.00 to 4.40 1,102,500 4.36 10 1,100,000 4.36 4.00 to 4.40
5.23 to 9.74 645,000 7.77 7 223,331 6.83 5.23 to 9.74
10.01 to 10.70 2,615,000 10.65 9 40,000 10.70 10.01 to 10.70
11.30 to 13.21 330,000 11.42 8 190,000 11.30 11.30 to 13.21
---------- ---------
10,343,500 6,197,391
---------- ---------
</TABLE>
Included in the preceding table are 1,020,000 stock options, of which
1,020,000 are exercisable at December 31, 1999, with an exercise price of $2.13
and a weighted average remaining contractual life of 8 years. The exercise price
of such stock options was less than the grant date fair value of the underlying
Common Stock.
During 1997 the Company granted two officers 2,650,000 stock options that
vest over a two year period. The exercise price of such grants was equal to the
grant date fair market value of the underlying Common Stock, except for 850,000
options with an exercise price of $2.13. The Company recognized non-cash
compensation expense of $527 related to the 850,000 options. The terms of
1,000,000 stock options granted during 1996 were modified during 1997 to provide
for immediate vesting.
F-49
<PAGE> 148
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Including the Initial and Note Warrants described in Note
3 -- Capitalization, the following is a summary of warrants granted by the
Company:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................ 8,487,226 $4.10 8,487,226 $4.10 697,226 $1.23
Granted..................... -- -- 7,790,000 $4.35
Exercised................... (4,847,541) 4.08 -- -- --
Cancelled................... (34,914 5.75 -- -- --
---------- ----- --------- ----- --------- -----
Outstanding at end of year.... 3,604,771 4.32 8,487,226 $4.10 8,487,226 $4.10
---------- ----- --------- ----- --------- -----
Exercisable at year-end....... 3,604,771 $4.32 8,487,226 $4.10 987,226 $1.86
---------- ----- --------- ----- --------- -----
</TABLE>
These warrants resulted from the Company's financing activities from 1994
to 1997. The weighted average grant date fair value of warrants granted during
1997 was $3.52.
Non-cash compensation and consulting expenses relate to various stock and
stock options issued to employees and consultants for payment of services
rendered. These expenses are shown separately on the accompanying statements of
operations and all relate to selling, general and administrative expense.
6. COMMITMENTS AND CONTINGENCIES
One of the Company's subsidiaries entered into an operating agreement in
1993 with Metro S.A. to install and operate the Company's optical fiber
telecommunication network in the tunnels, conduits and stations of lines 1 and 2
of the Santiago subway system. The Company has given Metro S.A. a $50
performance bond relating to these leases. The monthly lease rental is
equivalent to 15% of the net monthly invoicing of the company for services
rendered in the metropolitan region of Chile, subject to minimum amounts. The
lease expires in the year 2003. Under the agreement, the Company is obligated to
provide certain telecommunications services to Metro, S.A.
The following summarizes future minimum payments under non-cancelable
operating lease agreements at December 31, 1999:
<TABLE>
<S> <C>
2000........................................................ $1,532
2001........................................................ 1,513
2002........................................................ 1,545
2003........................................................ 1,589
2004 and 2005............................................... 2,172
------
$8,351
------
</TABLE>
Rental expense under operating leases was $919, $1,095, and $961 for the
years ended December 31, 1999, 1998 and 1997, respectively.
In September 1997, the Company entered into an employment and severance
agreement (the "Northland Agreement") with Patricio E. Northland, President,
Chief Executive Officer and Chairman of the Board of Directors of the Company,
which replaced his former employment agreement with the Company. The Northland
Agreement has a term of three years unless terminated earlier for cause, death
or disability, and provides for an initial annual base salary of $350,000,
subject to an increase of $50,000 in each of the second and third year of the
agreement. In addition, Mr. Northland was granted non-qualified stock options to
purchase 300,000 shares of the Company's Common Stock in the following manner:
100,000 shares which vest
F-50
<PAGE> 149
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on the date of employment at an exercise price of $4.00 per share; 100,000
shares which vest one year thereafter at an exercise price of $6.00 per share;
and 100,000 shares which vest two years after the date of employment at an
exercise price of $8.00 per share. In consideration of Mr. Northland's agreement
to terminate his former employment agreement with the Company, which would have
provided for a substantial bonus to Mr. Northland upon consummation of an equity
Offering, the Company agreed to pay Mr. Northland a performance bonus of
$250,000 and vest all of his existing options to acquire 1,000,000 shares of
Common Stock granted under his prior employment agreement. As a result of this
transaction, the Company recognized compensation expense of $250 related to the
performance bonus. The strike price of the vested options was equivalent to the
fair value of the underlying Common Stock on the date of the Northland
Agreement.
7. YEAR-END ADJUSTMENTS
The Company has changed its method of reporting revenues and cost of
revenues from the exchange of international long distance traffic with other
carriers. The Company has retroactively reduced revenues and cost of revenues in
the amount of $7,014 and $917, for the years ending December 31, 1999 and 1998,
respectively, to reflect the trading of international long distance traffic on a
net basis. These adjustments have no effect on net losses in these two years.
F-51
<PAGE> 150
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of the Class A common stock
registered hereby, all of which expenses, except for the Securities and Exchange
Commission registration fee and the NASD filing fee, are estimates:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
------------------------------------------------------------ --------
<S> <C>
Securities and Exchange Commission registration fee......... $143,451
NASD filing fee and expenses................................ []
Blue Sky fees and expenses (including legal fees)........... *
Printing and engraving expenses............................. *
Legal fees and expenses (other than Blue Sky)............... *
Accounting fees and expenses................................ *
Transfer Agent and Registrar's fee.......................... *
Miscellaneous............................................... *
--------
Total............................................. $ []
========
</TABLE>
------------
* To be furnished by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware law currently permits a corporation to limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for any breach of the
duty of loyalty to the corporation or its stockholders, acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law; violation of Section 174 of the Delaware General Corporation Law, any
transaction from which the director derived an improper personal benefit or any
act or omission prior to the adoption of such a provision in the certificate of
incorporation. Our certificate of incorporation provides that no directors will
be liable to us or any of our stockholders for breach of any fiduciary or other
duty as a director, to the extent permitted by Delaware law (as it is now or
later in effect).
Delaware law generally permits a corporation to indemnify its directors and
officers against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with a third-party action, other
than a derivative action, and against expenses actually and reasonably incurred
in the defense or settlement of a derivative action. However, there must be a
determination that the individual must have acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation or, with respect to a criminal action, had no reasonable cause to
believe his conduct was unlawful. This determination is made, in the case of an
individual who is a director or officer at the time of the determination, by:
-- a majority of the directors not a party to the action, even though
less than a quorum;
-- a committee of such directors designated by a majority vote of such
directors, even though less than a quorum;
-- independent legal counsel in a written opinion; or
-- a majority vote of the stockholders, at a meeting at which a quorum
is present.
Without court approval, however, no indemnification may be made in respect
of any derivative action in which the individual is adjudged liable to the
corporation.
II-1
<PAGE> 151
Delaware law requires indemnification of directors and officers for
reasonable expenses relating to a successful defense on the merits or otherwise
of a derivative or third-party action.
Delaware law permits a corporation to advance expenses relating to the
defense of any proceeding to directors and officers contingent upon that
individuals' commitment to repay any advances unless it is determined ultimately
that indemnification is proper.
Under Delaware law, subject to public policy issues, a corporation may
provide for more favorable indemnification and advancement of expenses than
provided by statute through bylaw, agreement, vote of stockholders,
disinterested directors or otherwise.
Our bylaws provide that we will indemnify any person made a party to a
third-party action as a result of being a director or officer, and we may
indemnify any other person party to a third-party action as a result of being
our employee, against expenses, judgment, fines and amount paid in settlement
actually and reasonably incurred. We will provide indemnification only upon a
determination that the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to our best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. This determination must be made in accordance
with the procedure provided for under Delaware law as described above. In
derivative actions, indemnification will be limited to expenses actually and
reasonably incurred by the indemnified party. Without court approval, no
indemnification for derivative actions may be made if the person is found liable
to us.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
We completed the acquisition of AT&T Argentina S.A. in June 2000.
Under the terms of our stock purchase agreement for AT&T Argentina, we
acquired all of the capital stock of AT&T Argentina in exchange for 1,178,689
shares of our Class A common stock, plus $5 million in cash. The parties placed
550,000 of those shares in escrow. These shares will be released to AT&T
Argentina's selling stockholders over six years to the extent they are not used
to satisfy indemnity obligations of the selling stockholders to us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS. See Exhibit Index following the signature pages to this
registration statement.
(b) FINANCIAL STATEMENT SCHEDULES.
All schedules, other than those listed above, are omitted because the
information is not required or because the information is included in our
Consolidated Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To provide to the underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions described under Item 14 above, 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 Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered,
II-2
<PAGE> 152
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 whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(c) For purposes of determining any liability under the Act, 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 Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the 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.
II-3
<PAGE> 153
SIGNATURES
Pursuant to the requirements of the Act, the registrant has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Basking Ridge, New Jersey on August 7, 2000.
AT&T Latin America Corp.
By: /s/ JOHN A. HAIGH
------------------------------------
Name: John A. Haigh
Title: President
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes and appoints
John Haigh and Robert Napor, or any of them, as such person's attorney-in-fact,
with full power of substitution and resubstitution, to sign and file on such
person's behalf individually and in each capacity stated below any and all
amendments (including post-effective amendments) to this registration statement
and any subsequent registration statement filed by us pursuant to Rule 462(b) of
the Securities Act of 1933, as amended, as fully as such person could do in
person, hereby verifying and confirming all that such attorney-in-fact, or his
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN A. HAIGH President and Director August 7, 2000
--------------------------------------------------- (principal executive officer)
John A. Haigh
/s/ FRANK J. VOYTEK Chief Financial and Accounting August 7, 2000
--------------------------------------------------- Officer (principal financial and
Frank J. Voytek accounting officer)
/s/ EDWARD M. DWYER Director August 7, 2000
---------------------------------------------------
Edward M. Dwyer
/s/ TIM L. MURRAY Director August 7, 2000
---------------------------------------------------
Tim L. Murray
/s/ JOHN C. PETRILLO Director August 7, 2000
---------------------------------------------------
John C. Petrillo
/s/ GERARD R. WEIS Director August 7, 2000
---------------------------------------------------
Gerard R. Weis
</TABLE>
II-4
<PAGE> 154
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
1.1 Form of Underwriting Agreement**
2.1 Agreement and Plan of Merger, dated as of November 1, 1999,
among AT&T Corp., the Registrant (formerly named Kiri Inc.),
Frantis, Inc., and FirstCom Corporation.*
2.2 Amendment, dated February 1, 2000, to the Agreement and Plan
of Merger among AT&T Corp., AT&T Latin America Corp.
(formerly Kiri Inc.), Frantis Inc., and FirstCom.
Corporation.*
2.3 Amendment, dated February 22, 2000, to the Agreement and
Plan of Merger among AT&T Corp. AT&T Latin America Corp.,
Frantis Inc., and FirstCom Corporation*
2.4 Third Amendment, dated as of May 10, 2000, to the Agreement
and Plan of Merger among AT&T Corp., AT&T Latin America
Corp., Frantis Inc., and FirstCom Corporation.*
2.5 Fourth Amendment, dated as of June 15, 2000, to the
Agreement and Plan of Merger among AT&T Corp., AT&T Latin
America Corp., Frantis Inc., and FirstCom Corporation.*
2.6 Fifth Amendment, dated as of July 25, 2000, to the Agreement
and Plan of Merger among AT&T Corp., AT&T Latin America
Corp., Frantis Inc., and FirstCom Corporation.*
3.1 Amended and Restated Certificate of Incorporation, dated
, of AT&T Latin America Corp.**
3.2 Certificate of Amendment of Amended and Restated Certificate
of Incorporation of AT&T Latin America Corp. (formerly Kiri
Inc.)**
3.3 Amended and Restated By-laws of AT&T Latin America Corp.**
4.1 Form of certificate for the common stock, par value $0.0001
per share, of AT&T Latin America Corp.**
4.2 Amended and Restated Certificate of Incorporation, dated
, of AT&T Latin America Corp.(see Exhibit 3.1)**
4.3 Amended and Restated By-laws of AT&T Latin America Corp.
(see Exhibit 3.2)**
4.4 Certificate of designation of shares of Series A convertible
preferred stock of AT&T Latin America Corp.**
4.5 Certificate of designation of shares of 15% Series B
preferred stock of AT&T Latin America Corp.**
4.6 Supplemental Indenture, dated as of January 8, 1999 between
FirstCom Corporation and State Street Bank & Trust Company,
N.A.**
4.7 Second Supplemental Indenture, dated as of July , 2000
between FirstCom Corporation and State Street Bank & Trust
Company, N.A.**
4.8 A/B Exchange Registration Rights Agreement, dated as of
October 27, 1998 between FirstCom Corporation (formerly
InterAmericas Communications Corporation) and UBS
Securities.**
4.9 Warrant Agreement, dated as of October 27, 1997, between
FirstCom Corporation (formerly InterAmericas Communications
Corporation) and State Street Bank & Trust Company, N.A.**
4.10 Warrant Registration Rights Agreement, dated as of October
27, 1997, between FirstCom Corporation (formerly
InterAmericas Communications Corporation) and UBS
Securities.**
</TABLE>
<PAGE> 155
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ------
<C> <S> <C>
4.11 Proceeds Pledge and Escrow Agreement, dated as of October
27, 1997 between FirstCom Corporation (formerly
InterAmericas Communications Corporation) and Bank and Trust
Company, N.A.**
5.1 Opinion of Debevoise & Plimpton regarding the legality of
the securities issued.**
10.1 Service Mark License Agreement, dated November 18, 1999,
between AT&T Latin America Corp. and AT&T Corp.**
10.2 Regional Vehicle Agreement, dated , between AT&T Latin
America Corp. and AT&T Corp.**
10.3 Credit Facility Agreement, dated July 28, 2000, among Global
Card Holdings Inc., AT&T Latin America Corp. and certain
subsidiaries of AT&T Latin America Corp. to be named.**
10.4 Employment Agreement between AT&T Latin America Corp.
(Formerly Kiri Inc.), FirstCom Corporation and Patricio E.
Northland, dated as of November 1, 1999.**
10.5 Employment Agreement between Netstream Telecom Ltda. and
Carlos Andre, dated March 15, 2000, as supplemented on March
15, 2000 and English translation.**
10.6 Employment Agreement between FirstCom Corporation and Thomas
Canfield, dated as of May 9, 2000.**
10.7 Employment Agreement between AT&T Latin America Corp. and
Alejandro Rossi, dated June 30, 2000.**
10.8 Employment Agreement between FirstCom Corporation and Marco
Northland, dated .**
10.9 2000 Long-Term Incentive Plan**
21.1 Subsidiaries of the registrant**
23.1 Consents of Ernst & Young LLP and Ernst & Young Auditores
Independientes S.C.*
23.2 Consents or PricewaterhouseCoopers LLP.*
23.3 Consent of Debevoise & Plimpton (included in Exhibit 5.1)**
24.1 Powers of Attorney (included in signature page)*
27.1 Financial Data Schedule**
</TABLE>
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* Filed herewith
** To be filed by amendment.
