<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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INTERCONTINENTAL TELECOMMUNICATIONS CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
FLORIDA 4899 65-0898395
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) identification No.)
</TABLE>
2190 NORTHWEST 89TH PLACE, SUITE 100
MIAMI, FLORIDA 33172
(305) 702-4300
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
MICHAEL E. LAWRENCE
CHIEF EXECUTIVE OFFICER
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
2190 NORTHWEST 89TH PLACE, SUITE 100
MIAMI, FLORIDA 33172
(305) 702-4300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
<TABLE>
<S> <C>
ANDREW HULSH WALTER G. VAN DORN, JR.
ISRAEL ALFONSO CLIFFORD CHANCE ROGERS & WELLS LLP
BAKER & MCKENZIE 200 PARK AVENUE
1200 BRICKELL AVENUE NEW YORK, NY 10166
MIAMI, FLORIDA 33131 (212) 878-8000
(305) 789-8985
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act 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, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock $.0001 par value.......... Shs(1) $(2) $50,000,000 $13,200
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Total.................................. $ $ $
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</TABLE>
(1) Includes up to shares that the underwriters have the option to
purchase from us to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
OF WHICH THIS PRELIMINARY PROSPECTUS FORMS A PART FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
SUBJECT TO COMPLETION. DATED OCTOBER 17, 2000.
SHARES
[LOGO]
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
COMMON STOCK
This is our initial public offering, and no public market currently exists
for our common shares. We are offering common shares in this
offering. We expect the initial public offering price for our common shares to
be between $ and $ .
We have applied to list our common shares on the Nasdaq National Market
under the symbol "ITCN".
INVESTING IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Intercontinental
Telecommunications Corp................................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to
additional common shares solely to cover over-allotments. The
underwriters expect to deliver the common shares on , 2000.
------------------------
JOSEPHTHAL & CO. INC.
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Use Of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Dilution.................................................... 16
Selected Consolidated Financial Data........................ 17
Management's Discussion And Analysis Of Financial Condition
And Results Of Operations................................. 18
Business.................................................... 23
Management.................................................. 36
Certain Relationships And Related Transactions.............. 40
Principal Shareholders...................................... 44
Description Of Securities................................... 45
Shares Eligible For Future Sale............................. 48
Underwriting................................................ 50
Legal Matters............................................... 51
Experts..................................................... 52
Enforceability Of Civil Liabilities......................... 52
Where You Can Find More Information......................... 52
Index To Consolidated Financial Statements.................. F-1
</TABLE>
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In this prospectus, the "Company," "ITC," "we," "us" and "our" refer to
Intercontinental Telecommunications Corp., a Florida corporation, and its
subsidiaries, and, unless the context otherwise requires, "common shares" refers
to the shares of common stock, par value $0.0001 per share, of ITC.
We have not taken any action to permit a public offering of our common
shares 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 common shares and the
distribution of this prospectus outside the United States.
We maintain our Website at www.ib2b.com.br. Information contained in our
Website does not constitute a part of this prospectus
We own the registration for the trademarks iB2B, VIPlink, and CyberVision
in Brazil, which we use in conjunction with the sale of our services. All other
trade names and trademarks used in this prospectus are the property of their
respective owners.
i
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our Company and the sale of our common shares, and our
financial statements and notes to those financial statements that appear
elsewhere in this prospectus.
OUR COMPANY
We provide advanced broadband communications services and software
application services in Brazil. Our target customers are multinational
corporations, government entities and small and medium-size businesses with
growing and diverse communications and business automation needs. We deliver
broadband communications services over our high-speed, high-capacity network
using fixed wireless access technology and leased fiber optic cable. Our
software application services offer business process improvements, database
management programs and electronic commerce services to our customers. We market
our services under the brand iB2B.
OUR SERVICES
We offer an integrated package of communications services that we have
organized across two business platforms: network services and software
application services. Our network services include:
- Basic Broadband Connectivity -- We connect our customers to our network
through last-mile wireless access and leased fiber optic cable;
- Virtual Private Networks, or VPNs -- We construct private networks that
allow a customer to communicate securely among its multiple locations
over the Internet. This service is sometimes referred to as an Intranet
service. We also build Extranets, which are VPNs, that allow third party
access to a customer's data;
- Web Hosting -- We place a customer's Website on our Internet Web servers
using the customer's registered domain name; and
- Voice-over-Internet Protocol -- We offer the transmission of voice over
an internetworking standard that enables communication across the
Internet. We provide this service to our business and government
customers through the installation of VPNs since Brazilian communications
regulation only allows this service to be provided over private networks.
Our software application services include Web-based and client/server based
software solutions tailored to the customer's business automation needs. We
currently offer vertical software solutions directed at specific industries and
applications, including:
- Healthcare -- The components of this solution include customer invoicing,
purchasing, insurance claim management and patient enrollment;
- Government Administration -- The components of this solution include
taxation tracking, budget and financial management, human resource
management and fleet control; and
- Education and Distance Learning -- This solution is comprised of three
core applications: school census and enrollment planning; school
management; and distance learning.
Our software application services are designed to take advantage of
broadband communications technology to improve the administrative and business
processes of our customers. These services, which require minimal customization,
help customers manage the flow of data among departments and customer locations
as well as with their clients. Most of our current customers have software
application services installed in a client/server configuration. However, most
of our software application services are designed to be delivered in conjunction
with our network services using an Application Service Provider, or ASP,
business model. An ASP business model involves the delivery of software over a
network, such as the Internet, rather than its installation at a customer
location.
1
<PAGE> 5
OUR RELATIONSHIP WITH MICROTEC SISTEMAS INDUSTRIA E COMERCIO S.A.
We have a strategic relationship with Microtec, a wholly owned subsidiary
of Vitech America, Inc., a Florida corporation whose shares are publicly traded
on the NASDAQ National Market. Microtec is a leading manufacturer and marketer
of computer products, peripherals and software to business, government and
individual customers in Brazil.
We have entered into a joint marketing agreement with Microtec that
terminates on November 1, 2005. Although the licenses for the services we offer
are currently held in the name of Microtec, under the joint marketing agreement,
Microtec has agreed to transfer the licenses to us. Microtec is in the process
of applying to the Brazilian National Telecommunications Agency, or ANATEL, for
the transfer of the licenses to us. Microtec also granted us the exclusive right
to sell our services to its customers so long as our services are bundled with
its products and equipment at prices agreed to with Microtec. In these
engagements and engagements requiring the provision of network services under
Microtec's licenses, Microtec bills the customer for our services and collects
from the customer on our behalf. Microtec has agreed to market our products and
services. Microtec also has agreed to assist our sales team, by:
- providing introductions to over 34,000 existing Microtec business and
government customers; and
- cross-selling our portfolio of Internet services in their information
technology, or IT, sales proposals.
We believe that our relationship with Microtec's sales force provides us
with a significant advantage for rapidly capturing marketing share.
OUR COMPETITIVE ADVANTAGES
We believe that our competitive strengths, in addition to our relationship
with Microtec, include:
- our integrated solutions approach, in which we offer multiple services
ranging from basic broadband connectivity to sophisticated software
applications and communications solutions;
- our rapidly deployable and scalable nationwide network using last-mile
wireless technology that allows us to capture market share; and
- our position as a low-cost provider of communications services and
solutions.
OUR NATIONAL AND LOCAL NETWORKS
Our national network currently consists of 15 operational
points-of-presence, or POPs, two network operations centers, or NOCs, and local
access nodes. This network links the Brazilian cities of Belo Horizonte,
Blumenau, Curitiba, Florianopolis, Goiania, Ilheus, Joinvile, Natal, Porto
Alegre, Recife, Ribeirao Preto, Salvador, Santos and Sao Paulo, and includes an
international connection to the United States in Miami, Florida. We have
connected a total of 106 customer buildings throughout 14 cities in Brazil as of
August 31, 2000. We are expanding our networks to consist of 32 operational POPs
within Brazil. We expect that this expansion will be completed by the end of
2001.
We are building local networks in Brazil based on fixed wireless broadband
access technology using radio frequencies and asynchronous transfer mode, or
ATM, switching technology. ATM technology enables us to accommodate many
different information systems and permits us to assure high levels of service
and quality across our national network. We own and operate our switches, lease
fiber optic cable transport capacity, and connect to our customers by using
fixed wireless broadband access technology. We can deploy our last-mile wireless
networks based on the local needs of our customers. We therefore do not incur
significant capital expenditures until we identify sufficient customer demand.
2
<PAGE> 6
OUR MARKET OPPORTUNITY
We believe that a substantial business opportunity exists for us in Brazil
as a result of the following factors:
- Brazil is a large, growing and underserved communications market lacking
an adequate communications infrastructure;
- we believe there is a large demand for high speed data communications in
Brazil; and
- our wireless broadband access technologies offer a high-quality
alternative to existing copper, satellite and fiber-based systems.
OUR BUSINESS STRATEGY
Our objective is to become a leading broadband connectivity and
communications solutions provider to our customers. To do this, we plan to:
- continue to build our fixed wireless broadband network to offer dedicated
broadband Internet access and other broadband services;
- rapidly build a large customer base;
- expand the range of services we provide to existing customers;
- selectively acquire or partner with complementary technology and service
providers; and
- expand into other markets in Latin America.
OUR CORPORATE STRUCTURE
We are a holding company incorporated in Florida. We conduct our business
through two operating subsidiaries incorporated in Brazil and headquartered in
Sao Paulo: Intercontinental Telecom Corporation do Brasil S/C Ltda., and
Viplink Provedora de Accesso a Internet S/C Ltda. We also have majority
ownership interests in two recently acquired Brazilian companies, Probit
Technologia Educacional Ltda. and Interactive Consultoria e Desenvolvimiento de
Sistemas Ltda. We also own a 49% interest in ITC Holding Brasil S/C Ltda.
Our principal executive offices are located at 2190 N.W. 89th Place, Suite
100, Miami, Florida 33172, and our telephone number is (305) 702-4300.
3
<PAGE> 7
THE OFFERING
Common shares offered...... shares
Common shares outstanding
after the offering(1)...... shares
Use of proceeds............ We intend to use the proceeds from this offering:
- to fund network operations and expansion plans;
- to implement our growth strategy; and
- for general corporate and working capital
purposes.
Dividend policy............ We have not paid any cash dividends on our common
shares, and we do not expect to do so in the
foreseeable future.
Proposed Nasdaq National
Market Symbol............ "ITCN"
---------------------
(1) Assumes the conversion of 4,914,005 shares of Series A Redeemable
Convertible Preferred Stock into an equal number of common shares. This
conversion will automatically occur if the gross proceeds to us from this
offering exceed $25 million and the initial public offering price per common
share is at least $8.14.
If the underwriters exercise their over-allotment option in full, the total
number of common shares offered will be , and the total number of
common shares outstanding after the offering will be .
The number of common shares outstanding after this offering is based on the
number of common shares outstanding on , 2000. The offering
information above excludes:
- 4,000,000 common shares issuable upon exercise of stock options
outstanding as of October , 2000 at a weighted average price of $0.37
per share;
- 3,000,000 common shares available as of October , 2000 for future
issuance under our 1998 stock option plan; and
- 3,518,810 common shares issuable upon exercise of warrants outstanding as
of October , 2000 at a weighted average price of $0.15 per share.
Unless otherwise indicated, this prospectus assumes that the underwriters
have not exercised their over-allotment option to purchase additional common
shares.
4
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary of the financial data for our business should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements and the accompanying
notes to those statements included elsewhere in this prospectus. The As Adjusted
column reflects the sale of common shares in this offering at an
assumed price of $ per share, after deducting the underwriting
discounts and commissions, the estimated offering expenses payable by us, and
the application of these proceeds.
SUMMARY STATEMENT OF OPERATIONS DATA:
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<CAPTION>
YEAR ENDED THREE MONTHS ENDED
APRIL 30, JULY 31,
------------------------- -----------------------
1999 2000 1999 2000
----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues................................. $ 795,000 $ 3,545,426 $ 309,980 $ 1,488,400
Cost of revenues............................. 406,913 2,427,513 99,395 750,113
----------- ----------- --------- -----------
Gross profit................................. 388,087 1,117,913 210,585 738,287
Selling, general and administrative
expenses................................... 1,281,295 2,705,655 476,934 1,593,316
Depreciation and amortization................ 161,940 411,341 43,435 494,762
----------- ----------- --------- -----------
Loss from operations......................... (1,055,148) (1,999,083) (309,784) (1,349,791)
Other expense................................ -- (605,352) (131,607) (37,686)
----------- ----------- --------- -----------
Net loss..................................... $(1,055,148) $(2,604,435) $(441,391) $(1,387,477)
=========== =========== ========= ===========
Loss per common share -- basic and diluted
(1)........................................ $ (0.24) $ (0.24) $ (0.05) $ (0.11)
=========== =========== ========= ===========
</TABLE>
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(1) See note 1 to our consolidated financial statements for a determination of
the shares used in computing basic and diluted loss per share.
SUMMARY BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JULY 31, 2000 (UNAUDITED)
APRIL 30, 2000 ------------------------------------------
-------------- PROFORMA
ACTUAL ACTUAL PROFORMA(1) AS ADJUSTED(2)
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Current assets............................. $ 662,738 $18,178,552 $18,178,552 $
Working capital (deficit).................. (5,477,117) 11,831,795 11,831,795
Total assets............................... 6,101,642 29,616,825 29,616,825
Long-term liabilities, including minority
interest................................. 681,439 292,074 292,074
Total liabilities and minority interest.... 6,821,294 6,638,831 6,638,831
Series A Redeemable Convertible Preferred
Stock.................................... -- 19,227,008 --
Shareholders' equity (deficit)............. (719,652) 3,750,986 22,977,994
</TABLE>
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(1) This assumes the conversion of the Series A Redeemable Convertible Preferred
Stock, which will occur assuming that this offering generates gross proceeds
to us in excess of $25 million and the initial offering price per common
share is at least $8.14.
(2) This gives effect to (i) the conversion of the Series A Redeemable
Convertible Preferred Stock, which will occur assuming that this offering
generates gross proceeds to us in excess of $25 million and the initial
offering price per common share is at least $8.14 and (ii) the sale of
common shares in the offering at an assumed offering price of $ per
share and the application of the estimated net proceeds therefrom.
5
<PAGE> 9
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before investing in our common shares.
Investing in our common shares 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.
RISKS RELATING TO US
WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY IN NEW AND
RAPIDLY EVOLVING MARKETS, AND WE MAY NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN.
Our business model is still in development, and our limited historical,
financial and operating data may not be a good indication of how our business is
doing or how it is evolving. You should consider our business and prospects in
light of the risks and difficulties typically encountered by companies in new
and rapidly evolving markets such as ours. We may not adequately address these
risks, and, if we do not, we may not be able to implement our business plan as
we intend.
WE HAVE INCURRED OPERATING LOSSES SINCE OUR INCEPTION AND MAY NEVER HAVE
PROFITABLE OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR ABILITY TO FINANCE
FUTURE OPERATIONS AND MAKE SUITABLE ACQUISITIONS.
We have incurred operating losses in every quarter and fiscal year since
our incorporation in 1998. We expect to continue to operate at a loss for the
foreseeable future, primarily as a result of the expansion of our network and
operations. If these losses continue, the value of our common shares could
decline, and we may have trouble raising additional capital. We cannot forecast
with any degree of accuracy exactly when, or if, we will become profitable.
THE CONTINUED GROWTH OF OUR BUSINESS DEPENDS UPON OUR ABILITY TO MANAGE
EXPANSION AND DEVELOPMENT EFFECTIVELY.
In order to manage our expansion effectively, we must continue to implement
and improve our operating, financial and accounting systems and to hire, train
and manage new employees. Among other things, the continued expansion and
development of our business also will depend upon our ability to:
- construct our broadband network;
- design and develop integrated private voice and data communications
networks;
- obtain any required government licenses and authorizations;
- create and develop adequate software application services;
- evaluate and penetrate potential new markets;
- secure financing; and
- hire qualified employees.
We must meet these demands in a timely manner, at reasonable costs and on
satisfactory terms and conditions. If we fail to manage our planned expansion
effectively, our business could be harmed.
OUR BUSINESS IS SIGNIFICANTLY DEPENDENT UPON OUR RELATIONSHIP WITH MICROTEC.
We rely on our relationship with Microtec in order to conduct our business
and implement our business plan. We depend on Microtec for:
- the communications licenses pursuant to which we provide our services;
- the marketing and sales of our services; and
- sales revenue, since Microtec is a significant customer of our services.
6
<PAGE> 10
In addition, the principal shareholders of Vitech America, Inc, Microtec's
parent, are also principal shareholders of ITC. There can be no assurance that
our relationship with Microtec will continue to exist. If our relationship with
Microtec, including the joint marketing agreement, is terminated for any reason,
our ability to provide network services, our business and expansion plans and
our ability to generate revenues could be materially adversely affected.
WE MUST KEEP PACE WITH RAPID INDUSTRY AND TECHNOLOGICAL CHANGE TO ATTRACT AND
MAINTAIN CUSTOMERS AND COMPETE EFFECTIVELY.
The communications industry, particularly in Brazil, is changing rapidly.
This rate of change is due to factors such as:
- deregulation;
- privatization;
- technological improvements;
- expansion of communications infrastructure; and
- globalization and liberalization of trade.
Our success depends, in part, upon how well we anticipate and adapt to
change and whether we offer our customers adequate services. If we cannot do so,
it will be more difficult for us to attract and retain customers and compete
effectively.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The markets in which we compete are highly competitive. We compete with
many international, national, and regional companies, most of which have
significantly larger operations and greater financial, marketing, human, and
other resources than us. Competitors in the Brazilian communications market
include companies such as Telefonica, Brasil Telecom, Telemar, AT&T Latin
America, IBM Business Solutions, MetroRed Telecommunications, Diveo Broadband
Networks and IMPSAT Fiber Networks. Additionally, we compete in the software
solutions market with internationally recognized companies providing systems
integration services and proprietary software applications. We may not
successfully compete in any of the markets in which we conduct or may conduct
operations.
SIGNIFICANT PRICE COMPETITION COULD ADVERSELY AFFECT OUR REVENUES AND OPERATING
RESULTS.
Price levels for our services will depend to a significant degree on
competitors' prices over which we have no control. Most 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 are required to reduce prices to
compete effectively, our operating results may suffer.
WE MAY NOT BE ABLE TO COMPLETE THE ACQUISITIONS NECESSARY TO IMPLEMENT OUR
GROWTH STRATEGY.
Our growth may depend in part on whether we can identify suitable
acquisition candidates and complete acquisitions at attractive prices and on
satisfactory terms. We may need approval from regulatory agencies and other
third parties in order to complete acquisitions. We have no commitments or
agreements for any acquisitions. We are not certain that we will complete any
future acquisitions. Our inability to make suitable acquisitions may make it
more difficult for us to implement our growth strategy.
7
<PAGE> 11
ACQUISITIONS COULD RESULT IN SHAREHOLDER DILUTION, ADDITIONAL LIABILITIES,
INCREASED AMORTIZATION EXPENSES, DIFFICULTIES IN INTEGRATING NEW BUSINESSES AND
DIVERSION OF MANAGEMENT'S ATTENTION.
Our expansion may involve acquiring other companies or assets. 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 EXPECT OUR QUARTERLY RESULTS WILL CONTINUE TO FLUCTUATE, AND THIS FLUCTUATION
COULD CAUSE OUR STOCK PRICE TO DECLINE.
Our operating results are subject to quarterly and annual fluctuations, and
our historical financial performance may not be a meaningful indicator of future
results. Our quarterly net sales and operating results have varied as a result
of, among other things:
- historical seasonal purchasing patterns of government and education
customers;
- the general economic climate in Brazil;
- the volume and timing of orders received during a quarter;
- changes in service mix and pricing;
- new technology developments or introductions; and
- availability of network hardware.
As a result of these and other factors, our operating results could fall
below the expectations of securities analysts and investors. If this happens,
the market price of our common shares would likely decrease.
WE DEPEND ON KEY PERSONNEL FOR OUR OPERATIONS AND MAY NOT BE ABLE TO FIND
ADDITIONAL PERSONNEL AS NEEDED.
We are dependent upon the efforts and abilities of senior management,
including Michael Lawrence, our Chief Executive Officer. The loss or
unavailability of the services of these individuals could harm our business. In
addition, our ability to attract and retain highly skilled personnel is critical
to our operations. If we are unable to attract and retain personnel with
necessary skills when needed, our business and expansion plans could be harmed.
WE MAY BE UNABLE TO RAISE THE ADDITIONAL CAPITAL NECESSARY TO CONTINUE GROWING
OUR BUSINESS.
We may require significant amounts of additional capital to fund our
business plan. We could require additional funding if our operating losses are
greater than anticipated or if we pursue acquisitions or other expansion
opportunities that require significant cash outlays. We may not be able to raise
sufficient funds on acceptable terms, if at all. Our failure to raise sufficient
funds could harm our ability to carry out our growth strategy.
WE MAY HAVE DELAYS OR UNANTICIPATED EXPENSES IN CONSTRUCTING OUR NETWORKS THAT
PUT US AT A COMPETITIVE DISADVANTAGE.
Our construction of substantial additions to our network and new network
systems involves significant risks. Our failure to complete construction on a
timely basis could adversely affect our ability to attract and retain customers.
In addition, this type of construction project is subject to cost overruns and
delays, some of which may be beyond our control. Increased expenses due to
construction difficulties could adversely affect
8
<PAGE> 12
our financial results. Delays may be caused by government entities, financing
problems and catastrophic occurrences. Delays also can arise from design changes
and material or equipment shortages or delays in delivery. Services to buildings
can also be delayed if the operating companies have difficulty in obtaining
easements, leases, permits or access approvals from third parties.
THE BUILD-OUT OF OUR NETWORK DEPENDS ON OUR ABILITY TO OBTAIN THE NECESSARY
COMMUNICATIONS LICENSES FROM GOVERNMENT AUTHORITIES.
Our business is dependent upon the procurement and maintenance of licenses
to provide various communications network services. We do not own our own
licenses for services but depend on a contractual arrangement with Microtec for
the transfer of these licenses. Microtec is in the process of applying to ANATEL
for the transfer of these licenses to us. Until the transfer of these licenses
is approved, Microtec must be named a contracting party in most of our
engagements for network services. We cannot assure you that we will be able to
obtain approval for the transfer of such licenses, or, upon their transfer, that
we will be able to maintain these licenses in force. The loss, or substantial
limitation upon the terms, of our licenses could have a material adverse effect
on our results of operations.
In addition, from time to time, we may need to obtain additional licenses
and approvals to offer additional services. There may be difficulties or delays
in obtaining such licenses and approvals. In the event we are required to
publicly bid for any additional licenses, there can be no assurance that we
would be selected as the winning bidder or that we would have the financial
resources needed to obtain these licenses. Our failure to obtain additional
licenses could require us to alter our business and expansion plans and
materially adversely affect our business and operations.
THE BUILD-OUT OF OUR NETWORK DEPENDS ON OUR ABILITY TO LEASE FIBER OPTIC CABLE.
Unlike many of our competitors, we do not own the fiber optic cable
capacity we use. We depend upon the availability of fiber optic cable for lease
at reasonable costs. There can be no assurance that fiber optic cable will
continue to be available for leasing at low cost. If the required fiber optic
cable is not available for leasing, our current operations and business and
expansion plans could be materially adversely affected.
WE MUST OBTAIN ADDITIONAL LEASE AGREEMENTS WITH BUILDING OWNERS FOR THE
INSTALLATION OF OUR NETWORK INFRASTRUCTURE, OR OUR GROWTH WILL BE CONSTRAINED.
Our business depends upon our ability to enter into lease agreements to
install our antenna and other network equipment in commercial and residential
buildings that are well-positioned for radio transmission to our customers. We
depend heavily on a limited number of property owners and developers for these
lease agreements. A deterioration in our relationship with them would harm our
business. In addition, there are currently a significant number of other
companies competing for these same rights. The failure of property owners and
managers to grant access rights or enter into lease agreements with us on
acceptable terms could affect our ability to build out our network. Furthermore,
building or property owners may terminate or fail to renew our existing lease
agreements. Current federal and state regulations do not require building or
property owners to make space available to us, or to do so on terms that are
reasonable or nondiscriminatory. Building owners may decide not to permit us to
install our network equipment in their buildings. If we are unable to obtain
lease agreements and install our network equipment in many additional buildings
on a timely basis, our business will be harmed.
OUR NATIONAL PRE-QUALIFICATION GRANT OF SPECTRUM IN BRAZIL IS NON-EXCLUSIVE AND
THEREFORE COULD INTERRUPT OR THREATEN OUR ABILITY TO PROVIDE SERVICE IN EACH OF
THE MAJOR URBAN MARKETS WE EXPECT TO SERVE IN BRAZIL.
Our national pre-qualification grant of spectrum in Brazil is non-exclusive
and therefore may require us to coordinate with competitors and other third
parties regarding access to the same spectrum frequencies. Coordinating our
spectrum usage with others could increase our costs of doing business and
threaten our ability to provide service. We cannot assure you that in the future
there will not be other providers who are
9
<PAGE> 13
granted overlapping frequencies or that spectrum grants will not overcrowd the
spectrum frequencies that we use to provide broadband services.
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.
We market our services to business customers and other high volume users.
We must ensure that our networks provide a high level of reliability, capacity
and security. Our networks, many of which are being expanded or newly
constructed, are subject to damage, power loss, capacity limitations, software
defects and breaches of security. If service is not restored in a timely manner,
we may be obligated to provide credits or other remedies to our customers, which
would reduce our revenues. Service disruptions could also damage our reputation
with customers, causing us to lose existing customers or have difficulty
attracting new ones. Many of our customers' communications needs will be
extremely time sensitive, and delays in signal delivery may cause significant
losses to a customer using our networks.
WE NEED TO CONTINUE TO SECURE NEW CUSTOMERS IF WE ARE TO GENERATE PROFITS.
Securing new customers to use our data, Internet and other broadband
services is particularly important to our growth strategy and to a large degree
depends on factors outside our control, such as the overall level of demand for
these types of services by business and government customers in our existing
markets. Other factors affecting demand include business, economic, regulatory
and competitive factors in the markets in which we operate. Insufficient demand
for our services will adversely affect our business and results of operations.
AS AN ACCESS PROVIDER, WE MAY INCUR LIABILITY FOR INFORMATION DISSEMINATED
THROUGH OUR NETWORKS.
The law relating to the liability of access providers for information
carried on or disseminated through their networks is unsettled. Although we have
not been the subject of any claims related to information carried on our
networks, it is possible that we could be. There may be new legislation and
court decisions that may affect our services and expose us to potential
liability.
As the law in this area develops, the potential imposition of liability for
information carried on and disseminated through our networks could require us to
implement measures to reduce our exposure to such liability, which may require
the expenditure of substantial resources or the discontinuation of certain
products or services offerings. Any significant costs that we incur as a result
of such measures or in the imposition of liability could have a material adverse
effect on our operating expenses and our liquidity.
UNAUTHORIZED ACTIONS OF OUR LOCAL REPRESENTATIVES OR AGENTS COULD SUBJECT US TO
LIABILITY UNDER THE FOREIGN CORRUPT PRACTICES ACT.
We are subject to the Foreign Corrupt Practices Act, or the FCPA. The FCPA
is a U.S. law that generally prohibits U.S. companies and their intermediaries
from bribing foreign officials for the purpose of obtaining or keeping business.
We have taken precautions and instituted a number of procedures to comply with
the FCPA. However, we cannot assure that such precautions will protect us
against liability under the FCPA. In particular, we may be held responsible for
actions taken by our local representatives or agents, regardless of our ability
to control them. Any determination that we have violated the FCPA could lead to
criminal penalties and could have a material adverse effect on our business and
operations.
RISKS RELATING TO BRAZIL
BRAZILIAN POLITICAL AND ECONOMIC CONDITIONS HAVE A DIRECT IMPACT ON OUR BUSINESS
AND THE MARKET PRICE OF OUR COMMON SHARES.
The Brazilian government frequently has intervened in the economy and
occasionally made drastic changes in policy. The government's actions to control
inflation and effect other policies have often included wage and price controls,
currency devaluations, capital controls, and limits on imports, among other
things.
10
<PAGE> 14
Our business, financial condition and results of operations may be harmed by
changes in policy involving tariffs, exchange controls, tax policies and other
matters.
BRAZIL-BASED COMPANIES HAVE LOST MONEY IN THE PAST DUE TO THE FLUCTUATION OF THE
REAL, AND WE ARE NOT HEDGED TO PROTECT OURSELVES FROM FUTURE CURRENCY LOSSES.
The relationship of the Real to the value of the U.S. Dollar in the future
may affect our financial condition and results of operations. All of our sales
and receivables are denominated in the Real, while a portion of our costs,
including purchases of capital equipment is payable in U.S. Dollars. Currently,
we are not engaged in hedging activities, and we are not hedged against currency
risks. Any significant devaluation, such as occurred during the first quarter of
1999, of the Real relative to the U.S. Dollar may have a material adverse effect
on our operating results and financial condition.
DEVELOPMENTS IN OTHER EMERGING MARKET COUNTRIES MAY AFFECT THE MARKET PRICE OF
OUR COMMON SHARES.
Shares of companies with operations in Brazil have been influenced by
economic and market conditions in other emerging market countries to varying
degrees. Although economic conditions are different in each country, investors'
reactions to developments in one country may affect the price of shares of
issuers from other countries, including Brazil. Between the fourth quarter of
1997 and the first quarter of 1999, the international financial markets
experienced significant volatility, and a large number of market indices,
including those in Brazil, declined significantly. For example, the Asian
economic crisis and the 1998 Russian debt moratorium and devaluation of the
Russian currency triggered market volatility in Latin America and securities
markets in other emerging market countries. The market value of our common
shares may be adversely affected by events elsewhere, especially in emerging
market countries.
WE FACE REGULATORY RISKS AND UNCERTAINTY WITH RESPECT TO BRAZILIAN LAW AND
REGULATIONS.
The interpretation and enforcement of Brazilian laws and regulations may
vary and may be based on the informal views of the local government officials.
Our service offerings may be impacted by future legislation or regulation.
WE COULD PAY ADDITIONAL TAXES BECAUSE OUR FOREIGN OPERATIONS ARE SUBJECT TO
VARIOUS FOREIGN TAXES.
We structure our operations based on certain assumptions about various tax
laws, U.S. and international tax treaty developments, currency exchange and
capital repatriation laws and other relevant laws of Brazil and other non-U.S.
jurisdictions. Taxing or other governmental authorities might not reach the
conclusions we anticipate. We could suffer adverse tax and other financial
consequences if our assumptions about these matters are incorrect or the
relevant laws are changed.
DISTRIBUTIONS AND OTHER PAYMENTS TO US FROM OUR SUBSIDIARIES MAY BE SUBJECT TO
BRAZILIAN AND OTHER FOREIGN TAXES, REDUCING OUR EARNINGS.
Distributions of earnings and other payments, including interest, which we
receive from our subsidiaries, may be subject to withholding taxes imposed by
Brazil or other jurisdictions where these entities are formed or operating.
These taxes would reduce the amount of after-tax cash we would receive from
these entities.
RISKS RELATING TO THIS OFFERING
OUR COMMON SHARE PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR
SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
The initial public offering price for our common shares will be determined
through negotiations between the underwriters and us. You should read the
"Underwriting" section for a more complete discussion of the factors that were
considered in determining the initial public offering price of our common
shares. The initial public offering price may vary from the market price of our
common shares after the offering. If you purchase common shares, you may not be
able to resell those common shares at or above the purchase price.
11
<PAGE> 15
If an active public market for our common shares does not develop, the
liquidity of your investment may be limited, and our common share price may
fluctuate or decline below our initial public offering price. The market price
of our common shares may fluctuate significantly in response to the following
factors, some of which are beyond our control:
- any deviations in net revenues, profits or in losses from levels expected
by securities analysts;
- trading volume fluctuations, which are particularly common among highly
volatile securities of Internet-related companies;
- actual or anticipated fluctuations in our operating results;
- changes in market valuations of other Internet-related communications
companies;
- significant technical innovations, contracts, acquisitions, strategic
partnerships, joint ventures or capital commitments;
- additions or departures of key personnel; and
- future sales of our common shares.
OUR AFFAIRS AND BUSINESS POLICIES ARE SUBJECT TO CONTROL BY OUR PRINCIPAL
SHAREHOLDERS.
Immediately following the offering, our principal shareholders together
will beneficially own approximately % of the outstanding common shares.
Accordingly, our principal shareholders are able to exercise significant
influence over the election of our Board of Directors and the outcome of all
matters submitted to a vote of our shareholders.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR
SHARES.
The initial public offering price of our common shares will be
substantially higher than the pro forma adjusted tangible book value per share
of our outstanding common shares. Dilution in net tangible book value per share
represents the difference between the amount per share paid by purchasers of
common shares in this offering and the net tangible book value per common share
immediately after the completion of this offering. Accordingly, based on the
offering price of $ per share, if you purchase common shares in the
offering, you will incur immediate dilution of approximately $ in the
net tangible book value per share from the price you pay for our common shares.
The common shares owned by our existing shareholders will receive a material
increase in the tangible book value per share. We also have a significant number
of outstanding options and warrants to purchase our common shares with exercise
prices significantly below the initial public offering price of the common
shares. To the extent these options or warrants are exercised, there will be
substantial further dilution to you as new investors in our common shares. For
additional information on this calculation, see "Dilution."
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS OF THIS OFFERING.
We presently intend to use the net proceeds of this offering for the
purposes set forth in "Use of Proceeds". However, our management and Board of
Directors will have considerable discretion with respect to the application and
allocation of the net proceeds of this offering and, among other things, they
may decide to use the proceeds in a way that is different from that now
disclosed under "Use of Proceeds."
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS MAY NOT BE ACCURATE.
This prospectus includes various forward-looking statements which can be
identified by the use of terminology such as "believe," "may," "will,"
"estimate," "continue," "anticipate," "plan," "intend," "expect", "seek" or
other and similar expressions. We have based these forward-looking statements
largely on our current expectations and projections about future events and
financial trends affecting the financial
12
<PAGE> 16
condition of our business. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions about our company, including,
among other things.
- general economic and business conditions in Brazil;
- our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
- anticipated trends in our business;
- existing and future regulations affecting our business; and
- the other risk factors set forth above in this section.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this prospectus may not occur, and actual results
could differ materially from those anticipated or implied in the forward-looking
statements. You should be aware that the industry studies and reports that we
refer to in this prospectus also make forward-looking statements concerning,
among other things, the future growth of Internet usage and communications in
Brazil.
13
<PAGE> 17
USE OF PROCEEDS
The net proceeds from the sale of common shares, after
deducting our estimated offering expenses and underwriting discounts, are
estimated to be approximately $ million, assuming an offering price of
$ per share, or $ million if the underwriters' over-allotment
option is exercised in full.
We intend to use a portion of the net proceeds to fund network operations
and expansion plans and to implement our growth strategy. We intend to use the
balance of the net proceeds for working capital and general corporate purposes.
Although we may use a portion of the net proceeds to acquire technology or
businesses that are complimentary to our business, we have no current plans to
do so. Pending use of the net proceeds from the sale of the shares, we intend to
invest such funds in short-term, interest-bearing, investment-grade instruments.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common shares since
our inception and we do not intend to pay any cash dividends in the foreseeable
future. We currently intend to reinvest earnings, if any, in the development and
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of our Board of Directors and will be dependent upon our
financial condition, operating results, capital requirements and such other
factors as our Board of Directors deems relevant.
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<PAGE> 18
CAPITALIZATION
The following table sets forth our short-term debt and capitalization as of
July 31, 2000:
- on an actual basis;
- on a proforma basis, assuming the conversion of the Series A Redeemable
Convertible Preferred Stock, which will occur assuming that this offering
generates gross proceeds to us in excess of $25 million and the initial
offering price per common share is at least $8.14; and
- on a proforma basis as adjusted to give effect to (i) the conversion of
the Series A Redeemable Convertible Preferred Stock, which will occur
assuming that this offering generates gross proceeds to us in excess of
$25 million and the initial offering price per common share is at least
$8.14; and (ii) the sale of common shares in the offering
at an assumed offering price of $ per share and the application
of the estimated net proceeds therefrom.
This table should be read in conjunction with our consolidated financial
statements and the notes thereto, management's discussion and analysis of
financial condition and results of operations and other information included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JULY 31, 2000 (UNAUDITED)
---------------------------------------
PROFORMA
ACTUAL PROFORMA AS ADJUSTED
----------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents................................ $11,394,157 $11,394,157
----------- ----------- --------
Short-term debt, including vendor-financing, related
party; short-term portion of capital lease, related
party and line of credit, related party................ $ 4,336,013 $ 4,336,013
Long-term liabilities, less short-term portion, related
party.................................................. 241,800 241,800
Minority interest........................................ 50,274 50,274
Series A Redeemable Convertible Preferred Stock, $.0001
par value, 4,914,005 shares authorized, issued and
outstanding actual and no shares issued and
outstanding, proforma and proforma as adjusted......... 19,227,008 --
Shareholders' equity
Preferred stock, $.0001 par value; 15,085,995 shares
authorized, no shares issued and outstanding........ -- --
Common stock, $.0001 par value; 100,000,000 authorized,
12,461,107 shares issued and outstanding, actual,
and 17,375,112 shares issued and outstanding,
proforma and shares issued and outstanding,
proforma
as adjusted......................................... 1,246 1,738
Additional paid-in capital............................... 8,676,584 27,903,100
Deferred compensation.................................... (169,847) (169,847)
Accumulated other comprehensive income................... 290,063 290,063
Accumulated deficit...................................... (5,047,060) (5,047,060)
----------- ----------- --------
Total shareholders' equity..................... 3,750,986 22,977,994
----------- ----------- --------
Total capitalization........................... $27,606,081 $27,606,081
=========== =========== ========
</TABLE>
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<PAGE> 19
DILUTION
As of July 31, 2000, our net tangible book value was $ or
$ per share. Net tangible book value per share represents the amount of
our total tangible assets reduced by the amount of total liabilities divided by
the number of common shares outstanding. As of July 31, 2000, our net tangible
book value, on a pro forma basis to reflect for the sale of
shares in this offering at an assumed offering price of $ per share and
the application of the net proceeds from such sale of $ (after
deducting the underwriting discounts and commissions and other estimated
offering expenses), would have been approximately $ per share. This
represents an immediate increase of $ per share to existing
shareholders and an immediate dilution of $ per share to new investors.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $--
Unaudited net tangible book value per share as of July 31,
2000................................................... --
Increase per share attributable to the new investors...... --
Pro forma net tangible book value per share after the
offering.................................................. --
Dilution per share to new investors......................... --
</TABLE>
The following table summarizes, on a pro forma basis giving effect to this
offering, the differences between the existing shareholders and the new
investors with respect to the number and percentage of common shares purchased
from us, the amount and percentage of total consideration paid to us and the
average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......................... % % $
New investors.................................. % % $
Total................................ % % $ % $
</TABLE>
The foregoing information does not give effect to the exercise of (i) the
underwriter's option to purchase from us up to an additional
common shares to cover over-allotments, if any, and (ii) the underwriter's
warrants. The foregoing information assumes the conversion of all shares of
Series A Redeemable Convertible Preferred Stock into common shares.
16
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data for each of the two years in the
period ended April 30, 2000 are derived from our audited consolidated financial
statements. The financial data for the three month periods ended July 31, 1999
and 2000 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which we consider necessary for a fair presentation of the financial
position and the results of operations for these periods.
Operating results for the three months ended July 31, 2000 are not
necessarily indicative of the results that may be expected for the entire year
ending April 30, 2001. The data should be read in conjunction with the
consolidated financial statements, related notes, and other financial
information included herein.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, THREE MONTHS ENDED JULY 31,
-------------------------- ----------------------------
1999 2000 1999 2000
----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................. $ 795,000 $ 3,545,426 $ 309,980 $ 1,488,400
Cost of revenues......................... 406,913 2,427,513 99,395 750,113
----------- ----------- --------- -----------
Gross profit............................. 388,087 1,117,913 210,585 738,287
Selling, general and administrative
expenses............................... 1,281,295 2,705,655 476,934 1,593,316
Depreciation and amortization............ 161,940 411,341 43,435 494,762
----------- ----------- --------- -----------
Loss from operations..................... (1,055,148) (1,999,083) (309,784) (1,349,791)
Other expense............................ -- (605,352) (131,607) (37,686)
----------- ----------- --------- -----------
Net loss................................. $(1,055,148) $(2,604,435) $(441,391) $(1,387,477)
=========== =========== ========= ===========
Loss per common share -- basic and
diluted (1)............................ $ (0.24) $ (0.24) $ (0.05) $ (0.11)
=========== =========== ========= ===========
</TABLE>
---------------
(1) See note 1 to our consolidated financial statements for a determination of
the shares used in computing basic and diluted loss per share.
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF APRIL 30, AS OF JULY 31,
------------------------- --------------
1999 2000 2000
----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets.......................................... $ 862,452 $ 662,738 $18,178,552
Working capital (deficit)............................... (415,563) (5,477,117) 11,831,795
Total assets............................................ 2,844,537 6,101,642 29,616,825
Long-term liabilities, including minority interest...... 1,087,985 681,439 292,074
Total liabilities and minority interest................. 2,366,000 6,821,294 6,638,831
Series A Redeemable Convertible Preferred Stock......... -- -- 19,227,008
Shareholders' equity (deficit).......................... 478,537 (719,652) 3,750,986
</TABLE>
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<PAGE> 21
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" and elsewhere in this prospectus.
OVERVIEW
We conduct most of our operations through our subsidiary, Intercontinental
Telecom Corporation do Brasil S/C Ltda. Substantially all of our earnings are
attributable to this subsidiary's operations.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain line items
from our consolidated statement of operations as a percentage of our
consolidated net revenues:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
APRIL 30, JULY 31,
------------ ----------------
1999 2000 1999 2000
---- ---- -------- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues................................................ 100% 100% 100% 100%
Cost of revenues............................................ 51 68 32 50
Selling, general and administrative expenses................ 161 76 154 107
Depreciation and amortization............................... 20 12 14 33
---- --- ---- ---
Loss from operations........................................ (132) (56) (100) (90)
Other (expense) income...................................... -- (17) (42) (3)
---- --- ---- ---
Net loss.................................................... (132)% (73)% (142)% (93)%
==== === ==== ===
</TABLE>
Three Months Ended July 31, 2000 Compared to the Three Months Ended July 31,
1999.
NET REVENUES. Net revenues for the three months ended July 31, 2000
increased by $1.2 million, or 380%, to $1.5 million, compared to $0.3 million
for the comparable period in 1999. This increase was primarily attributable to
improved business conditions in Brazil and acceleration of our network expansion
in 2000.
COST OF REVENUES. Cost of revenues for the three months ended July 31,
2000 increased by $0.7 million to $0.8 million, compared to $0.1 million for the
comparable period in 1999. Cost of revenues as a percentage of total revenues
increased due to our increased network costs relating to network expansion. As a
result, our gross profit for the three months ended July 31, 2000 was lower than
in the comparable period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended July 31, 2000 increased by
$1.1 million, or 234%, to $1.6 million, as compared to $0.5 million for the
comparable period in 1999. The increase was primarily attributable to the
addition of personnel and the costs associated with the marketing of our
expanded service offerings. Selling, general, and administrative expense as a
percentage of net revenues was 107% for the three months ended July 31, 2000,
compared to 154% for the comparable period in 1999. This decrease was primarily
attributable to faster growth in sales in the current period than the rate of
increase in selling, general and administrative expenses. We expect our selling,
general and administrative expenses as a percentage of sales to decline in
future periods.
LOSS FROM OPERATIONS. Loss from operations for the three months ended July
31, 2000 increased by $1.0 million, or 336%, to $1.3 million, as compared to
$0.3 million for the comparable period in 1999. This increase was primarily
attributable to the increase in sales, marketing and depreciation expenses
associated with the addition of personnel, the marketing of our expanded
services offering and the build-out of our network. Loss from operations as a
percentage of net revenues decreased to (90)% for the three months ended
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<PAGE> 22
July 31, 2000 from (100)% for the comparable period in 1999. This decrease was
primarily attributable to a faster growth in net revenues than growth in
operating expenses. We believe that this decrease in the period represents a
natural progression that we expect to continue as our operations mature.
OTHER (EXPENSE). Other expense for the three months ended July 31, 2000
decreased by $(0.09) million to $(0.04) million, as compared to $(0.1) million
for the comparable period in 1999. Other expense decreased primarily due to
interest generated from short-term investments.
NET LOSS. We had a net loss for the three months ended July 31, 2000 of
$1.4 million as compared to a net loss of $0.4 million for the comparable period
in 1999.
FISCAL YEAR ENDED APRIL 30, 2000 COMPARED TO THE FISCAL YEAR ENDED APRIL 30,
1999.
NET REVENUES. Net revenues in the fiscal year ended April 30, 2000
increased by $2.8 million, or 346%, to $3.5 million compared to $0.8 million in
the fiscal year ended April 30, 1999. This increase was primarily due to
increased sales volume associated with the addition of new clients and the
completion of a major customer contract.
COST OF REVENUES. Cost of revenues in the fiscal year ended April 30, 2000
increased by $2.0 million to $2.4 million compared to $0.4 million in the fiscal
year ended April 30, 1999. The cost of revenues as a percentage of net revenues
increased from 51% for 1999 to 68% for 2000. This increase was attributable to
the implementation costs of a major customer contract during 2000, which
resulted in a lower gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the fiscal year ended April 30, 2000 increased by
$1.4 million, or 111%, to $2.7 million compared to $1.3 million in the fiscal
year ended April 30, 1999. The increase was primarily attributable to the
addition of administrative personnel and the build-out of our network in new
markets. Selling, general and administrative expense as a percentage of net
revenues in the fiscal year ended April 30, 2000 was 76%, compared to 161% in
the fiscal year ended April 30, 1999. This decrease was primarily attributable
to a faster growth in sales in the fiscal year ended April 30, 2000 than
selling, general and administrative expenses in the same period. We expect our
selling, general and administrative expenses as a percentage of sales to
continue to decline in future periods.
LOSS FROM OPERATIONS. Loss from operations in the fiscal year ended April
30, 2000 increased by $0.9 million, or 89%, to $2.0 million, as compared to $1.1
million in the fiscal year ended April 30, 1999. This increase was primarily
attributable to the increase in operations including network expansion. Loss
from operations as a percentage of net revenues in the fiscal year ended April
30, 2000 decreased to (56)% from (132)% in the fiscal year ended April 30, 1999.
This decrease was primarily attributable to a faster growth in net sales than
growth in operating expenses. We believe that this decrease in the period
represents a natural progression that we expect to continue as our operations
mature.
OTHER (EXPENSE). Other expense in the fiscal year ended April 30, 2000
increased by $(0.6) million, to $(0.6) million, as compared to no other expense
in the fiscal year ended April 30, 1999. This increase was primarily due to the
use of our line of credit during 2000.
NET LOSS. We had a net loss in the fiscal year ended April 30, 2000 of
$2.6 million as compared to a net loss of $1.1 million in the fiscal year ended
April 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have used our cash to develop our infrastructure
and expand our operations. During the fiscal year ended April 30, 1999 and the
fiscal year ended April 30, 2000, we principally used cash flow from operations
and debt financing to satisfy our working capital requirements. We expect to
continue to make significant capital expenditures in the future in connection
with the development of our network and the further expansion of our operations.
We believe that earlier equity capital financings, including the net proceeds
from the issuance of the Series A Redeemable Convertible Preferred Stock in May
2000, together with potential vendor financing agreements will be sufficient to
fund our capital expenditures and operating
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<PAGE> 23
losses at least through the next twelve months. We are currently evaluating
vendor financing proposals from several vendors of communications equipment
including Nortel Networks, Cisco Systems, Alcatel, Ericsson and Siemens.
At April 30, 2000, we had a working capital deficit of $5.5 million
compared to a deficit $0.4 million at April 30, 1999. This decrease in working
capital was primarily attributable to the increase in our line of credit. At
July 31, 2000, we had working capital of $11.8 million. This increase from April
30, 2000 was primarily attributable to the increase in cash and short-term
investments from the net proceeds of the issuance of Series A Redeemable
Convertible Preferred Stock.
NET CASH USED IN OPERATING ACTIVITIES. Net cash provided by operating
activities in the fiscal year ended April 30, 2000 was $0.9 million as compared
to $1.7 million in cash used in operating activities during the comparable
period in the fiscal year ended April 30, 1999. The increase resulted primarily
from the increase in trade accounts payable and accrued expenses. Net cash used
in operating activities during the three months ended July 31, 2000 was $4.4
million as compared to $1.5 million during the comparable period in 1999. This
increase resulted primarily from an increase in trade accounts payable and
accrued expenses, related party, and a deposit made to an equipment broker for
purposes of securing equipment from major vendors.
NET CASH USED IN INVESTING ACTIVITIES. Net cash used in investing
activities was $3.7 million in the fiscal year ended April 30, 2000 as compared
to $0.3 million in the fiscal year ended April 30, 1999. The investment
activities in the fiscal year ended April 30, 2000 were primarily related to
purchases of property and equipment for the expansion of our broadband network.
Net cash used in investing activities was $3.6 million during the three months
ended July 31, 2000 as compared to $0.07 million during the comparable period in
1999. This increase is primarily due to purchases of property and equipment for
the build-out of our network, the acquisition of solutions software and
investment in short term notes receivable, related party. We also invested
approximately $3.2 million with a related party and in return received two
senior short-term notes aggregating that amount. Both notes bear interest at an
annual rate of 8% and have 90-day maturity dates.
NET CASH PROVIDED FOR FINANCING ACTIVITIES. Net cash provided from
financing activities was $2.9 million for the fiscal year ended April 30, 2000
as compared to $1.7 million provided by financing activities for the fiscal year
ended April 30, 1999. The increase was primarily attributable to borrowings on
the Microtec line of credit of $2.0 million and proceeds from a $0.6 million
promissory note to Millenium Investment Capital Corp. Net cash provided from
financing activities was $19.3 million during the three months ended July 31,
2000 as compared to $1.4 million provided by financing activities during the
comparable period in 1999. The increase resulted primarily from the private
placement of 4,914,005 shares of Series A Redeemable Convertible Preferred Stock
to Capital Communications CDPQ Inc., or Capcom, for net proceeds of $19.3
million. For a description of the terms of the Series A Redeemable Convertible
Preferred Stock, see "Description of Securities -- Preferred Stock."
As of July 31, 2000, we have a line of credit in the amount of $2.8 million
with Microtec. The credit line bears interest of 12% annually. As of April 30,
2000 and July 31, 2000, there was $2,274,484 and $2,363,494, respectively, of
outstanding borrowings under this facility.
During the fiscal year ended April 30, 2000, we entered into a promissory
note with a third party, Millenium Investment Capital Corp. Under the note, we
received proceeds of $600,000, payable upon demand. This note accrued interest
at an annual rate of 10% to be paid on a biannual basis, until the note was to
become due. During April 2000, in conjunction with the sale of Series A
Redeemable Convertible Preferred Stock the balance of the note of $600,000, was
converted into 147,420 common shares and accrued interest related to the note
was forgiven.
On April 30, 1999, we entered into a vendor financing agreement with
Microtec, for the principal amount of $1.9 million. The borrowings under this
agreement bear interest at an annual rate of 12% payable monthly in 18
consecutive monthly interest and principal payments starting on March 31, 2000.
As of July 31, 2000, the outstanding balance under this arrangement was
$1,768,221. We have obtained a letter from Vitech waiving Microtec's rights to
demand immediate payment of the entire outstanding balance in the event of
default related to non-payment.
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<PAGE> 24
In February 2000, we entered into a capital lease with Microtec for $0.5
million for the purchase of equipment. The capital lease has a term of 36 months
and requires a monthly payment of $.02 million.
On June 30, 2000 and July 31, 2000, we received two senior short-term notes
from Vitech for approximately $1.8 million each. Both notes bear interest at an
annual rate of 8% and principal plus interest are due on the maturity dates of
September 30, 2000 and October 30, 2000, respectively. The note due on September
30, 2000 has been paid.
INCOME TAXES
We are subject to federal, state and foreign income taxes but we have
incurred no liability for such taxes in fiscal years 1999 or 2000 due to net
operating losses incurred. Under certain circumstances, these net operating
losses could be used to offset future taxable income. Our 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. Certain tax benefits could expire prior to the time we generate
taxable income.
NET OPERATING LOSS CARRYFORWARDS
At April 30, 2000 we have net tax operating loss carryforwards of
approximately $1.2 million for U.S. income tax purposes and approximately $2.2
million 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 2019 through 2020. The foreign net operating loss carryforwards
related to Brazil of $2.2 million do not expire.
If a change of ownership occurs, utilization of U.S. net operating losses
may be limited under the Internal Revenue Code.
IMPACT OF INFLATION ON RESULTS OF OPERATIONS, LIABILITIES AND ASSETS
For many years prior to July 1994, the Brazilian economy was characterized
by high rates of inflation and devaluation of the Real against the U.S. Dollar
and other currencies. However, since the implementation in July 1994 of the
Brazilian government's latest stabilization plan, the "Real Plan", inflation,
has been significantly reduced. We have no assurance that the Real Plan or other
current government policies will continue to be effective at reducing inflation.
Inflation affects us by increasing the cost of goods and services we use in the
operation of our business and by increasing our financing costs. The reaction of
the Brazilian government to economic uncertainties such as rising inflation
could lead to adverse conditions for our business.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission, or the SEC,
issued Staff Accounting Bulletin No. 101, or SAB 101, "Revenue Recognition in
Financial Statements". SAB 101 explains how the SEC staff applies by analogy the
existing rules on revenue recognition to other transactions not covered by such
rules. The four criteria that must be met to recognize revenue are:
- persuasive evidence of an arrangement exists;
- delivery has occurred or services have been rendered;
- the price is fixed or determinable; and
- collectibility is reasonably assured.
In June 2000, the SEC issued SAB 101B. SAB 101B delays the effective date
of SAB 101 until no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999 (fourth quarter of fiscal year 2001 for us).
We do not believe the adoption of SAB 101 will have a material impact on our
results of operations. However, we understand the SEC staff will issue
additional guidance in the form of a Frequently Asked Questions document, at
which time we will reevaluate the impact of SAB 101.
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<PAGE> 25
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25. We are required to adopt
this interpretation as of July 1, 2000. This interpretation requires, among
other things, that stock options that have been modified to reduce the exercise
price be accounted for as variable. We have not repriced stock options since
inception and, as a result, we currently do not expect the impact of the
adoption of this interpretation to be significant.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCY RISK AND HEDGING ACTIVITIES
Although our consolidated financial statements are presented in U.S.
Dollars in accordance with U.S. generally accepted accounting principles, our
transactions are consummated in both the Real and the U.S. Dollar. Inflation and
fluctuations in exchange rates have had, and may continue to have, an effect on
our results of operations and financial condition. Currently, we are not engaged
in any hedging activities. We are, however, analyzing our exposure to currency
risks and developing a plan to use hedging activities to offset currency risks
as deemed appropriate. Any significant devaluation of the Real relative to the
U.S. Dollar, such as the devaluation that occurred in the first quarter of 1999,
would have a material adverse effect on our operating results.
FOREIGN CURRENCY TRANSLATION
Our financial statements have been prepared in accordance with U.S.
generally accepted accounting principles and are stated in U.S. Dollars. The
assets and liabilities of our subsidiaries were translated into U.S. Dollars at
exchange rates in effect at the balance sheet date for monetary items and at
historical rates for non-monetary items. Revenue and expense accounts are
translated at the average exchange rate in effect during each month, except for
those accounts that relate to non-monetary assets and liabilities that are
translated at historical rates.
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<PAGE> 26
BUSINESS
BUSINESS OVERVIEW
We provide advanced broadband communications services and software
application services in Brazil. Our target customers are multinational
corporations, government entities and small and medium-size businesses with
growing and diverse communications and business automation needs. We deliver
broadband communications services over our high-speed, high-capacity network
using fixed wireless access technology and leased fiber optic cable. Our
software application services offer business process improvements, database
management programs and electronic commerce services to our customers. We market
our services under the brand iB2B.
We offer an integrated package of communications services that we have
organized across two business platforms: network services and software
application services. Our network services include:
- Basic Broadband Connectivity -- We connect our customers to our network
through last-mile wireless access and leased fiber optic cable;
- Virtual Private Networks, or VPNs -- We construct private networks that
allow a customer to communicate securely among its multiple locations
over the Internet. This service is sometimes referred to as an Intranet
service. We also build Extranets, which are VPNs, that allow third party
access to a customer's data;
- Web Hosting -- We place a customer's Website on our Internet Web servers
using the customer's registered domain name; and
- Voice-over-Internet Protocol -- We offer the transmission of voice over
an internetworking standard that enables communication across the
Internet. We provide this service to our business and government
customers through the installation of VPNs since Brazilian communications
regulation only allows this service to be provided through private
networks.
Our software application services include Web-based and client/server based
software solutions tailored to the customer's business automation needs. We
currently offer vertical software solutions directed at specific industries and
applications, including:
- Healthcare -- The components of this solution include customer invoicing,
purchasing, insurance claim management and patient enrollment;
- Government Administration -- The components of this solution include
taxation tracking, budget and financial management, human resource
management and fleet control; and
- Education and Distance Learning -- This solution is comprised of three
core applications: school census and enrollment planning; school
management; and distance learning.
Our software application services are designed to take advantage of
broadband communications technology to improve the administrative and business
processes of our customers. These services, which require minimal customization,
help customers manage the flow of data among departments and customer locations
as well as with their clients. Most of our current customers have software
application services installed in a client/server configuration. However, most
of our software application services are designed to be delivered in conjunction
with our network services using an Application Service Provider, or ASP,
business model. An ASP business model involves the delivery of software over a
network, such as the Internet, rather than its installation at a customer
location.
Our nationwide broadband, high-speed Internet-Protocol network serves the
largest metropolitan areas in Brazil and extends over 11,000 kilometers. Our
national network currently consists of fifteen operational Points-of-Presence,
or POPs, two network operations centers, or NOCs, and local access nodes. This
network links the Brazilian cities of Belo Horizonte, Blumenau, Curitiba,
Florianopolis, Goiania, Ilheus, Joinvile, Natal, Porto Alegre, Recife, Ribeirao
Preto, Salvador, Santos, and Sao Paulo, and includes an international
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<PAGE> 27
connection to the United States in Miami, Florida. We are expanding our networks
to consist of thirty-two operational POPs within Brazil. We expect that this
expansion will be completed by the end of 2001.
We have obtained national communications specialized service licenses as
well as regional and national pre-qualification grants to use point-to-point
radio routes at frequencies ranging from 1.5 GHz to 38 GHz, and
point-to-multipoint routes at 3.5 GHz and 10.5 GHz in Brazil. We are designing
and operating local fixed wireless broadband access networks throughout Brazil
and have connected a total of 106 customer buildings throughout 14 Brazilian
cities as of August 31, 2000.
INDUSTRY OVERVIEW
Liberalization of the global communications industry and technological
change has resulted in an increasingly data-intensive business environment. In
Brazil, regulatory, technological, marketing and competitive trends have led to
an increased demand for bandwidth-intensive software applications among the
growing business community. We believe there is significant unmet demand for
these advanced communications services, including:
- reliable, high capacity broadband communications networks;
- dedicated Internet and data access;
- webhosting services;
- private local and wide area networks; and
- software application services tailored to the customer's data and
communications needs.
We believe that demand for complex data, Internet, voice and video
communications services and solutions will continue to increase. We believe our
high-speed data network utilizing last-mile wireless connectivity provides the
transmission capacity and flexibility to meet that demand. In Brazil, some
communications carriers continue to use older technologies and offer
connectivity and service over the existing copper wire infrastructure that was
designed primarily for voice services. The use of this low capacity
infrastructure has limited the ability of these communications providers to
address the increased bandwidth demands of businesses.
The recent growth in the Brazilian communications industry, particularly in
broadband communications services, has been shaped by a number of underlying
trends that we believe will continue. These include:
MARKET LIBERALIZATION. Privatization and the related breakup of the
Brazilian communications monopoly have resulted in increased competition for
substantially all communications products and services. The Brazilian government
continues to demonstrate a pro-competition approach to the market. In addition,
Brazil is a signatory to the World Trade Organization Agreement on Basic
Telecommunications Services, which mandates liberalization. Competition has
facilitated the development and availability of more advanced communications
services to the Brazilian business market at generally reduced prices, which has
in turn increased demand.
GLOBALIZATION OF CORPORATIONS. As corporations in more developed markets
expand into Brazil, and as domestic business markets continue to grow, we
believe that the demand for private network services, Internet access, tailored
software application services, broadband connectivity and increased capacity
between and within the major cities in Brazil will continue to grow.
INCREASED DEVELOPMENT OF TECHNOLOGICALLY ADVANCED COMMUNICATIONS
INFRASTRUCTURE. Historically, Brazil has depended upon the capacity constrained
and poor quality communications infrastructure of the incumbent operators. As a
result, business customers have been slower to adopt data intensive applications
than similar customers in more developed markets. We believe 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 Brazil.
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INCREASED USE OF THE INTERNET IN BRAZIL. The Brazilian market has lagged
behind the United States market in using Internet-related services. We believe
that as Internet use increases in Brazil, corporations will accelerate their
adoption of new technologies and applications, thereby increasing demand for
broadband services and software application services.
OUR MARKET OPPORTUNITY
Brazil is the largest country in Latin America with an estimated population
of approximately 171 million at December 1999. Sao Paulo, its largest city, has
a population of approximately 17 million. For the first half of the year 2000,
Brazil's GDP increased approximately 3.8% over the first half of 1999.
We believe that a substantial business opportunity exists for us in Brazil
as a result of the following factors:
LARGE, GROWING AND UNDERSERVED COMMUNICATIONS MARKET LACKING AN ADEQUATE
COMMUNICATIONS INFRASTRUCTURE. Businesses and government agencies in Brazil
traditionally have had a limited technology infrastructure from which to grow
their information management and communications capabilities. Business and
government customers now seek a single-source solution for their integrated
business information and process automation requirements.
Until recently, the communications infrastructure in Brazil could not
provide customers with reliable and cost-effective broadband connectivity. We
believe the Brazilian communications infrastructure and service providers do not
adequately provide the latest technology, availability of immediate Internet
access, quality of service and flexibility of operations. Due to the lack of an
advanced communications infrastructure, customers traditionally have not had the
opportunity to acquire comprehensive Web-centric solutions that create
efficiencies in their businesses.
Brazil represents Latin America's largest and fastest growing Internet
market. International Data Corp., or IDC, a leading technology industry research
firm, estimates that Brazil accounts for approximately 46% of all Internet users
in Latin America and between 60% and 90% of all the e-commerce revenues
generated in Latin America. We believe that our rapid and low-cost deployment of
wireless broadband communications services and tailored software application
services provides us with an opportunity to quickly capture a significant share
of the underserved Brazilian market.
LARGE DEMAND FOR HIGH SPEED DATA COMMUNICATIONS. We believe the continued
growth in demand for broadband communications services in Brazil will be
influenced by the level of growth of the Brazilian economy, demand from business
customers, foreign investment and international trade, and the continued
expansion of the Brazilian communications infrastructure. We intend to address
this demand in Brazil by offering broadband Internet and communications
solutions that we believe will provide significant savings and productivity
enhancements to our business and government customers.
EMERGENCE OF WIRELESS BROADBAND ACCESS TECHNOLOGIES. Our fixed wireless
broadband access and leased fiber optic cable network are high-quality
alternatives to existing copper, satellite and hybrid fiber-coaxial cable
systems. Employing fixed wireless technology allows for success-based capital
expenditures, meaning that we do not incur significant capital costs until we
identify sufficient customer demand. Moreover, we are able to reach customer
buildings in areas where it may not be cost-effective for other providers to lay
fiber optic cable.
OUR RELATIONSHIP WITH MICROTEC SISTEMAS INDUSTRIA E COMERCIO S.A.
We have entered into a joint marketing agreement terminating on November 1,
2005 with one of Brazil's largest computer manufacturers, Microtec, a subsidiary
of Vitech America, Inc., a Florida corporation, whose shares are publicly traded
on the NASDAQ National Market. Microtec is the exclusive manufacturer of Gateway
Computer's products in Brazil, and has over 19 years experience in the
information technology market in Brazil. The joint marketing agreement provides
us with a significant competitive advantage by giving us access to Microtec's
direct marketing system including its sales and support services. This direct
marketing system includes approximately 100 commissioned sales employees, 500
commissioned sales agents,
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15 store locations and 15 telemarketing representatives available to promote and
support our broadband communications services and software application services.
Although the licenses for our network services are held in the name of
Microtec, under the joint marketing agreement, Microtec has agreed to transfer
the licenses to us. Microtec is in the process of applying to ANATEL for the
transfer of the licenses to us. We expect the transfer to be completed by the
end of 2000. The agreement also grants us the exclusive right to sell our
services to Microtec's customers as long as our services are bundled with its
products and equipment at prices agreed to with Microtec. In these engagements
and engagements requiring the provision of network services under Microtec's
licenses, Microtec bills the customer for our services and also collects from
the customer on our behalf.
Our initial market focus has been to target Microtec's customer base in the
largest metropolitan areas of Brazil, including Sao Paulo, Salvador, Ilheus,
Florianopolis, Recife, Goiaia, Porto Alegre, Riberao Preto, Belo Horizonte and
Curitiba. Microtec has a long history and deep penetration in these markets with
sales ranging from high-end workstations to low-end computers. Microtec's sales
have traditionally been distributed among corporations, government
organizations, and small businesses.
Our joint marketing agreement with Microtec provides us with access to
Microtec's base of over 34,000 existing business and government customers.
Through our alliance with Microtec, we also gain further in-depth knowledge of
Brazil's business environment, including:
- access to sales and marketing databases;
- increased awareness of our brand name, iB2B;
- introductions to new customer accounts; and
- relationships with the customers, decision makers and IT managers.
We believe that our relationship with Microtec's sales force provides us with a
significant advantage for rapidly capturing market share.
OUR COMPETITIVE ADVANTAGES
We believe that our competitive advantages, in addition to our relationship
with Microtec, include:
INTEGRATED SOLUTIONS APPROACH. We believe that we distinguish ourselves
from our competitors by offering bundled communications services. This offering
allows our customers to engage us to provide basic connectivity and positions us
to expand our engagement to include more advanced communications and process
automation services on a cost-efficient basis. Our customers can depend on us as
a single source supplier of network services and software application services.
RAPIDLY DEPLOYABLE AND SCALABLE NETWORK THAT ALLOWS US TO CAPTURE MARKET
SHARE. We have deployed, and continue to expand, a national IP-based broadband
communications network in Brazilian business centers using highly reliable
wireless access technologies. Our national network routes traffic over high
capacity fiber optic cable using ATM technology to provide bandwidth on demand
up to 622 Mbps. Our use of fixed wireless technology enables us to connect a
customer and provide service usually within seven days of a customer's request
for service. Through our operational support system and NOCs, we are able to
monitor our network and assure that reliability and bandwidth requirements are
consistently met. Our network design allows us to respond quickly to changing
customer needs and distributes data rapidly and cost-effectively.
LOW COST PROVIDER. We believe that our business model provides cost
advantages to customers through efficient use of high quality bandwidth. The
following factors allow us to be a low cost provider of integrated network and
software application services:
- our marketing, advertising and sales expenses are reduced because of our
access to Microtec's established national sales and marketing team;
- our bundling of network services and software application services to
customers reduces the costs associated with dealing with multiple
vendors;
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- our entire network is based on highly efficient IP-based technology that
allows us to avoid amortization and overhead costs associated with a less
efficient circuit switched infrastructure; and
- we employ fixed wireless technology that allows for success-based capital
expenditures, meaning that we do not incur significant capital costs
until we identify significant customer demand.
OUR SERVICES AND SOLUTIONS
While many market participants focus largely or exclusively on
connectivity, we integrate and offer software application services to our
clients over our broadband network. Our services are offered across our two
business platforms: network services and software application services.
NETWORK SERVICES
Our network services include dedicated broadband access and enhanced
Internet access.
DEDICATED BROADBAND ACCESS
- Broadband Wireless IP Links -- Depending upon public and private
frequency availability, we can offer rapidly deployable, high quality
wireless connections, at speeds up to 155 megabits per second, or Mbps,
and with a reach of up to 25 kilometers per tower. Most of our customers
have wireless connections at speeds up to 10 Mbps.
- Dedicated Links -- We offer dedicated access to the Internet at speeds of
64 kilobits per second, or Kbps, to 2.048 Mbps, with access up to 34
Mbps. Dedicated links offer higher performance than dial-up access at a
lower cost than traditional leased line access. These links can be used
for local area networks, servers or hosts, and for customers that require
constant two-way connectivity to the Internet. We provide complete
customer support, including ordering and installation of local loop
services, continuous customer service and network monitoring through our
NOCs.
ENHANCED INTERNET ACCESS
- Virtual Private Networks -- Our network offers business and government
entities a cost-effective alternative to wide area networks through
virtual private networks, or VPNs. This service provides clients with a
private network that is configured within a public network and travels
over the public Internet. VPNs also provide transmission of private
Internet-Protocol traffic using state-of-the-art security measures on
shared network capacity. VPNs are the basis for providing Intranet and
Extranet services. Once the VPN is installed, our client's network is
monitored 24 hours a day, 7 days a week by a fully redundant NOC. This
service is sometimes referred to as an Intranet service. We also build
Extranets, which are VPNs, that allow third party access to a customer's
data.
- Web Hosting -- We offer Web-hosting plans that place our customer's
Websites on our Web servers. We also offer businesses the opportunity to
place servers on our gateway, enabling them to communicate to clients and
customers over local POPs in Brazil. Our Web hosting allows customers to
obtain a reliable, local Internet presence without the typical capital
investment in data center space and high-speed data connections.
- Voice-over-IP -- We provide a low cost Internet-to-public, PBX-to-public,
public-to-public, or telephone voice/fax service communications option.
The quality of this service conforms to industry standards and is
supported by software located throughout our network. We provide this
service to our business and government customers through the installation
of VPNs, since Brazilian communications regulation only allows this
service to be provided over private networks.
SOFTWARE APPLICATION SERVICES
We provide enterprise software application services and solutions for a
wide range of business needs including health care management, educational
institution management, municipal government administra-
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tion, and student enrollment. Our Internet-enabled software solutions are
delivered over a Web-based platform that is connected to our fixed wireless
broadband network. This delivery platform allows our customer's data to be
available on-demand via the Web, providing them with the ability to make more
informed business decisions, deliver consistent training to geographically
dispersed locations, and automate business processes.
We use several software applications to deliver our software application
services. We own most of these applications. We license our school management
enterprise software package from Microtec. Most of the applications we use
require minimal customization for each customer installation. The software
packages that we own were either developed in-house by our own team of software
developers, or developed by a third party and acquired by us. We have a team of
22 in-house programmers and software developers who assist us in Web-enabling
our client/server solutions, integrating licensed software into our own
applications and installing and customizing applications at our customer sites.
We are in the process of Web-enabling our software application services so
that we can deliver them to our customers over an Application Service Provider,
or ASP, business model. We expect to complete this conversion process by the end
of 2000. Web-enabled delivery provides us with several advantages, including:
- secure and recurring revenue streams through the ASP business model;
- online maintenance and customer support that is less costly to us than
on-site maintenance and customer support; and
- increased customer bandwidth usages, which generate higher network
services revenue.
Our current key target markets are the following:
HEALTHCARE. Our healthcare industry application is called iB2B
Saude,meaning "health" in Portuguese. In coordination with the Microtec sales
force, we market this application to hospitals and clinics throughout Brazil. We
offer a scaled-down version of the software package for the smaller, single
doctor clinics and a full enterprise-wide software application for large
hospitals.
We are the exclusive owner of the iB2B Saude software package. In our
client/server version, we charge an up-front fee based on the number of users
plus a monthly maintenance fee. In our Web-enabled package, we charge an
all-inclusive, monthly usage fee per seat. Currently, we install and implement
the client/server package for all of our new iB2B Saude customers; however, if
human resource constraints require it, we may outsource implementation to a
third party consulting firm.
We offer the following service modules within the iB2B Saude package:
<TABLE>
<S> <C>
- customer invoicing; - report generator;
- purchasing; - bed/occupancy management;
- accounting; - prescription tracking;
- insurance claim management; - inventory management; and
- patient enrollment; - patient history smart card interface.
</TABLE>
GOVERNMENT ADMINISTRATION. Our government administration application is
called iB2B Cidade, meaning "city" in Portuguese. In response to the need for
greater financial controls and process automation, as mandated by recent
Brazilian legislation requiring budgetary and spending limits, we offer the iB2B
Cidade package for local governments and agencies. Brazil's National Development
Bank, or BNDES, has set aside a pool of funds to be awarded to municipalities on
a per capita basis for administration automation. We are the exclusive owner of
the iB2B Cidade software and one of six companies that has been officially
approved to deliver software application services under this recent legislation.
We charge for this software based on the
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number of inhabitants in a given city. Our iB2B Cidade software package provides
city managers with the following service modules:
<TABLE>
<S> <C>
- taxation tracking; - permit processing;
- budget and financial management; - complaints and customer service tracking;
- human resource management; - legislation tracking; and
- public bids, purchasing and materials; - information, events and municipal
- asset management; communications.
- fleet control;
</TABLE>
As of August 31, 2000, we had identified 96 municipalities, with a total
population of 11 million, that are applying to the BNDES for funding to
implement a government administration solution, such as iB2B Cidade. Of those 96
cities, 24 cities had been approved to receive BNDES funding.
EDUCATION AND DISTANCE LEARNING. Our Education and Distance Learning suite
of solutions is comprised of three core applications:
- school census and enrollment planning;
- school management; and
- distance learning.
The school census and enrollment planning application is targeted toward
state governments that manage schools within their jurisdiction. We have
developed and own this Web-enabled software application that allows for student
enrollment, tracking and budgetary planning. We charge our customers for this
application on a per-student-enrolled basis.
Our school management enterprise software package provides our customers
with the ability to manage their public and private school administrations. This
package contains modules for managing budgeting, grades, attendance, scheduling
and accounting. We license these modules from Microtec, and bill our customers
on a per-student basis.
Our iB2B Distance Learning software application solution is comprised of
customizable templates for our business or government customers who wish to
distribute consistent training over a geographically dispersed area. We own this
Web-enabled module.
OUR NATIONAL NETWORK
Our nationwide broadband, high-speed Internet-Protocol network serves the
largest metropolitan areas in Brazil and extends over 11,000 kilometers. Our
national network currently consists of fifteen operational Points-of-Presence,
or POPs, two fully redundant network operations centers, or NOCs, and local
access nodes, linking Belo Horizonte, Blumenau, Curitiba, Florianopolis,
Goiania, Ilheus, Joinvile, Natal, Porto Alegre, Recife, Ribeirao Preto,
Salvador, Santos and Sao Paulo, and includes an international connection to the
United States in Miami, Florida. We are expanding our networks to consist of
thirty-two operational POPs within Brazil. We expect that this expansion will be
completed by the end of 2001.
OUR LOCAL WIRELESS BROADBAND ACCESS NETWORKS
FIXED WIRELESS TECHNOLOGY
We are deploying point-to-point and point-to-multipoint technology to build
out our local fixed wireless broadband access networks. Using the point-to-point
configuration, we connect each of our customers to our local network through a
dedicated two-way radio link that is set up between a pair of narrow-beam
antennae. With point-to-multipoint technology, an antenna with a larger beam of
typically 45 to 360 degrees communicates with several customer sites
simultaneously. Point-to-multipoint technology offers certain cost benefits in
reaching buildings with fewer customers. Point-to-multipoint technology also
allows us to
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<PAGE> 33
maximize the use of our network assets, reach more customers in our existing
coverage areas and expand the reach of our local networks.
We use the 2.4 or 5.7 Gigahertz, or GHz, spread spectrum frequencies to
connect customers to our access nodes. This frequency range most effectively
links customers located 1 to 25 kilometers from an access node, depending on
topography, rain, line of sight and other variables. The 2.4 or 5.7 GHz
frequency ranges for spread spectrum radios have capacity up to 11Mbps for each
link and can be configured to provide from 64 Kbps to 11 Mbps or can be
configured in hybrid arrays for higher capacity. We also use other frequencies,
from 1.5 to 38 GHz, to interconnect our access node sites. Using this radio
technology, our access nodes can be placed at distances up to 25 kilometers from
one another. This placement allows for capital efficiency by using fewer access
nodes to service a market and to provide coverage to an area with many potential
customers.
Our fixed wireless network provides the following advantages:
HIGH QUALITY OF SERVICE. Our local wireless networks and leased national
fiber optic backbone are fully redundant. We use performance monitoring software
that we make available to our customers on the Internet. We employ network
management systems at each NOC to assure consistent and reliable performance.
RAPIDLY DEPLOYABLE. We install a radio at a customer site with line of
sight to another antenna installed on one of our access nodes. Unlike copper or
fiber-based systems, we do not have to dig trenches or install wires on utility
poles in order to connect our customers to our network. As a result, we can
usually complete installations and provide service from 24 hours to one week
after a customer requests service. Traditional wire line service providers in
Brazil usually quote customers installation times ranging from 30 to 180 days.
DEMAND-BASED CAPITAL EXPENDITURES. The amount and timing of capital
expenditures for the build-out of our local networks depends to a large extent
upon customer demand. Our costs to install the core network for a new market are
usually less than 50% of our total costs to build-out the full network for that
market. After an initial investment, we are able to provide service in that
market as we connect customer buildings to our local network. Once we have
installed the core network elements, customer demand drives our decision of when
to purchase and install the equipment necessary to connect a new customer to our
network.
LOWER BUILD-OUT COSTS. We believe that our costs to launch service in a
market and to connect each customer are lower than for copper and fiber-based
network providers. Unlike these network providers that must install and maintain
a significant amount of wire and cable, our fixed wireless technology does not
require such capital-intensive installations, except for minimal amounts within
customer buildings. As a result, our installation and labor costs are
significantly lower and we believe we can reach customer buildings more
efficiently.
LOCAL NETWORK BUILD-OUT
We are currently in various stages of designing, building and operating our
local fixed wireless broadband access networks in 32 major urban markets
throughout Brazil. We have rapidly built-out our local fixed wireless broadband
access networks and launched operations in 15 of the projected 32 markets. We
plan to launch operations in the other projected 17 markets by the end of 2001.
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<PAGE> 34
The table below sets forth the 15 major markets in which we operate, the
number of customers being served, the number of access nodes built and the
number of customer sites connected as of August 31, 2000:
<TABLE>
<CAPTION>
CUSTOMERS
CITY OF OPERATION BEING SERVED ACCESS NODES BUILT BUILDINGS CONNECTED
----------------- ------------ ------------------ -------------------
<S> <C> <C> <C>
Belo Horizonte........................... 1 7 9
Blumenau................................. 1 1 2
Curitiba................................. 1 3 8
Florianopolis............................ 1 1 1
Goiania.................................. 23 4 5
Ilheus................................... 167 3 3
Joinvile................................. 1 1 1
Miami.................................... 2 1 2
Natal.................................... 1 1 1
Porto Alegre............................. 1 1 2
Recife................................... 3 8 10
Ribeirao Preto........................... 1 1 1
Salvador................................. 8 10 12
Santos................................... 1 7 42
Sao Paulo................................ 706 2 7
--- -- ---
Total.......................... 918 51 106
</TABLE>
NETWORK ARCHITECTURE
The architecture of our local networks employs equipment at the customer
sites that connects to our access nodes located throughout each of our markets.
Our access nodes are interconnected to create full redundancy, and are in turn
connected to our NOCs. Our NOCs manage communications traffic and route it to
the appropriate destinations either within our network or, via gateway nodes,
beyond our network.
Our typical market initially will consist of 3 to 8 access nodes, which are
located in high demand areas with good line-of-sight characteristics and which
we believe will cover between 50% to 80% of the potential business and
government customers that we have identified. Each access node is designed to
provide access to an average of 25 customer sites. Our access node antennae are
located on radio towers that we either own or lease from third parties.
Initially, all access nodes are interconnected within a market to form the
backbone of a local network, using owned fixed wireless links, which can
accommodate data traffic up to 622 Mbps. Access nodes are connected in a
configuration with redundancy that is optimized for each market. As demand
grows, we increase the capacity of our network backbone by adding additional
fixed wireless links or more enabling equipment at each access node. We
construct our local fixed wireless broadband access networks using Internet
protocol, or IP, and Asynchronous Transfer Mode, or ATM, switching technology.
This technology supports multi-protocol networking, including IP, private
digital line, frame relay, ATM, voice and video, all in the same network
backbone. Our technology gives us the flexibility to rapidly deploy new services
on a cost-effective basis without disrupting existing services.
We connect each customer site to an access node using fixed wireless
technology with a service radius range of 1 to 25 kilometers. Each customer
building has equipment, which we own, consisting of two major components: an
antenna/radio unit, which is installed on the roof of the building or a nearby
building, and the indoor customer interface equipment, or customer kit, which is
installed within the customer building. We assemble most of our customer kits
in-house to ensure a high level of quality, on time delivery and cost
effectiveness. Based on our experience to date, we are generally able to connect
a customer building to an access node within 24 hours to one week from the time
an order is received. This process includes obtaining the building access
rights, installing the antenna/radio unit and the customer kit, and establishing
the connection through our access nodes to our NOCs.
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<PAGE> 35
Our NOCs are staffed 24 hours a day, seven days a week, 365 days a year and
provide us with real-time status and performance information. We have fully
redundant national NOCs in Sao Paulo and Salvador. We employ network management
systems at each NOC in order to assure consistent and reliable performance.
We install gateway nodes to act as connection points that send traffic to
termination points covered by other service providers. Data routing equipment
and switches direct a data packet, private digital network or voice signal from
its origin to its correct destination according to its network address or
telephone number.
ACCESS NODE SITE ACQUISITION
Our ability to identify and secure access node sites is critical to our
success. Upon entering a new market, we immediately deploy our site acquisition
staff, who are knowledgeable about local real estate, zoning, and commercial
customs and codes. Our site acquisition team may also contract with a local firm
that has experience working in the market.
Our site acquisition process is customer-demand driven. Our marketing and
engineering teams work together to design local network access node topology. As
these teams identify sites that meet certain criteria, the site acquisition team
performs an analysis of candidates. As preferred sites are identified, the site
acquisition team performs due diligence regarding building access rights and
proceeds to the signing of a lease.
ACCESS NODE USE AGREEMENTS
As we build out our networks, we obtain property leases or building access
rights from building owners to lease or use a portion of the roof and internal
space of the building. We use the roof space to install our radio towers, radios
and other equipment and use interior space to house equipment for our access
nodes. Our access node site agreements carry at least a three-year term, and
often include the lease of office space in the building to house our local
offices or local network operations.
FIBER OPTIC CABLE AGREEMENTS
We recently have entered into fiber optic cable lease agreements with long
distance fiber providers to serve as the backbone of our national networks. We
believe the capacity that these lease agreements provide will be sufficient for
the foreseeable future. We currently lease over 11,000 kilometers of fiber optic
cable and have the option to lease an additional 7,000 kilometers of fiber optic
cable under our agreements.
OUR BUSINESS STRATEGY
Our objective is to become a leading broadband connectivity and software
application services provider to our customers. To do this, we plan to:
BUILD OUR NETWORK TO OFFER DEDICATED INTERNET ACCESS AND BROADBAND
SERVICES. In order to benefit from our Web-centric software application
services, our customers must first have access to our network services.
Therefore, we believe that our best opportunity to sustain high margin growth in
our software applications business is to first have in place a broadband
Internet platform that provides access to as many potential customers as
possible. We have obtained access to national and international
telecommunications operating licenses as well as regional and national grants of
use of certain radio frequencies. We intend to obtain additional licenses as
they become necessary.
RAPIDLY BUILD A LARGE CUSTOMER BASE. We are aggressively marketing our
network services in order to rapidly build a customer base. We believe that
rapid growth in our network services will:
- lead to opportunities to sell software application services to clients;
- create valuable economies of scale that spread the fixed costs of our
network development over more users; and
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<PAGE> 36
- provide a base of secure, recurring monthly revenues and operating cash
flow to fund the build-out of our network.
EXPAND SERVICES PROVIDED TO EXISTING CUSTOMERS. We attract our customers
and exploit our target market by providing clients with network services that
create efficiencies in routine business processes. As our client partnership
develops, our sales teams promote our software application services as further
means to enhance the client's business processes. These Web-centric services
increase the customer's use of our bandwidth because we design our software
application services to be delivered over our network. This integration of
network and software application services strengthens our ties to the customer,
provides a barrier to our competitors and increases the value of our contracts.
SELECTIVELY ACQUIRE OR PARTNER WITH COMPLEMENTARY TECHNOLOGY AND SERVICE
PROVIDERS. We believe that, as we grow, we will need to make strategic
acquisitions, investments and strategic partnerships to gain access to
technology, customers and human resources. Acquisitions of complementary
businesses may allow us to be able to offer a broader suite of technology and
services to our customers. Geographical expansion also may require us to
consider the acquisition of a local competitor.
EXPAND INTO OTHER MARKETS IN LATIN AMERICA. Our plan is to replicate our
business model in other countries in Latin America, subject to available capital
and other required resources.
OUR SALES AND MARKETING STRATEGY
Our sales team is comprised of our internal sales force as well as
Microtec's sales force to which we have access through our joint marketing
agreement. Our internal sales force is divided into business and government
units. Microtec's sales force provides us with access to an established channel
for local, state and national IT related industries. We currently rely heavily
on Microtec's sales channel in building our customer base.
We have initially focused the efforts of our internal sales force and
Microtec's sales force on accessing corporate management information systems and
strategic decision makers. We are positioning ourselves as a high value-added
provider of customized vertical software application services. We consider this
flexibility to be a strategic advantage that provides early benefits to our
customers, and allows us to build a relationship that leads to opportunities to
bundle communications and software application services.
Brand management is a key focus of our marketing and sales strategy. We
have launched an advertising campaign to promote our principal brand, iB2B. The
campaign includes promotions through billboard advertising, advertising in
industry magazines and a direct-mail campaign.
In the period ended July 31, 2000, six customers accounted for
approximately 82% of our total third-party net revenues. In the period ended
April 30, 2000, one customer accounted for approximately 91% of our total third
party net revenues.
SUPPLIERS AND VENDORS
We purchase hardware from leading network equipment providers, including
Microtec, Cisco and Ericsson, for our POPs and NOCs. In addition, we purchase
hardware from other vendors to build spread spectrum radios that we place at the
local access nodes and customer sites. Pursuant to our joint marketing agreement
with Microtec, we are obliged to consider purchasing products and equipment
offered by Microtec.
We are currently evaluating vendor-financing proposals for a substantial
acquisition of equipment for the expansion of our network from several vendors
of communications equipment including Nortel Networks, Cisco Systems, Alcatel,
Ericsson and Siemens. We may be dependent upon vendor-financing to complete the
full build-out of our local networks.
COMPETITION
Brazil's communications market is dominated by the incumbent carriers,
which are former Telebras operating companies, including Embratel and the three
local carriers, Telefonica, Brasil Telecom and
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<PAGE> 37
Telemar. Telefonica (formerly Telesp) 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 MCI-Worldcom. Emerging competitors in the
Internet and data services markets include IBM Business Solutions, AT&T Latin
America, MetroRed Telecommunications, IMPSAT Fiber Networks and Diveo Broadband
Networks. We also compete in the software solutions market with internationally
recognized companies providing systems integration services, and proprietary
software applications.
The Brazilian government auctioned off Telebras' local wireline and long
distance communications business to three private local carriers and one
national and international long distance carrier. Each carrier services 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 and in the national area served by the long distance carrier. 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, Vesper, Global Village Telecom and Intelig. Each of the mirror
companies is able to offer the same fixed switched telephone services as the
incumbent carrier serving the same geographic area, but is not subject to
universal service requirements as are the incumbent carriers. Although the
mirror companies are constructing modern communications networks, they focused
initially 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 services, competition in these service areas
increased due to new entrants, including communications carriers that also
provide services in other countries. The incumbent communications service
providers also have established customer relationships, as well as other
capabilities and resources to expand their current service offerings further
increasing competition. The existing service providers include local carriers,
wireless telephone operators, providers of data services, cable television
operators and operators of existing private network infrastructure, such as
utilities and railroads.
BRAZILIAN GOVERNMENT REGULATION AND LICENSES
The Brazil Ministry of Communications, or BMC, and the National
Telecommunications Agency, or ANATEL, are the Brazilian communications
authorities responsible for the administration and regulation of the
communications industry. ANATEL is an independent agency in charge of regulating
communications services and performing many of the tasks formerly performed by
the BMC. ANATEL has the authority to grant licenses to interested parties by way
of concessions, authorizations and permissions, establish requirements and
conditions for the provision of each communication service and inspect the
provision of such services to guarantee compliance with applicable regulations,
while promoting competition and protecting the rights of consumers of such
services. Further, ANATEL has the authority to administer the radio frequency
spectrum, to control tariffs, to mediate conflicts among service providers, and
to apply penalties for any violations of the regulations and licenses, among
others.
SPECIALIZED LIMITED SERVICES LICENSES. The communication services we
provide in Brazil fall within the private services system, under the
classification of Specialized Limited Services, which are in turn divided into
Specialized Circuit Services and Specialized Network Services. Private services
licenses are granted through an authorization from ANATEL and formalized by the
execution of a license agreement. Microtec was granted two authorizations from
ANATEL in March 1999, one for Specialized Network Services and a second for
Specialized Circuit Services, both of which are, by law, for indefinite terms.
Two license agreements, or Licenses, formalizing the authorizations are in the
process of being executed by Microtec and ANATEL. Pursuant to the joint
marketing agreement, Microtec agreed to the transfer of the Licenses to us. We
are in the process of requesting approval from ANATEL for the transfer of the
Licenses. We expect that the transfer will be approved by ANATEL by the end of
2000.
The Specialized Network Services license authorizes us to provide a wide
range of communications services, including Internet, data transmission, virtual
private network services, value-added services, video, national and
international Internet and data transmission to legal entities but not
individuals. The Specialized Circuit Service license permits us to provide
point-to-point and point-to-multipoint communications services
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<PAGE> 38
to final customers by using wireless, wireline local access circuits or any
other type of technology available from time to time. The Specialized Network
Services license and the Specialized Circuit Service license cover all of
Brazil. We may further use the Specialized Circuit Service license to provide to
businesses and government entities the communications services authorized under
our Specialized Network Service license including local, national and
international terminations.
RADIO FREQUENCY LICENSES. Our use of the radio frequency needed for the
provision of our Specialized Limited Services is also subject to a prior grant
by ANATEL, by means of a specific license, linked to the terms of the
authorizations and the Licenses. We operate under, and have applied for, various
point-to-point radio frequency licenses, which are issued for terms of 10 to 20
years, and can be extended once for equal periods. We are pre-qualified and
licensed to operate point-to-point radio routes at frequencies ranging from 1.5
GHz to 38 GHz, assigned by ANATEL based on distance between points and the
availability of frequency channels. The pre-qualified status assures us the
grant of the frequency license, assuming spectrum availability. We were granted
licenses during the grant of the initial group of point-to-point radio frequency
licenses that took place in September 2000. We will apply for additional
point-to-point licenses as needed. In addition to the point-to-point radio
frequencies, we have also pre-qualified in 21 major markets for the point-
to-multi-point spectrum at frequencies ranging from 3.5 GHz and 10.5 GHz, which
allows for evolution to high capacity wireless local loop access and to local
multi-point distribution. These frequencies are granted for renewable terms of
10 to 20 years. We have paid for and fulfilled our current obligations with
respect to some of our pre-qualified radio frequencies although we have not yet
executed the relevant license agreements. We anticipate the execution of the
point-to-multi-point radio frequency licenses will take place on or around the
fourth quarter of 2000.
EMPLOYEES
As of August 30, 2000, we employed approximately 122 persons, of which 77
work on our network services business platform, 34 work on our software
application services business platform, and 11 are administrative personnel. We
believe that our employee relations are excellent.
PROPERTIES
We sublease our Brazilian headquarters in Sao Paulo from an unrelated third
party. We lease our offices in Salvador, Brazil from an unrelated third party.
We sublease our corporate offices in Miami, Florida from Vitech America, Inc.
INTELLECTUAL PROPERTY RIGHTS
We own the registration for the trademarks iB2B, VIPlink, and CyberVision
in Brazil, which we use in conjunction with the sale of our services. All other
trade names and trademarks used in this prospectus are the property of their
respective owners.
LEGAL PROCEEDINGS
We are not party to any material legal proceedings, and we know of no
proceedings contemplated by government authorities to which we are or may become
a party.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
We have five members on our Board of Directors. Our directors will hold
office until the next annual meeting of shareholders and until their successors
have been elected and qualified, or until their earlier death, resignation or
removal.
Our officers are elected at the annual meetings of our Board of Directors.
All officers hold office until their successors are elected and qualified, or
until their earlier death, resignation or removal.
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>
Michael E. Lawrence...................... 53 Chief Executive Officer
William C. St. Laurent................... 36 Director, President, Secretary and
Treasurer
Steven A. Edwards........................ 33 Chief Financial Officer
Luiz Roberto Veiga De Sa................. 45 Senior Vice President of Sales, Marketing
and Development
Ricardo Alves Ferreira Silva............. 42 Chief Technology Officer
Georges C. St. Laurent, Jr.(1)........... 64 Chairman of the Board of Directors
Adolphe M. Deslorieux(1)(2).............. 46 Director
Francisco Suarez Warden(1)(2)............ 57 Director
James H. Boyle(2)........................ 45 Director
</TABLE>
---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
MICHAEL E. LAWRENCE has served as our Chief Executive Officer since
November 1999. Mr. Lawrence has over thirty years of experience in the
international communications industry. From November 1997 to November 1999, Mr.
Lawrence served as Director, Network Design and Integration, for Alcatel
Telecom, Brazil. From April 1997 to November 1997, Mr. Lawrence served as
Kingdom Deployment Director for Lucent Technologies in Saudi Arabia. From
February 1995 to April 1997, Mr. Lawrence served as Implementation Director for
Lucent Technologies in Brazil and Saudi Arabia. From September 1994 to February
1995, Mr. Lawrence served as Technical Services Director for AT&T NS do Brasil.
WILLIAM C. ST. LAURENT has served as Director, President, Secretary and
Treasurer since April 1998. Mr. St. Laurent has also served as President, Chief
Operating Officer and a Director of our affiliate, Vitech America, Inc. since
June 1993. Mr. St. Laurent also served as a director of Western Bank of Oregon
from January 1989 to January 1996. William C. St. Laurent is the son of Georges
C. St. Laurent, Jr. and the brother of Georges C. St. Laurent, III, one of our
principal shareholders.
STEVEN A. EDWARDS has served as our Chief Financial Officer since February
2000. He is a Certified Public Accountant and worked with Ernst & Young from
October 1990 to February 2000, most recently serving as a Senior Manager in the
Entrepreneurial Services Group. He has significant experience working with
growth-oriented, multinational private and publicly traded companies. His
experience includes reporting and filings with the SEC and consulting on the
financial and accounting impact of projects for clients in Latin America. He
recently spent two years on an overseas assignment in Brazil with Ernst & Young
where he performed audits, due diligence procedures, and provided consulting
services for multinational clients with operations in Brazil.
LUIZ ROBERTO DE SA has served as our Senior Vice President of Sales,
Marketing and Development since December 1999. He was the founder and President
of CyberVision, a leading Web design and interactive net-communications company
in Brazil, which we acquired in December 1999. From April 1996 to February
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<PAGE> 40
1998, he worked with Moore Brazil, last serving as Chief Operating Officer for
the business solutions unit. Prior to that, for five years, he served in a
variety of sales positions at Oracle do Brazil, last serving as Sales Director.
RICARDO ALVES FERREIRA SILVA has served as our Chief Technology Officer
since January 2000. He also served as our Chief Information Officer from
February 1999 through December 1999. Prior to joining us, Mr. Ferreira worked
with our affiliates, Microtec and Vitech America, Inc. from December 1994
through January 1999, last serving as System Integration and Technology Manager.
He is an electronics engineer with more than 17 years experience in Brazil in
computer systems, local and wide network area technology, fault tolerant data
storage systems and TCP/IP protocols. He has held senior technical management
positions in network operating systems with Microsoft Windows NT, Novell
NetWare, SunSoft Solaris and SCO UNIX. He is a Cisco Certified Network and
Design Professional and a certified Microsoft Systems Engineer.
GEORGES C. ST. LAURENT, JR. has served as our Chairman of the Board of
Directors since 1998. Mr. St. Laurent, Jr. is currently a director of P.E.
Corp., P.E. Biosystems, Celera and Aames Financial Corp. From 1996 to 1999, Mr.
St. Laurent, Jr. served as Chairman of the Board of Directors of Evans Forest
Products, Golden, Canada. From 1996 to 1998, Mr. St. Laurent, Jr. also served as
Chairman of the Board of Directors of Western Bank, a division of Washington
Mutual, Oregon. From 1988 to 1996, Mr. St. Laurent, Jr. served as Chairman of
the Board of Directors and Chief Executive Officer of Western Bank. Georges C.
St. Laurent, Jr. is the father of William C. St. Laurent and Georges C. St.
Laurent, III, one of our principal shareholders.
ADOLPHE M. DESLORIEUX has served as Director since July 2000. Mr.
Deslorieux has served since July 1998 as Managing Director -- Latin America at
Telinvest Management Corporation, an investment management company, where he has
primary responsibility for investment activities in Latin America. From June
1995 to July 1998, Mr. Deslorieux served as President of Telescape, Inc., a
management and telecommunications investment company and independent contractor
to Telecom Project Investment Corporation and Telinvest Management Corporation.
Mr. Deslorieux has extensive business development, operations and project
management experience, gained over an 18 year career with the General Electric
Company, Ingersoll-Rand and Browne & Sharpe Manufacturing.
FRANCISCO SUAREZ WARDEN has served as a Director since February 2000. Mr.
Suarez has served as Corporate Director for Grupo Financiero BBVA Bancomer in
Mexico since July 2000. Mr. Suarez served as Corporate Director of Human
Resources from March 1998 to July 2000, and as Director of Workout from March
1996 to March 1998, at Grupo Financiero BBVA Bancomer. He has over 25 years of
senior management experience with U.S. and local companies operating in Latin
America, including Mexico and Brazil. Mr. Suarez is a former President of the
Mexican Institute of Financial Executives and Vice President of the Board of the
National Chapter. Mr. Suarez has served as a Director of our affiliate Vitech
America, Inc., since February 2000. He is also a certified public accountant.
JAMES H. BOYLE has served as a Director since July 2000. Mr. Boyle is
President of Boyle Enterprises, Inc., a management and investment consulting
company. Since July 1998, Mr. Boyle has provided his services to Capital
Communications CDPQ Inc., or Capcom, one of our principal shareholders, through
a subcontractor relationship with Telinvest Management Corporation, an
investment management company. From January 1998 to June 1998, Mr. Boyle
provided investment consulting services to Capcom through a subcontractor
relationship with Telecom Project Investment Corporation. From October 1994 to
December 1997, Mr. Boyle provided his services to International
Telecommunications Investment Limited Partnership, through a subcontractor
relationship with Telecom Project Investment Corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
Our Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee administers our stock option plan
and makes recommendations to the full Board of Directors concerning
compensation, including incentive arrangements, of our officers and key
employees. The Audit Committee reviews the engagement of the independent
accountants and reviews the independence of the accounting firm. The Audit
Committee also reviews the audit and non-audit fees of the independent
accountants and the adequacy of our internal accounting controls. Additionally,
the Audit Committee reviews
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any affiliated transactions by us. Independent directors comprise a majority of
each of the Compensation Committee and the Audit Committee.
EXECUTIVE COMPENSATION
The table that appears below sets forth information relating to the total
compensation paid by us for the past two fiscal years to our Chief Executive
Officer. There are no other executive officers whose total annual salary and
bonus exceeded $100,000 per year during either of the last two fiscal years:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------- ---------------------------------
AWARDS PAYOUTS
----------------------- -------
SECURITIES
OTHER UNDER-
ANNUAL RESTRICTED LYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
--------------------------- ---- ------- -------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael E. Lawrence................ 2000 $66,500(1) -- -- 300,000 -- --
Chief Executive Officer
</TABLE>
---------------
(1) Mr. Lawrence joined us in November 1999.
DIRECTOR COMPENSATION
We intend to pay cash compensation to non-employee members of our Board of
Directors in the amount of $10,000 annually. We will reimburse each member of
the Board of Directors for reasonable expenses incurred in connection with
attending a meeting of the Board of Directors or any committee thereof. In
addition, non-employee directors will receive each year for services as a
Director options to purchase 10,000 common shares at an exercise price equal to
the fair market value at the time of the grant. Options issued to the directors
vest on the day of grant. We have historically paid each non-employee director
$1,000 per meeting attended. We intend to implement this director compensation
program upon completion of this offering.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options that we
granted to the executive officer named in the summary compensation table above
during the fiscal year ended April 30, 2000.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/ EXERCISE GRANT
UNDERLYING SARS GRANTED OF BASE DATE
OPTION/SARS TO EMPLOYEES PRICE PRESENT
NAME GRANTED(#) IN FISCAL YEAR ($/SH) EXPIRATION DATE VALUE $
---- ------------ -------------- -------- ---------------- ---------
<S> <C> <C> <C> <C> <C>
Michael E. Lawrence......................... 150,000 50% $ .30 October 11, 2004
Chief Executive Officer 150,000 50% $3.00 October 11, 2004
</TABLE>
AGGREGATED FISCAL YEAR-END OPTIONS VALUE TABLE
The table below sets forth certain information pertaining to unexercised
stock options held by the named executive officers during the fiscal year ended
April 30, 2000. No stock options were exercised by our Chief Executive Officer
during the year fiscal year ended April 30, 2000.
<TABLE>
<CAPTION>
SHARES NUMBER OF OPTIONS HELD AT VALUE OF IN-THE-MONEY
ACQUIRED APRIL 30, 2000 OPTIONS AT APRIL 30, 2000
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael E. Lawrence................... -- -- 123,750 176,250 $290,250 $204,750
Chief Executive Officer
</TABLE>
STOCK OPTION PLAN
Our 1998 Stock Option Plan provides for the grant of options to purchase up
to 4,000,000 common shares to our employees, officers, directors, and
consultants. Options may be either incentive stock options within the meaning of
Section 422 of the Internal Revenue Code or non-qualified options. Incentive
stock options may
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<PAGE> 42
be granted only to employees, while non-qualified options may be issued to
non-employee directors, consultants, and others, as well as to employees.
This plan is administered by the Compensation Committee of the Board of
Directors, which determines, among other things, those individuals who shall
receive options, the time period during which the options may be partially or
fully exercised, the number of common shares issuable upon the exercise of each
option, and the option exercise price.
The exercise price of an incentive stock option may not be less than the
fair market value per common share on the date the option is granted. The Board
of Directors or the Compensation Committee may establish the exercise price of a
non-qualified option. The aggregate fair market value of our common shares for
which any person may be granted incentive stock options that first become
exercisable in any calendar year may not exceed $100,000. No person who owns,
directly or indirectly, at the time of the granting of an incentive stock option
to such person, 10% or more of the total combined voting power of all classes of
our stock shall be eligible to receive any incentive stock options under this
plan unless the exercise price is at least 110% of the fair market value of the
common shares subject to the option, determined on the date of grant.
Non-qualified options are not subject to such limitations.
Incentive stock options may not be transferred by an optionee other than by
will or the laws of descent and distribution, and, during the lifetime of an
optionee, only the optionee may exercise the option. In the event of termination
of employment for cause or voluntary termination of employment by the optionee,
the option will expire upon such termination. In the event of termination of
employment other than by death or disability, for cause, or voluntary
termination by the optionee, the optionee will have no more than thirty days
after such termination during which the optionee shall be entitled to exercise
the option, unless otherwise determined by our Board of Directors. Upon
termination of employment of an optionee by reason of death or permanent and
total disability, such optionee's options remain exercisable for one year
thereafter to the extent such options were exercisable on the date of such
termination. No similar limitation applies to non-qualified options.
Options under this plan must be issued within ten years from June 1, 1998,
the effective date of this plan. Incentive stock options granted under this plan
cannot be exercised more than ten years from the date of grant. Incentive stock
options issued to a 10% shareholder are limited to five-year terms. Options
granted under this plan generally provide for the payment of the exercise price
in cash and may provide for the payment of the exercise price by delivery to us
of common shares already owned by the optionee having a fair market value equal
to the exercise price of the options being exercised, or by a combination of
such methods. Therefore, if so provided in an optionee's grant, such optionee
may be able to tender common shares to purchase additional common shares and may
theoretically exercise all of his or her stock options with no additional
investment other than the consideration paid for the purchase of such optionee's
original shares.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by us become available again for issuance under this
plan.
This plan may be terminated or amended at any time by the Board of
Directors, except that the number of common shares reserved for issuance upon
the exercise of options granted under this plan may not be increased without the
consent of our shareholders.
As of the date of this prospectus, options for 1,000,000 common shares have
been issued pursuant to this plan. These options were issued to our employees
and consultants at exercise prices ranging from $0.05 to $3.00 per share.
ADDITIONAL OPTIONS
In May 1998, we issued ten year options to purchase three million common
shares to Georges C. St. Laurent, III, William St. Laurent and Wolf Partners.
All of these options are exercisable at $0.30 per share.
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<PAGE> 43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Certain members of our management and certain of our principal shareholders
are members of management and are principal shareholders of Vitech America,
Inc., a Florida corporation that is publicly traded on the NASDAQ National
Market. Vitech owns 100% of Microtec Sistemas Industria e Comercio, S.A., or
Microtec. Microtec owns 767,677 of our common shares.
Georges St. Laurent, III, one of our principal shareholders, is Chairman of
the Board of Directors and Chief Executive Officer of Vitech. William C. St.
Laurent, one of our directors and principal shareholders, is President, Chief
Operating Officer and a Director of Vitech. Georges C. St. Laurent, Jr., our
Chairman of the Board of Directors and a principal shareholder, is also a
principal shareholder of Vitech.
Brazilian law requires corporate entities to have a minimum of two
shareholders. In order to comply with this legal requirement, 1% of the equity
interests of Intercontinental Telecom Corporation do Brasil S/C Ltda. and 51% of
the equity interests of ITC Holding Brasil S/C Ltda., a non operating entity,
are held in the name of William C. St. Laurent, one of our directors, and 1% of
the interests of Viplink Provedora de Accesso a Internet S/C Ltda. is held in
the name of Georges St. Laurent, III, one of our principal shareholders. We
retain all rights and benefits to these shareholdings.
During the year ended April 30, 1999, we provided services to Microtec and
its affiliates in the amount of $780,000. At April 30, 1999, we also had
outstanding obligations to Microtec of $480,952 and $1,883,697 in the form of a
line of credit and an equipment financing loan. The total net amount due to
Microtec for the period ended April 30, 1999 was approximately $1.6 million.
During the year ended April 30, 2000, we provided services to Microtec and
its affiliates in the amount of $1,080,000. At April 30, 2000, we also had a
note receivable from Microtec of $443,980 and had outstanding liabilities under
various agreements of $6,402,210. These liabilities include line of credit
obligations of $2,274,484, $1,922,854 of accounts payable and accrued expenses
including interest payable of $64,435, equipment financing of $1,737,001 and a
capital lease of $467,871. The total net amount due Microtec for the period
ended April 30, 2000 was $5,958,230.
In connection with service contracts entered into with third parties, we
perform the service and receive the revenues. However, Microtec collects a
portion of our revenues and applies them as payment toward the various related
accounts payable incurred by Microtec in relation to those revenues. Net amounts
earned to be collected by Microtec on our behalf were $0, $2,236,033, and
$326,789 for the years ended April 30, 1999 and 2000, and the three months ended
July 31, 2000, respectively.
On July 1, 2000, we entered into an agreement to acquire a software
package, known as PMAT Software, from Vitech for $332,042 in cash and 767,677
common shares. The agreement calls for some or all of the common shares to be
returned to us in the event we fail to generate certain levels of revenue from
sales of the software over a fifteen-month period following the acquisition. Due
to the related party nature of this non-cash exchange, the PMAT software was
recorded at Vitech's historical cost basis of approximately $5.2 million.
On June 30, 2000 and July 31, 2000, we received two senior short-term notes
from Vitech for approximately $1.8 million each. Both notes bear interest at 8%
per annum and principal plus interest have maturity dates of 90 days.
On July 1, 2000, William St. Laurent transferred 3,000 common shares
(valued at $10,500) to some of our Directors.
JOINT MARKETING AGREEMENT
We have entered into a joint marketing agreement with Microtec. Under the
agreement, Microtec agreed to transfer to us the rights to its licenses to
provide communications services to businesses and government entities in Brazil.
In addition, we agreed to market each other's products and services on a
commission basis.
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<PAGE> 44
On March 1, 1999, in consideration for the joint marketing agreement, each
shareholder of Vitech, except the founders and principal shareholders of ITC,
received one common stock purchase warrant of ITC for each share of Vitech
common stock that they held on that date. The warrants are exerciseable at a
price per common share of $0.15 and will expire on April 30, 2002. The ITC
warrants are non-exerciseable, non-transferable and non-assignable until ITC has
an effective registration statement for the warrants under the federal
securities laws. The ITC warrants are subject to redemption at the option of
ITC, upon 30 day's prior written notice, provided ITC has an effective
registration statement for the warrants under the federal securities laws. The
ITC warrants are not being registered pursuant to this registration statement.
Approximately 65% of our net revenue for the fiscal year ended April 30,
2000 was derived from the sales efforts of Microtec personnel pursuant to the
joint marketing agreement.
Approximately 29% of our net revenue for the fiscal year ended April 30,
2000 was received directly from Microtec as a customer.
AFFILIATE COMPANY SALES
Employees and sales agents of Microtec sell our services and solutions to
their customers. Upon a sale, an invoice bearing Microtec's name and logo is
presented to the customer. The payment is then delivered by the customer to
Microtec. Pursuant to the joint marketing agreement, Microtec then delivers the
funds to us, net of commission. Microtec also provides us with customer support
and collections assistance.
Microtec entered into a contract with the state of Bahia that was concluded
in April 2000. This project was a Web-centric student enrollment project. We
implemented the solution. Microtec installed its own PCs and then sold all the
rights of the software to us for approximately $1.5 million. We recognized net
revenue of approximately $2.2 million.
Microtec entered into a contract with the city of Blumenau on our behalf
for approximately R$260,000, or approximately $144,000, for the provision of our
services.
Microtec entered into a contract with the city of Jaboatao on our behalf
for over R$516,000, or approximately $287,000, for the provision of our
services.
AFFILIATE COMPANY PURCHASES
We purchase computer hardware, software and network equipment from Microtec
at fair market value (with the exception of the PMAT software which was recorded
at Microtec's historical cost). As of the fiscal years ended April 30, 1999 and
2000 and the quarter ended July 31, 2000, we purchased $1,737,001, $2,649,711
and $5,262,735, respectively.
SERVICES RENDERED TO AFFILIATES AND BY AFFILIATES
From May 1, 1998 through the date of incorporation, certain administrative
and operational activities were conducted for us by Microtec and its affiliates.
We entered into a Service Agreement on June 29, 1998 with Vitech. Under
this agreement, we agreed to provide communication services, integrated
projects, consulting, network security, video surveillance monitoring, network
installation and maintenance, dedicated circuits, virtual private networks,
Internet access for Vitech and its subsidiaries. Under this Agreement, Vitech
pays us $90,000 a month for such services which we believe to be the fair market
value of such services. Our revenues under this agreement for the years ended
April 30, 1999 and 2000, and the quarters ended July 31, 1999 and 2000, amounted
to $780,000 and $1,080,000, and $270,000 and $270,000, respectively.
We have entered into a Telecommunications Link and Internet Service
Provider Cost Agreement with Vitech to procure international link and Internet
services from Worldcom. Under this Agreement, Vitech agreed to bill us, at fair
market value, for all international link and Internet service provider costs
incurred by Vitech with third party providers. Our link costs incurred under
this agreement for the years ended April 30,
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<PAGE> 45
1999 and 2000 and the quarters ended July 31, 1999 and 2000 amounted to
approximately $225,000 and $118,000 and $35,000 and $19,000, respectively.
We license from Microtec our school management enterprise software package.
We pay for this license on a per-student basis. No costs have been incurred to
date.
We share certain general and administrative resources with Vitech. We have
recorded our allocable share of costs related to these resources. In the opinion
of our management, this allocation is reasonable and accurately reflects the
cost of these services to us. Our share of costs related to these resources for
the years ended April 30, 1999 and 2000 and the three months ended July 31, 1999
and 2000 amounted to $65,549, $152,915 and $25,811, $69,028, respectively.
LEASE PAYMENTS
Until September 15, 2000, Microtec provided us with office space in
Salvador, Bahia, Brazil.
We sublease our corporate offices in Miami, Florida from Vitech. We pay
Vitech $2,500 per month pursuant to this sublease. The sublease commenced on
February 1, 2000. The term ends on January 31, 2004. Through July 31, 2000, we
have incurred expenses payable to Vitech in the amount of $11,452 pursuant to
this sublease.
FINANCINGS
On April 30, 1999, we entered into a Vendor Financing Agreement with
Microtec, whereby we purchased from Microtec certain computer and network
related products and Microtec financed such products. The total amount financed
as of April 30, 1999 was approximately $1.9 million at a rate of 12% per year on
the unpaid balance. The agreement matures on August 31, 2001. We have obtained a
letter from Vitech waiving Microtec's rights to demand immediate payment of the
entire outstanding balance in the event of default related to non-payment.
On March 15, 1999, we entered into a Line of Credit Agreement, pursuant to
which Microtec agreed to lend us, on an as needed basis, R$5,000,000, or
approximately $2,800,000, at a 12% annual interest rate. The loan matures on
December 31, 2000, but can be extended upon the agreement of both parties. As of
April 30, 2000 and July 31, 2000, we have drawn $2,274,484 and $2,363,494,
respectively under this agreement.
During the fiscal year ended April 30, 2000, we entered into a financing
arrangement with Vitech, whereby we will advance funds to Vitech on a request
basis. These advances accrue interest at a 10% annual interest rate and
principal and interest are due upon demand. We had $797,000 and $36,995 in
principal and interest receivable, respectively, at April 30, 2000 under this
financing arrangement. During 2000, we also entered into a financing arrangement
with Vitech, whereby Vitech will advance funds to us on a request basis. These
advances accrue interest at a ten percent annual rate and principal and interest
are due upon demand. We had $386,958 and $3,057 in principal and interest
payable, respectively at April 30, 2000 related to this financing arrangement.
The notes receivable and payable, including the respective accrued interest were
netted for financial statement purposes at April 30, 2000. This balance of
$443,980 was consolidated with short term notes receivable from Vitech that
occurred during the quarter ended July 31, 2000 totalling a balance of $3.6
million.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 607.0850 of the Florida Business Corporation Act, or FBCA, permits,
in general, a Florida corporation to indemnify any person who was or is a party
to any action or proceeding by reason of the fact that he or she was a director
or officer of the corporation, or served another entity in any capacity at the
request of the corporation, against liability incurred in connection with such
proceeding including the estimated expenses of litigating the proceeding to
conclusion and the expenses actually and reasonably incurred in connection with
the defense or settlement of such proceeding, including any appeal thereof, if
such person acted in good faith for a purpose he or she reasonably believed to
be in, or not opposed to, the best
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<PAGE> 46
interest of the corporation and, in criminal actions or proceedings,
additionally had no reasonable cause to believe that his or her conduct was
unlawful. Section 607.0850(6) of the FBCA permits the corporation to pay such
costs or expenses in advance of a final disposition of such action or proceeding
upon receipt of an undertaking by or on behalf of the director or officer to
repay such amount as and to the extent required by statute. Section 607.0850 of
the FBCA provides that the indemnification and advancement of expense provisions
contained in the FBCA shall not be deemed exclusive of any rights to which a
director or officer seeking indemnification or advancement of expenses may be
entitled.
Our amended and restated articles of incorporation provide, in general,
that we shall indemnify, to the fullest extent permitted by law, any and all
persons whom it shall have the power to indemnify under that section from and
against any and all of the expenses, liabilities or other matters referred to or
covered by said section. Our amended and restated articles of incorporation also
provide that the indemnification provided for therein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled as a
matter of law or which they may be lawfully granted.
In accordance with that provision of our amended and restated articles of
incorporation, we shall indemnify any officer or director (including officers
and directors serving another corporation, partnership, joint venture, trust, or
other enterprise in any capacity at our request) made, or threatened to be made,
a party to an action or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that he or she was serving in any of those
capacities against judgments, fines, amounts paid in settlement and reasonable
expenses (including attorney's fees) incurred as a result of such action or
proceeding. Indemnification would not be available if a judgment or other final
adjudication adverse to such director or officer establishes that (i) his or her
acts were committed in bad faith or were the result of active and deliberate
dishonesty or (ii) he or she personally gained in fact a financial profit or
other advantage to which he or she was not legally entitled.
Prior to the completion of the offering, we intend to enter into
indemnification agreements with each of our current directors and officers to
give these directors and officers additional contractual assurances regarding
the scope of the indemnification set forth in our amended and restated articles
of incorporation and bylaws and to provide additional procedural protections. At
present, there is no pending litigation or proceeding involving a director,
officer or employee of ITC regarding which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
We are currently in the process of obtaining directors' and officers'
liability insurance with $6,000,000 of coverage.
Insofar as indemnification for liability arising under the Securities Act
may be permitted to directors, officers, and controlling persons of ours
pursuant to the foregoing provisions or otherwise, we have been advised that, in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
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<PAGE> 47
PRINCIPAL SHAREHOLDERS
The following table shows common share ownership and ownership of Series A
Redeemable Convertible Preferred Stock with respect to:
- each person known to us to be the beneficial owner of more than 5% of any
class of our capital stock;
- each director;
- our Chief Executive Officer; and
- all of our directors and named executive officers as a group.
This table assumes the following:
- unless otherwise indicated, the address of each of the listed beneficial
owners identified is c/o Intercontinental Telecommunications Corp., 2190
N.W. 89th Place, Suite 100, Miami, Florida 33172;
- unless otherwise noted, we believe that all persons named in the table
have sole voting and investment power with respect to all common shares
beneficially owned by them;
- a person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this prospectus;
and
- as of the date of this prospectus there were issued and outstanding
12,461,107 common shares, 4,914,005 Series A Redeemable Convertible
Preferred Stock, 4,000,000 common shares issuable upon exercise of stock
options and 3,518,810 common shares issuable upon the exercise of
warrants.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
----------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES BEFORE THE OFFERING AFTER THE OFFERING
------------------------------------ ---------------- ------------------- ------------------
<S> <C> <C> <C>
Georges C. St. Laurent, Jr...................... 2,585,760 10.39% %
Georges C. St. Laurent, III(1).................. 5,288,430 21.24% %
William C. St. Laurent(1)(2).................... 2,347,497 9.43% %
Wolf Partners(1)(2)............................. 3,719,658 14.94% %
Francisco Suarez Warden......................... 1,000 *
Capital Communications CDPQ Inc. (4)............ 4,915,005 0%
Michael E. Lawrence(3).......................... 123,750 *
James H. Boyle(5)............................... *
Adolphe M. Deslorieux(5)........................ *
All directors and named executive officers as a
group (7 persons)(6).......................... 8,777,665 35.26%
</TABLE>
---------------
* Less than 1%
(1) Includes options to purchase 1,000,000 common shares.
(2) Includes options to purchase 1,000,000 common shares. Wolf Partners is a
family Limited Partnership of which William C. St. Laurent is the general
partner.
(3) Represents options to purchase common shares.
(4) Represents 4,914,005 shares of Series A Redeemable Convertible Preferred
Stock which will automatically convert into an equal number of common shares
on the first business day following the effective date of this offering;
provided that this offering results in gross proceeds to us of at least $25
million and that the public offering price per common share is at least
$8.14. Also includes 1,000 common shares.
(5) Mr. Boyle and Mr. Deslorieux each have a participatory interest in gains
generated on Capital Communications CDPQ Inc.'s investment in us.
(6) Includes the common shares held by Wolf Partners.
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<PAGE> 48
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue 100,000,000 common shares, par value of $0.0001
per share, of which 12,461,107 common shares are outstanding as of the date of
this prospectus. The holders of our common shares are entitled to one vote for
each common share held of record on all matters submitted to a vote of
shareholders. Holders of our common shares are entitled to receive ratably such
dividends as may be declared by our Board of Directors out of funds legally
available after dividends are paid to the holders of Series A Redeemable
Convertible Preferred Stock. In the event of a liquidation, dissolution, or
winding up of our company, holders of common shares are entitled to share
ratably all assets remaining after payment of liabilities and the payments to
the holders of Series A Redeemable Convertible Preferred Stock. Holders of our
common shares have no preemptive rights and have no rights to convert their
common shares into any other securities.
PREFERRED STOCK
We are authorized to issue up to 20,000,000 shares of preferred stock, par
value of $0.0001 per share. The preferred stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by our
Board of Directors, without further action by shareholders, and may include
voting rights (including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion rights, redemption
rights, and sinking fund provisions. The issuance of any additional preferred
stock could adversely affect the rights of the holders of our common stock and,
therefore, reduce the value of our common stock. The ability of our Board of
Directors to issue preferred stock could discourage, delay, or prevent a
takeover of our company. We have no plans to issue any additional shares of
preferred stock.
On May 31, 2000, we issued 4,914,005 shares of Series A Redeemable
Convertible Preferred Stock to Capital Communications CDPQ Inc., or Capcom, a
corporation incorporated under the laws of Quebec, Canada, for an aggregate
consideration of $20,000,000. If and when our Board of Directors declares
dividends, holders of the Series A Redeemable Convertible Preferred Stock is
entitled to receive, in preference to the holders of common shares, dividends
equal to that paid to a common share. Each share of Series A Redeemable
Convertible Preferred Stock is entitled to voting rights equal to the number of
common shares into which the Series A Redeemable Convertible Preferred Stock are
then convertible, for all matters upon which the holders of common shares are
entitled to vote. Each share of Series A Redeemable Convertible Preferred Stock
has a redemption price of $4.07 per share, together with unpaid dividends, and
redemption is at the option of the holder any time after January 15, 2004. Each
share of Series A Redeemable Convertible Preferred Stock will automatically
convert into one share of common stock on the first business day following the
consummation of this offering; provided that this offering results in gross
proceeds to us of at least $25 million and that the public offering price per
common share is at least $8.14.
On May 31, 2000, ITC, Capcom, William St. Laurent, George St. Laurent, Jr.,
George St. Laurent III and Wolf Partners executed an Investor Rights Agreement,
whereby Capcom was granted certain registration rights, rights of first offer,
rights of first refusal, tag-along rights. Capcom also has certain anti-dilution
rights in the event common shares are issued below $4.07 a share. In addition,
for so long as Capcom owns at least 5% of the Company's outstanding capital
stock, the Board of Directors of the Company shall consist of no more than seven
members and Capcom shall have the right to designate two members to the
Company's Board of Directors.
WARRANTS
In connection with this offering and the provision by Josephthal & Co. Inc.
of advisory services, on August 17, 2000 we have agreed to issue to Josephthal &
Co. Inc. warrants to purchase up to 100,000 common shares. The nominal
consideration to be paid by Josephthal & Co. Inc. for the warrants is $100
($.001 per share). The warrants are exercisable for a period of five years
commencing August 17, 2000 at an exercise price per share equal to $
(120% of the public offering price). The warrants grant to Josephthal &
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<PAGE> 49
Co. Inc., with respect to the registration under the Securities Act of the
securities directly and indirectly issuable upon exercise of the warrants, one
demand registration right during the exercise period, as well as piggyback
registration rights during the exercise period. The warrants contain
anti-dilution provisions providing for adjustments of the exercise price and
number of shares issuable on exercise of the warrants, upon the occurrence of
some events, including stock dividends, stock splits, and recapitalizations. The
holder of the warrants has no voting, dividend, or other rights as a shareholder
with respect to common shares underlying the warrants, unless the warrants shall
have been exercised.
On March 1, 1999, in consideration for the joint marketing agreement, each
shareholder of Vitech, except the founders and principal shareholders of ITC,
received one common stock purchase warrant of ITC for each share of Vitech
common stock that they held on that date for an aggregate of 3,518,810 warrants.
The warrants are exerciseable at a price per common share of $0.15 and will
expire on April 30, 2002. The ITC warrants are non-exerciseable,
non-transferable and non-assignable until ITC has an effective registration
statement under the federal securities laws. The ITC warrants are subject to
redemption at the option of ITC, upon 30 day's prior written notice, provided
ITC has an effective registration statement for the warrants under the federal
securities laws. The ITC warrants are not being registered pursuant to this
registration statement.
NASDAQ NATIONAL MARKET
We have applied to list our common shares for trading on the Nasdaq
National Market under the symbol "ITCN".
ANTI-TAKEOVER PROVISIONS OF FLORIDA LAW
We are subject to several anti-takeover provisions under Florida law that
apply to public corporations organized under Florida law unless the corporation
has elected to opt out of those provisions in its articles of incorporation or
its bylaws. We have not elected to opt out of these provisions.
The FBCA prohibits the voting of shares in a publicly held Florida
corporation that are acquired in a "control share acquisition" unless the Board
of Directors approves the control share acquisition or the holders of a majority
of the corporation's voting shares approve the granting of voting rights to the
acquiring party. A "control share acquisition" is defined as an acquisition that
immediately thereafter entitles the acquiring party, directly or indirectly, to
vote in the election of directors within any of the following ranges of voting
power:
- 1/5 or more but less than 1/3;
- 1/3 or more but less than a majority;
- a majority or more; or
- There are some exceptions to the "control share acquisition" rules.
The FBCA also contains an "affiliated transaction" provision that prohibits
a publicly-held Florida corporation from engaging in a broad range of business
combinations or other extraordinary corporate transactions with an "interested
shareholder" unless:
- the transaction is approved by a majority of disinterested directors
before the person becomes an interested shareholder;
- the corporation has not had more than 300 stockholders of record during
the past three years;
- the interested shareholder has owned at least 80% of the corporation's
outstanding voting shares for at least five years;
- the interested shareholder is the beneficial owner of at least 90% of the
voting shares (excluding shares acquired directly from the corporation in
a transaction not approved by a majority of the disinterested directors);
46
<PAGE> 50
- consideration is paid to the holders of the corporation's shares equal to
the highest amount per share paid by the interested shareholder for the
acquisition of the corporation's shares in the last two years or the fair
market value of the shares, and other specified conditions are met; or
- the transaction is approved by the holders of two-thirds of the company's
voting shares other than those owned by the interested shareholder.
An "interested shareholder" is defined as a person who, together with
affiliates and associates, beneficially owns more than 10% of a company's
outstanding voting shares. The FBCA defines "beneficial ownership" in more
detail.
TRANSFER AND WARRANT AGENT
The transfer agent and registrar for our common shares is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
47
<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, our common shares have not been traded publicly,
and no prediction can be made as to the effect, if any, that future market sales
of common shares or the availability of common shares for sale will have on the
market price of the common shares prevailing from time to time. Nevertheless,
sales of substantial amounts of common shares in the public market, or the
perception that sales could occur, could cause the market price of the common
shares to decline and could impair our future ability to raise capital through
the sale of our equity securities.
SHARES OUTSTANDING AND FREELY TRADABLE IMMEDIATELY FOLLOWING THIS OFFERING
After this offering, we will have an aggregate of common
shares outstanding. Of the common shares outstanding immediately after the
offering, common shares, will be freely tradable without
restriction or further registration under the Securities Act, except that any
common shares purchased by our affiliates, as that term is defined in Rule 144
under the Securities Act, in this offering or in the public market may only be
sold in compliance with the volume and manner of sale limitations of Rule 144
described below.
SHARES SUBJECT TO RULE 144
12,461,107 common shares held by existing shareholders will be deemed
restricted securities as that term is defined in Rule 144. Restricted securities
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or 144(k) promulgated under the
Securities Act. These rules are summarized below.
Subject to the lock-up agreements described below and the provisions of
Rules 144 and 144(k), additional common shares will be eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<C> <S>
As of the date of this prospectus all of these common shares
will be subject to the volume and manner of sale limitations
of Rule 144; and
6 months after the date of this prospectus all of these
common shares will be subject to the volume and manner of
sale limitations of Rule 144.
</TABLE>
In general, under Rule 144 as currently in effect, a person or persons
whose shares are aggregated, including an affiliate, who has beneficially owned
shares for at least one year is entitled to sell, within any three-month period
commencing 90 days after the date of this prospectus, a number of shares that
does not exceed the greater of:
- one percent of the then outstanding common shares, which will equal
approximately common shares immediately after this
offering; or
- the average weekly trading volume in the common shares during the four
calendar weeks preceding the date on which notice of that sale is filed
with the SEC, subject to restrictions.
In addition, a person who is not deemed to have been an affiliate of ours
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years is entitled to sell those
common shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares are acquired from an affiliate of ours, the
acquiring person's holding period for the purpose of effecting a sale under Rule
144 commences on the date of transfer from the affiliate.
Our executive officers, directors and holders of more than 5% of our common
shares or securities exercisable or exchangeable for or convertible into shares
of common stock have agreed not to offer to sell, sell, transfer, hypothecate or
otherwise encumber any securities held by them under Rule 144 or otherwise for a
period of not more than 6 months following the consummation of this offering
without the prior written consent of Josephthal & Co. Inc.
48
<PAGE> 52
Upon closing of this offering, we will have options outstanding to purchase
a total of 4,000,000 common shares, of which 3,441,242 are currently
exercisable. The outstanding options have a weighted average exercise price of
$0.37 per share.
We intend to file a registration statement on Form S-8 under the Securities
Act to register common shares reserved for issuance under our 1998 Stock Option
Plan, permitting the resale of these shares by nonaffiliates in the public
market without restriction under the Securities Act.
Upon the closing of the offering, 100,000 shares will be issuable upon the
exercise of outstanding warrants.
REGISTRATION RIGHTS
The holders of Series A Redeemable Convertible Preferred Stock have certain
demand and piggyback registration rights.
Millennium Investment Capital Corp. has certain registration rights with
respect to the 147,420 common shares issued to them on April 26, 2000.
Certain holders of options and/or warrants to purchase common shares have
registration rights.
49
<PAGE> 53
UNDERWRITING
The underwriters named below, acting through Josephthal & Co. Inc. and
as their representatives, have severally agreed, subject to the
terms and conditions of the underwriting agreement, to purchase common shares
from us in the amounts set forth opposite their respective names below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Josephthal & Co. Inc........................................
Total.............................................
---------
</TABLE>
The common shares are being sold on a firm commitment basis. The
underwriting agreement provides, however, that the obligations of the several
underwriters are subject to conditions precedent. These conditions include that:
- the representations and warranties we made to the underwriters are true;
- there is no material change in the financial markets; and
- we deliver customary closing documents to the underwriters.
The Underwriters are committed to purchase all of the common shares offered
hereby if any are purchased.
The representatives have advised that the underwriters propose initially to
offer the common shares to the public at the public offering set forth on the
cover page of this prospectus and to dealers at that price less concessions of
not in excess of $ per common share, of which amount a sum in excess of
$ per share may in turn be allowed by those dealers to other dealers.
After the common shares are released for sale to the public, the representatives
may change the offering price and the concessions.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by ITC. These amounts are shown
assuming both no exercise and full exercise of the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share...................................................
Total.............................................
</TABLE>
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the underwriters may be required to make. We have agreed
to pay Josephthal & Co. Inc. a non-accountable expense allowance equal to 1.5%
of the gross proceeds of this offering, none of which has been paid to date.
We have granted the underwriters an option to exercise during the 45-day
period after the date of this prospectus to purchase from us, at the public
offering price less underwriting discounts and the expense allowance, up to an
additional common shares for the sole purpose of covering over-
allotments, if any. To the extent the underwriters exercise this option, each
underwriter will have a firm commitment, subject to certain conditions, to
purchase a number of the additional common shares proportionate to such
underwriter's initial commitment.
In connection with this offering and in exchange for advisory services, we
have agreed to sell to Josephthal, for nominal consideration, warrants to
purchase from us 100,000 common shares. The warrants are initially exercisable
at an exercise price of 120% of the initial public offering price per common
share for a period of five years from August 17, 2000. The warrants contain
provisions providing for the adjustment of the exercise price and the number and
type of common shares issuable upon exercise of the warrants upon the occurrence
of certain events. The warrants grant to the holders thereof certain demand and
"piggyback" registration rights under the Securities Act for the common shares
issuable upon the exercise thereof.
Our executive officers, directors and holders of more than five percent of
our common shares or securities exercisable or exchangeable for or convertible
into shares of common stock have agreed not to offer to sell,
50
<PAGE> 54
sell, transfer, hypothecate or otherwise encumber any securities held by them
under Rule 144 or otherwise for a period of not more than six months following
the consummation of this offering without the prior written consent of
Josephthal.
The foregoing is a summary of the principal terms of the underwriting
agreement and does not purport to be complete. Reference is made to the copy of
the underwriting agreement filed as an Exhibit to the registration statement of
which this prospectus forms a part.
Prior to this offering, there has been no public market for the common
shares, and there can be no assurance that one will develop after consummation
of this offering or, if developed, that it will be sustained. The initial public
offering price for the common shares was determined by negotiation between us
and the representatives and should not be considered indicative of the actual
value of the common shares. Factors considered in determining the public
offering price, in addition to the prevailing market conditions, include the
history of and prospects for the industry in which we compete, an assessment of
our management, our past and present operations, our prospects, our capital
structure, and such other factors as were deemed relevant.
Until the distribution of the common shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase common shares. As an exception to
these rules, the representatives are permitted to engage in transactions that
stabilize the price of our common shares. These transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of our
common shares.
The underwriters may create a short position in the common shares in
connection with the offering, which means that they may sell more common shares
than are presented on the cover page of this prospectus. If the underwriters
create a short position, then the representatives may reduce that short position
by purchasing our common shares in the open market. The representatives also may
elect to reduce any short position by exercising all or part of the
over-allotment option described in this prospectus.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase our
common shares in the open market to reduce the underwriters' short position or
to stabilize the price of the common shares, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those common shares as part of the offering.
In general, purchasers of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might be in the absence of these purchases. The imposition of a
penalty bid could have an effect on the price of a security to the extent that
it were to discourage resales of the security by purchasers in an offering.
Neither we nor any of the underwriters make any representation or
prediction concerning the direction or magnitude of any effect that the
transactions described above may have on the price of our common shares. In
addition, neither we nor any of the underwriters make any representation that
the representatives will engage in these transactions or that any such
transaction, once commenced, will not be disconnected without notice.
The underwriters have informed us that sales to any account over which the
underwriters exercise discretionary authority will not exceed % of this
offering.
LEGAL MATTERS
Baker & McKenzie, Miami, Florida, will pass upon the validity of the
issuance of the common shares that we are offering by this prospectus. Clifford
Chance Rogers & Wells LLP, New York, New York will pass upon certain legal
matters for the underwriters.
51
<PAGE> 55
EXPERTS
Ernst & Young LLP, independent certified public accountants, have audited
our consolidated financial statements and schedule at April 30, 1999 and 2000,
and for each of the two years in the period ended April 30, 2000, as set forth
in their report. We have included our financial statements and schedule in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
ENFORCEABILITY OF CIVIL LIABILITIES
Although we are a corporation organized under the laws of the State of
Florida, our principal operations are in and substantially all of our assets are
located in Brazil. As a result, investors in our common shares may not be able
to enforce against us in U.S. courts judgments predicated upon the civil
liability provisions of the federal securities laws of the United States. There
is doubt as to enforceability in original actions in courts of Brazil of
liabilities predicated solely on U.S. federal securities laws and as to the
enforceability in the courts of Brazil of judgments of U.S. courts obtained in
actions predicated upon the civil liability provisions of U.S. federal
securities laws.
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:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois
60661-2511
</TABLE>
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 Website that contains
reports, proxy statements and other information about issuers, including ITC,
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 ITC 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.
52
<PAGE> 56
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Certified Public
Accountants............................................... F-2
Consolidated Balance Sheets at April 30, 1999 and 2000 and
July 31, 2000 (Unaudited)................................. F-3
Consolidated Statements of Operations for the Years Ended
April 30, 1999 and April 30, 2000 and for the Three Months
Ended July 31, 1999 (Unaudited) and 2000 (Unaudited)...... F-4
Consolidated Statement of Changes in Redeemable Convertible
Stock and Common Shareholders' Equity (Deficit) for the
Years Ended April 30, 1999 and April 30, 2000 and for the
three months ended July 31, 2000 (Unaudited).............. F-5
Consolidated Statements of Cash Flows for the Year Ended
April 30, 1999 and April 30, 2000 and for the Three Months
Ended July 31, 1999 (Unaudited) and 2000 (Unaudited)...... F-6
Notes to Consolidated Financial Statements.................. F-7
The following consolidated financial statement schedule of
Intercontinental Telecommunications Corp. is included
in Item 16(b):
Schedule II Valuation and Qualifying Accounts............... S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
F-1
<PAGE> 57
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Intercontinental Telecommunications Corp.
We have audited the accompanying consolidated balance sheets of
Intercontinental Telecommunications Corp. as of April 30, 1999 and 2000 and the
related consolidated statements of operations, changes in redeemable convertible
preferred stock and common shareholders' equity (deficit) and cash flows for
each of the two years in the period ended April 30, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 16(b).
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
Intercontinental Telecommunications Corp. at April 30, 1999 and 2000, and the
consolidated results of its operations and its cash flows for each of the two
years in the period ended April 30, 2000 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
September 27, 2000
F-2
<PAGE> 58
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
APRIL 30, EQUITY AT
-------------------------- JULY 31, 2000
1999 2000 JULY 31, 2000 (NOTE 7)
----------- ----------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 63,695 $ 128,124 $11,394,157
Short term notes receivable from related party,
net............................................. -- 443,980 3,620,200
Deposit........................................... -- -- 1,775,000
Trade accounts receivable, net of allowance for
doubtful accounts of $--, $115,571 and $137,105,
respectively.................................... 15,483 41,761 596,738
Accounts receivable, related party................ 780,000 -- 611,202
Other current assets.............................. 3,274 48,873 181,255
----------- ----------- -----------
Total current assets....................... 862,452 662,738 18,178,552
Property and equipment, net......................... 1,982,085 5,097,672 10,084,793
Identifiable intangible assets, net of accumulated
amortization of $31,443, and $55,025,
respectively...................................... -- 333,838 310,256
Goodwill, net of accumulated amortization of
$45,697........................................... -- -- 1,043,224
Other assets........................................ -- 7,394 --
----------- ----------- -----------
Total assets............................... $ 2,844,537 $ 6,101,642 $29,616,825
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit, related party..................... $ 480,952 $ 2,274,484 $ 2,363,494
Accounts payable and accrued expenses, related
parties......................................... -- 1,922,854 --
Accounts payable and accrued expenses, third
parties......................................... 1,351 419,084 2,010,744
Vendor financing, related party................... 795,712 1,323,682 1,768,221
Short-term portion of capital leases, related
party........................................... -- 199,751 204,298
----------- ----------- -----------
Total current liabilities.................. 1,278,015 6,139,855 6,346,757
Vendor financing, related party..................... 1,087,985 413,319 --
Capital leases, related party....................... -- 268,120 241,800
Commitments
Minority interest................................... -- -- 50,274
Series A redeemable convertible preferred stock,
$.0001 par value; no shares authorized, issued and
outstanding at April 30, 2000 and 1999 and
4,914,005 shares authorized, issued and
outstanding at July 31, 2000 (unaudited) and no
shares issued and outstanding pro forma at July
31, 2000 (unaudited).............................. -- -- 19,227,008 $ --
Shareholders' equity (deficit):
Preferred stock, $.0001 par value; no shares
authorized, issued and outstanding at April 30,
1999 and 2000 and 15,085,995 shares authorized,
and no shares issued and outstanding at July 31,
2000 (unaudited)................................ -- -- -- --
Common stock, $.0001 par value; 30,000,000 shares
authorized at April 30, 1999 and 2000 and
100,000,000 shares authorized at July 31, 2000,
and, 9,032,085, 11,415,265 and 12,461,107 shares
issued and outstanding at April 30, 1999 and
2000 and July 31, 2000 (unaudited),
respectively, and 17,375,112 shares issued and
outstanding pro forma at July 31, 2000
(unaudited)..................................... 903 1,142 1,246 1,738
Additional paid-in capital........................ 1,233,004 2,841,449 8,676,584 27,903,100
Deferred compensation............................. -- (242,552) (169,847) (169,847)
Accumulated other comprehensive income............ 299,778 339,892 290,063 290,063
Accumulated deficit............................... (1,055,148) (3,659,583) (5,047,060) (5,047,060)
----------- ----------- ----------- -----------
Total shareholders' equity (deficit)....... 478,537 (719,652) 3,750,986 $22,977,994
----------- ----------- ----------- ===========
Total liabilities and shareholders' equity
(deficit)................................ $ 2,844,537 $ 6,101,642 $29,616,825
=========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 59
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30, QUARTERS ENDED JULY 31,
-------------------------- -------------------------
1999 2000 1999 2000
----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues............................. $ 15,000 $ 2,465,426 $ 39,980 $ 1,218,400
Net revenues, related party.............. 780,000 1,080,000 270,000 270,000
----------- ----------- ---------- -----------
795,000 3,545,426 309,980 1,488,400
Cost of revenues......................... 406,913 2,427,513 99,395 750,113
----------- ----------- ---------- -----------
Gross profit............................. 388,087 1,117,913 210,585 738,287
Selling, general and administrative
expenses............................... 1,281,295 2,705,655 476,934 1,593,316
Depreciation and amortization............ 161,940 411,341 43,435 494,762
----------- ----------- ---------- -----------
Loss from operations..................... (1,055,148) (1,999,083) (309,784) (1,349,791)
Other income (expense):
Interest income........................ -- 36,996 -- 146,223
Interest expense....................... -- (642,348) (131,607) (174,893)
Minority interest...................... -- -- -- (9,016)
----------- ----------- ---------- -----------
Total other income (expense)... -- (605,352) (131,607) (37,686)
----------- ----------- ---------- -----------
Net loss................................. $(1,055,148) $(2,604,435) $ (441,391) $(1,387,477)
=========== =========== ========== ===========
Net loss per common share -- basic and
diluted................................ $ (0.24) $ (0.24) $ (0.05) $ (0.11)
=========== =========== ========== ===========
Weighted average common shares
outstanding -- basic and diluted....... 4,470,266 10,841,880 9,743,742 11,891,837
=========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 60
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND COMMON SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A
REDEEMABLE CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED OTHER
------------------------ -------------------- PAID-IN COMPENSATION COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EXPENSE INCOME
--------- ----------- ---------- ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization............... -- $ -- 1,000 $ -- $ 1,000 $ -- $ --
Stock issued for cash............... -- -- 9,031,085 903 1,232,004 -- --
Comprehensive income (loss):
Foreign currency translation
adjustment...................... -- -- -- -- -- -- 299,778
Net loss.......................... -- -- -- -- -- -- --
Total comprehensive loss......
--------- ----------- ---------- ------ ---------- --------- ---------
Balance at April 30, 1999............ -- -- 9,032,085 903 1,233,004 -- 299,778
Stock issued for cash............... -- -- 2,085,760 209 306,755 -- --
Stock issued for acquisitions....... -- -- 150,000 15 374,985 -- --
Conversion of notes payable to
common stock...................... -- -- 147,420 15 614,985 -- --
Options granted to employees and
consultants....................... -- -- -- -- 311,720 (242,552) --
Comprehensive income (loss):
Foreign currency translation
adjustment...................... -- -- -- -- -- -- 40,114
Net loss.......................... -- -- -- -- -- -- --
Total comprehensive loss......
--------- ----------- ---------- ------ ---------- --------- ---------
Balance at April 30, 2000............ -- -- 11,415,265 1,142 2,841,449 (242,552) 339,892
Series A Redeemable Convertible
Preferred Stock issued for cash,
net of offering costs of $772,992
(Unaudited)....................... 4,914,005 19,227,008 -- -- -- -- --
Stock issued for acquisitions
(Unaudited)....................... -- -- 278,165 28 894,018 -- --
Stock issued for PMAT software
(Unaudited)....................... -- -- 767,677 76 4,930,617 -- --
Contribution by principal
shareholder (Unaudited)........... -- -- -- -- 10,500 -- --
Recognition of deferred compensation
(Unaudited)....................... -- -- -- -- -- 72,705 --
Comprehensive income (loss):
Foreign currency translation
adjustment (Unaudited).......... -- -- -- -- -- -- (49,829)
Net loss (Unaudited).............. -- -- -- -- -- -- --
Total comprehensive loss
(Unaudited)..................
--------- ----------- ---------- ------ ---------- --------- ---------
Balance at July 31, 2000
(Unaudited)......................... 4,914,005 $19,227,008 12,461,107 $1,246 $8,676,584 $(169,847) $ 290,063
========= =========== ========== ====== ========== ========= =========
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY (DEFICIT)
----------- ----------------
<S> <C> <C>
Initial capitalization............... $ -- $ 1,000
Stock issued for cash............... -- 1,232,907
Comprehensive income (loss):
Foreign currency translation
adjustment...................... -- 299,778
Net loss.......................... (1,055,148) (1,055,148)
-----------
Total comprehensive loss...... (755,370)
----------- -----------
Balance at April 30, 1999............ (1,055,148) 478,537
Stock issued for cash............... -- 306,964
Stock issued for acquisitions....... -- 375,000
Conversion of notes payable to
common stock...................... -- 615,000
Options granted to employees and
consultants....................... -- 69,168
Comprehensive income (loss):
Foreign currency translation
adjustment...................... -- 40,114
Net loss.......................... (2,604,435) (2,604,435)
-----------
Total comprehensive loss...... (2,564,321)
----------- -----------
Balance at April 30, 2000............ (3,659,583) (719,652)
Series A Redeemable Convertible
Preferred Stock issued for cash,
net of offering costs of $772,992
(Unaudited)....................... -- --
Stock issued for acquisitions
(Unaudited)....................... -- 894,046
Stock issued for PMAT software
(Unaudited)....................... -- 4,930,693
Contribution by principal
shareholder (Unaudited)........... -- 10,500
Recognition of deferred compensation
(Unaudited)....................... -- 72,705
Comprehensive income (loss):
Foreign currency translation
adjustment (Unaudited).......... -- (49,829)
Net loss (Unaudited).............. (1,387,477) (1,387,477)
-----------
Total comprehensive loss
(Unaudited).................. (1,437,306)
----------- -----------
Balance at July 31, 2000
(Unaudited)......................... $(5,047,060) $3,750,986
=========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 61
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30, QUARTERS ENDED JULY 31,
------------------------- -------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................... $(1,055,148) $(2,604,435) $ (441,391) $(1,387,477)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization............. 161,940 411,341 43,435 494,762
Allowance for doubtful accounts........... -- 115,571 -- 21,534
Contribution by principal shareholder..... -- -- -- 10,500
Non-cash compensation and consulting
expenses............................... -- 69,168 5,720 72,705
Minority interest......................... -- -- -- 9,016
Changes in operating assets and
liabilities:
Deposit................................ -- -- -- (1,775,000)
Trade accounts receivable.............. (15,483) (141,849) (25,230) (407,306)
Accounts receivable, related party..... (780,000) 780,000 (1,355,403) (611,202)
Other current assets................... (3,274) (39,092) -- (127,010)
Other assets........................... -- (7,394) 892 7,394
Accounts payable and accrued expenses,
related parties...................... -- 1,922,854 46,181 (1,922,854)
Accounts payable and accrued expenses,
third parties........................ 1,351 415,476 215,836 1,214,346
----------- ----------- ----------- -----------
Net cash (used in) provided by operating
activities................................ (1,690,614) 921,640 (1,509,960) (4,400,592)
INVESTING ACTIVITIES
Purchases of property and equipment......... (260,328) (3,296,217) (67,463) (469,541)
Cash invested in short term notes receivable
from related party, net................... -- (443,980) -- (3,176,220)
Cash received in connection with
acquisitions.............................. -- 8,491 -- 1,286
----------- ----------- ----------- -----------
Net cash used in investing activities....... (260,328) (3,731,706) (67,463) (3,644,475)
FINANCING ACTIVITIES
Proceeds from line of credit, related
party..................................... 480,952 1,986,863 1,133,499 89,010
Net principal repayments on capital lease,
related party............................. -- (22,422) -- (21,773)
Net proceeds from sale of Series A Preferred
Stock..................................... -- -- -- 19,227,008
Proceeds from issuance of common stock...... 1,232,907 306,964 306,964 --
Proceeds from notes payable................. -- 600,000 -- --
----------- ----------- ----------- -----------
Net cash provided by financing activities... 1,713,859 2,871,405 1,440,463 19,294,245
----------- ----------- ----------- -----------
Effect of exchange rate changes on cash..... 299,778 3,090 117,769 16,855
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................... 62,695 64,429 (19,191) 11,266,033
Cash and cash equivalents, beginning of
period.................................... 1,000 63,695 63,695 128,124
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period.... $ 63,695 $ 128,124 $ 44,504 $11,394,157
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 62
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
ORGANIZATION
Intercontinental Telecommunications Corp. (the "Company" or "ITC"), a
Florida corporation, began operations May 1, 1998 and was incorporated on
October 3, 1998 (see Note 8). As more fully explained in Note 8, these financial
statements include the operating results of ITC from the date operations began
(May 1, 1998).
The Company provides advanced broadband communications services and
software application services in Brazil. Its target customers are multinational
corporations, government entities and small and medium-size businesses with
growing and diverse communications and business automation needs. The Company
delivers broadband communications services over its high-speed, high-capacity
network using fixed wireless access technology and leased fiber optic cable. The
Company's software application services offer business process improvements,
database management programs and electronic commerce services to its customers.
The Company operates its business and offers its services in Brazil through its
principal operating subsidiaries, Intercontinental Telecom Corporation do Brasil
Ltda. (ITC Brazil) and Viplink Provedora de Accesso a Internet S/C Ltda. The
Company also has majority ownership interests in two other Brazilian companies,
Probit Technologia Educational Ltda. and Interactive Consultoria a
Desenvolvimiento de Sistemas Ltda. In addition, the Company has a 49% interest
in ITC Holding Brasil Ltda. with the remaining equity ownership held by a
principal shareholder of the Company. However, the Company retains all rights
and benefits to the share held by the principal shareholder.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ITC and its
majority-owned subsidiaries (collectively herein, the Company). All significant
intercompany accounts and transactions have been eliminated in consolidation.
MINORITY INTEREST
The Company generally allocates to the minority shareholders their share of
any profits or losses. However, for the period ended July 31, 2000 and the years
ended April 30, 1999 and 2000, some of the minority interest shareholders did
not fund their share of the losses and, as a result, the Company absorbed 100%
of the cumulative unfunded net losses through April 30, 2000.
FOREIGN OPERATIONS AND FOREIGN CURRENCY TRANSLATION
The Company transacts substantial business in foreign currency and almost
all of its sales occur outside the U.S.
Financial statements of the foreign subsidiary are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for each period for revenues,
expenses, gains and losses. The local currency is considered the functional
currency of the Company's foreign subsidiaries. Accordingly, translation
adjustments are recorded as a component of comprehensive income.
F-7
<PAGE> 63
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
CASH AND CASH EQUIVALENTS
The Company defines as cash equivalents all highly liquid investments with
a maturity of three months or less at the time of purchase.
CONCENTRATION OF CREDIT RISK
The Company performs ongoing evaluations of its trade accounts receivable,
monitors its exposure for credit losses and does not require collateral. For the
year ended April 30, 2000 and the quarter ended July 31, 2000, one customer and
6 customers, respectively, accounted for approximately 91% and 82% of the total
third party net revenues, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed by use
of the straight-line method over the estimated useful life of telecommunications
equipment and furniture, fixtures and equipment, which is 3-10 years.
CAPITALIZED SOFTWARE
The Company capitalized certain costs incurred in connection with
developing or obtaining internal use software in accordance with Statement of
Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed for
or Obtained For Internal Use. Such costs aggregated approximately $1.5 million
and $6.8 million as of April 30, 2000 and July 31, 2000, respectively, and are
included in property and equipment on the accompanying consolidated balance
sheet, net of accumulated amortization of approximately $2,700 and $267,000,
respectively.
REVENUE RECOGNITION
The Company's revenues are generated from support services in
telecommunications, projects, consulting, network security, network design and
implementation for voice, video and access to the Internet. Revenue is
recognized when earned based on service agreements established with each of the
Company's customers.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 explains how the SEC staff applies by analogy the existing
rules on revenue recognition to other transactions not covered by such rules.
The four criteria that must be met to recognize revenue are: (a) persuasive
evidence of an arrangement exists, (b) delivery has occurred or services have
been rendered, (c) the price is fixed or determinable, and (d) collectibility is
reasonably assured. In June 2000, the SEC issued SAB 101B delays the effective
date of SAB 101 until no later than the fourth fiscal quarter of fiscal years
beginning after December 15, 1999 (fourth quarter of fiscal year 2001 for ITC).
The Company does not believe the adoption of SAB 101 will have a material impact
on the Company's results of operations. However, the Company understands the SEC
staff will issue additional guidance in the form of a Frequently Asked Questions
(FAQ), at which time the Company will reevaluate the impact of SAB 101.
COST OF REVENUES
Cost of revenues primarily consists of telecommunication expenses and
international link costs inherent in the network infrastructure.
F-8
<PAGE> 64
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
INTANGIBLE ASSETS
Intangible assets consist of trademarks, URL software, domain names,
customer bases and goodwill. These intangible assets are amortized over their
estimated useful lives of two to five years.
IMPAIRMENT OF LONG LIVED ASSETS
The carrying value of long-lived assets, including intangible assets, are
reviewed by the Company's management if the facts and circumstances suggest that
they may be impaired. If this review indicates that these costs will not be
recoverable, as determined based on the expected undiscounted cash flows, the
carrying value of these assets is adjusted to fair value, if necessary.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred
income tax assets and liabilities are determined based upon differences between
the financial statement and income tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. 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.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company grants stock options generally for a fixed number of shares
with an exercise price equal to or below the fair value of the shares at the
date of grant. The Company accounts for stock option grants to employees in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and, accordingly, recognizes compensation
expense only if the market value on the date of the grant is above the exercise
price of the options. The Company applies APB opinion 25 and related
interpretations in accounting for its employee stock-based transactions, and
have complied with the disclosure requirements of Financial Accounting Standard
Board Statement No. 123, Accounting for Stock-Based Compensation.
ADVERTISING
Advertising costs are charged to expense as incurred, advertising expenses
for the year ended April 30, 1999 and 2000 were $0 and $93,000, respectively,
and for the three months ended July 31, 1999 and 2000 were $43,000 and $7,000,
respectively.
COMPREHENSIVE INCOME
The Company reports and displays comprehensive income in accordance with
SFAS No. 130, Reporting Comprehensive Income. There are no other components of
comprehensive loss other than foreign currency translation adjustment and the
Company's net loss for each of the periods presented.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Accordingly, actual results could differ from those
reported.
F-9
<PAGE> 65
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
LOSS PER SHARE
The Company calculates earnings or loss per common share in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128. Computation of
Earning Per Share. Accordingly, basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share is calculated based upon the sum of the weighted
average number of shares outstanding and the weighted average number of
potentially dilutive securities, which consists of stock options, warrants and
common shares issuable upon the conversion of preferred stock. However,
potentially dilutive securities have been excluded from the calculation of
diluted net loss per share for all periods presented because their effect would
have been anti-dilutive. The number of potentially dilutive securities excluded
was 7,275,113, 7,518,810, and 12,432,815, as of April 30, 1999 and 2000 and July
31, 2000, respectively.
NEW PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25. The Company is required
to adopt the Interpretation on July 1, 2000. The Interpretation requires that
stock options that have been modified to reduce the exercise price be accounted
for as variable. The Company has not repriced stock options since inception and
the impact of the adoption of this Interpretation is not significant.
RISKS AND UNCERTAINTIES
The Company's operations are subject to certain risks and uncertainties,
including those associated with: a brief operating history; losses and negative
cash flows from continuing operations; funding expansion and acquisitions;
international operations; dependence on key personnel; and dependence on related
party vendors and financing.
RECLASSIFICATIONS
Certain amounts in the prior year's consolidated financial statements and
related notes have been reclassified to conform to the current year's
presentation.
3. ACQUISITION
CYBERVISION ACQUISITION
On December 21, 1999, the Company acquired 100% of the assets of
CyberVision for a purchase price of $375,000. The Company did not incur any
acquisition costs as part of this transaction. The purchase price consisted of
150,000 shares of the Company's common stock valued at $2.50 (fair value as
determined by the Board of Directors) per share. The CyberVision acquisition was
accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired and the liabilities assumed
based on estimates of their underlying fair values. The fair value of net assets
acquired was approximately $375,000, of which approximately $365,281 was
allocated to identifiable intangible assets.
F-10
<PAGE> 66
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
Summary unaudited pro forma results for the acquisition discussed above, as
if such acquisition had occurred at the beginning of each respective period is
as follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
YEARS ENDED
APRIL 30,
------------------
1999 2000
------- -------
UNAUDITED
<S> <C> <C>
Revenues.................................................... $ 897 $ 3,809
Net loss.................................................... (1,133) (2,668)
Basic and diluted net loss per share........................ $ (0.25) $ (0.24)
Basic and diluted weighted average shares................... 4,620 10,942
</TABLE>
These unaudited pro forma results of operations do not purport to represent
what the Company's actual results of operations would have been if the
acquisitions had occurred at the beginning of each period and should not serve
as a forecast of the Company's operating results for future periods. The pro
forma adjustments are based solely on the available information and certain
assumptions that management believes are reasonable. Management believes the
full impact of potential cost savings has not been reflected in the pro forma
results presented above, although there can be no assurances such cost savings
will be achieved. Subsequent adjustments may be necessary upon final
determination of the allocation of the purchase prices.
PROBIT ACQUISITION
On May 11, 2000, the Company entered into a purchase agreement to acquire
51% of the outstanding common stock of Probit Tecnologia Educacional Ltda for
$186,301 in cash to be paid within six months of closing and 233,333 shares of
the Company's Common Stock valued at fair value of $745,204 as determined by the
Company's Board of Directors. As of July 31, 2000, the cash portion of the
purchase price was reflected in accounts payable.
IAS ACQUISITION
On June 30, 2000, the Company entered into a purchase agreement to acquire
51% of the outstanding common stock of Interactive Consultoria e Desenvolvimento
de Sistemas Ltda. (IAS) for $44,272 to be paid in cash within six months of
closing and 44,832 shares of the Company's Common Stock valued at fair value of
$148,842 as determined by the Company's Board of Directors. As of July 31, 2000,
the cash portion of the purchase price was reflected in accounts payable.
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL APRIL 30,
LIFES ----------------------- JULY 31,
(IN YEARS) 1999 2000 2000
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Telecommunications equipment.................... 3 - 10 $2,108,684 $2,144,871 $2,207,774
Furniture, fixtures, and equipment.............. 5 35,341 1,538,279 1,639,333
Software........................................ 3 -- 1,484,601 6,760,843
Telecommunications equipment under capital
lease......................................... 5 -- 490,293 499,107
---------- ---------- ------------
2,144,025 5,658,044 11,107,057
Accumulated depreciation and amortization....... (161,940) (560,372) (1,022,264)
---------- ---------- ------------
$1,982,085 $5,097,672 $10,084,793
========== ========== ============
</TABLE>
F-11
<PAGE> 67
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
Depreciation expense for the years ended April 30, 1999 and 2000 was
$161,940 and $379,898, respectively, and $43,435 and $425,476 for the quarters
ended July 31, 1999 and 2000, respectively. Amortization of telecommunications
equipment under capital lease is included in depreciation expense for each
period presented.
Accumulated amortization relating to telecommunications equipment under
capital lease was $24,509 and $23,809 at April 30, 2000 and July 31, 2000,
respectively.
5. INCOME TAXES
The Company is subject to federal, state and foreign income taxes. At April
30, 2000, and July 31, 2000 (unaudited), the Company had net tax operating loss
carryforwards of approximately $1,243,000, and $1,277,000, respectively for U.S.
income tax purposes and approximately $2,238,000, and $3,493,000, respectively
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 2019 through 2021, while the foreign net operating loss carryforwards do
not expire.
If a change in ownership occurs, utilization of U.S. net operating losses
may be limited under Internal Revenue Code Section 382.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset and liability are presented below:
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
------------------------ -----------
1999 2000 2000
--------- ----------- -----------
<S> <C> <C> <C>
Deferred tax asset
Net operating loss carryforwards............... $ 357,000 $ 1,217,000 $ 1,651,000
Amortization................................... -- 9,000 15,000
--------- ----------- -----------
357,000 1,226,000 1,666,000
Less: valuation allowance...................... (357,000) (1,226,000) (1,666,000)
--------- ----------- -----------
Net deferred tax asset......................... $ -- $ -- $ --
========= =========== ===========
</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>
APRIL 30,
------------ JULY 31,
1999 2000 2000
---- ---- -----------
<S> <C> <C> <C>
U.S. Federal statutory income tax rate..................... (34)% (34)% (34)%
State taxes................................................ -- (4) (4)
Non-deductible items....................................... -- 2 --
Foreign rate differential.................................. -- 2 4
Increase in valuation allowance............................ 34 34 34
--- --- ---
--% --% --%
=== === ===
</TABLE>
F-12
<PAGE> 68
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
The domestic and foreign components of net loss are as follows:
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
-------------------------- -----------
1999 2000 2000
----------- ----------- -----------
<S> <C> <C> <C>
Domestic.................................... $ (79,755) $(1,330,866) $(1,333,735)
Foreign..................................... (975,393) (1,273,569) (53,742)
----------- ----------- -----------
$(1,055,148) $(2,604,435) $(1,387,477)
=========== =========== ===========
</TABLE>
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if based on weight of the evidence it is more likely than not that
some, or all, of the deferred tax assets will not be realized. After
consideration of all the evidence, management has determined that a valuation
allowance of $357,000, $1,226,000, and $1,666,000 at April 30, 1999 and 2000 and
July 31, 2000, respectively, is necessary to reduce the deferred tax assets to
the amounts that will more likely than not be realized.
The change in the valuation allowance for the years ended April 30, 1999
and 2000 and the quarter ended July 31, 2000 was $357,000, $869,000 and
$440,000, respectively.
6. SHAREHOLDERS' EQUITY (DEFICIT)
CONVERSION OF NOTES PAYABLE TO COMMON STOCK
During January 2000, the Company entered into a promissory note with a
third party who received a fee in connection with the sale of Series A Preferred
Stock discussed on Note 7. Under the note, the Company received proceeds of
$600,000 to be paid back upon demand in one lump-sum payment. This note accrued
interest at a rate of 10% per annum to be paid on a biannual basis, until the
note was to become due. During April 2000, in conjunction with the sale of
Series A Preferred Stock (Note 7) the balance of the note of $600,000, was
converted into 147,420 shares of common stock, and accrued interest related to
the note was forgiven.
ACQUISITIONS
On December 21, 1999, the Company issued 150,000 shares of the Company's
common stock as part of the CyberVision acquisition (Note 3). On May 11, 2000,
the Company issued 233,333 shares of the Company's common stock as part of the
Probit acquisition (Note 3). On June 30, 2000, the Company issued 44,832 shares
of the Company's common stock as part of the IAS acquisition (Note 3).
OTHER ISSUANCES
During 1999 and 2000, the Company issued an aggregate of 9,032,085 shares
and 2,085,760 shares of common stock, respectively, to new and existing
shareholders for aggregate cash proceeds of $1,233,907 and $306,964,
respectively.
During July 2000, a principal shareholder of the Company transferred 3,000
shares of common stock (valued at fair value of $10,500) to certain members of
the Company's Board of Directors. This has been reflected as an equity
contribution in the accompanying financial statements.
INCREASE IN AUTHORIZED SHARES
On May 24, 2000, the Company's Board of Directors ("Board") approved to
increase the number of authorized shares of capital stock for issuance to
120,000,000 shares, consisting of (i) 100,000,000 shares of common stock, par
value $0.0001 per share, and (ii) 20,000,000 shares of preferred stock, par
value $0.0001
F-13
<PAGE> 69
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
per share. The preferred stock may be issued from time to time in one or more
classes or series, the shares of each class or series to have such designations
and powers, preferences and rights, and qualification limitations and
restrictions thereof as are stated in the resolution or resolutions providing
for the issuance of such class or series adopted by the Company's Board.
STOCK OPTIONS
On June 1, 1998, the Company adopted the 1998 Stock Option Plan (the Plan)
which provides for the granting of incentive and non qualified stock options to
purchase shares of Common Stock to officers, directors and key employees
responsible for the direction and management of the Company and to non-employee
consultants and independent contractors. The Plan authorizes 4,000,000 shares of
common stock for issuance upon the exercise of stock options, of which 1,000,000
common shares have been granted as of April 30, 2000 (3,000,000 founder's
options are excluded from this plan). The vesting period of the stock options
granted is established by the Board of Directors of the Company (the Board) or a
committee of the Board of Directors (the Committee). The options granted vest
ratably over a five 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 Board or the Committee at the
time of grant but shall not be less than 75% of the fair market value of the
underlying stock. The exercise price of the options granted ranged from $.05 to
$3.00 per share, which was determined by the Board to be or exceed the fair
value at the date of grant.
Under the terms of the Company's currently outstanding stock option
agreements, options have a maximum term of five years from the date of the
grant. The options vesting period varies from full vesting upon issuance of
options to twenty percent vesting on a yearly basis until the options terminate
in five years.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
1999 2000
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year....................... -- $ -- 3,756,303 $0.25
Granted.............................................. 3,756,303 0.25 482,000 1.11
Cancelled............................................ -- -- (238,303) 0.08
--------- ---------
Outstanding at end of year............................. 3,756,303 0.25 4,000,000 0.37
========= =========
Options exercisable at year-end........................ 3,263,303 $0.28 3,441,242 $0.33
========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at April 30, 2000:
<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>
$0.05 - 0.13 570,000 $0.05 3 366,242 $0.05 $0.05 - 0.13
0.30 3,280,000 0.30 8 3,000,000 0.30 0.30
$3.00 150,000 $3.00 4 75,000 $3.00 $3.00
--------- ---------
4,000,000 3,441,242
========= =========
</TABLE>
F-14
<PAGE> 70
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
During the fiscal year ended April 30, 1999, the Company granted 3,000,000
non plan options to the Company's founders, 158,000 options to employees, and
598,303 options granted to consultants with exercise prices of $0.30,
$0.05-$0.15, and $0.05-$0.13 per share, respectively. The options granted to the
founders and 263,303 options granted to consultants vested on the date of grant.
The remaining 335,000 options granted to consultants, and all of the employee
options vest over five years. The employee options were valued under APB 25 and
options granted to the founders and consultants were valued at the fair market
value using the Minimum Value options valuation model under SFAS 123. The
Company determined that the options had no value and therefore no compensation
was recorded as a result.
During the fiscal year ended April 30, 2000, the Company granted three
officers and an outside consultant an aggregate of 482,000 stock options. Of
this amount, 280,000 of the options have an exercise price of $0.30 per share
and 150,000 have an exercise price of $3.00 per share, with all vesting over a
three year period. At the date of grant, some of these options were determined
to have exercise prices that were less than fair market value of the underlying
common stock. The remaining 52,000 options had an exercise price of $0.05 per
share and vested immediately. The options granted to the officers were valued
under APB 25 while the options granted to the consultant were valued at fair
market value using the Minimum Value option valuation model under SFAS No. 123.
The Company valued the options at $311,720, of which $69,168 was recognized as
compensation in the current year and $242,552 was deferred to be recognized over
the remaining vesting periods.
The weighted average per share fair values of options granted under the
stock option plan during 1999 and 2000, based on the Minimum Value option
valuation model, were zero and $0.01, respectively. Had compensation expense for
the Company's stock option grants been determined based on the fair value at the
grant date for awards, consistent with the method of SFAS No. 123, the Company's
net loss would have increased for the years ended April 30, 1999 and 2000 by
zero and $42,492, respectively.
The following weighted average assumptions were used in the Minimum Value
model:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------
1999 2000
--------- ---------
<S> <C> <C>
Expected life............................................... 5 years 5 years
Interest rate............................................... 6% 6%
Volatility.................................................. -- --
Dividend yield.............................................. -- --
</TABLE>
The Minimum Value options valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, the
existing models, in management's opinion, do not necessarily provide a reliable
single measure of the fair value of the Company's stock options.
F-15
<PAGE> 71
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
WARRANTS
Including the Stock Purchase Warrants described in Note 8 - Related Party
Transactions, the following is a summary of warrants granted by the Company:
<TABLE>
<CAPTION>
1999 2000
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year....................... -- $ -- 3,518,810 $0.15
Granted.............................................. 3,518,810 0.15 -- --
--------- ---------
Outstanding at end of year............................. 3,518,810 0.15 3,518,810 0.15
========= =========
Warrants exercisable at year-end....................... 3,518,810 $0.15 3,518,810 $0.15
========= =========
</TABLE>
These warrants resulted from the Company's Joint Marketing Agreement
entered into during March 1999 (Note 8). The weighted average grant date fair
value of warrants granted during 1999 was immaterial.
On August 17, 2000, the Company entered into an agreement with an
underwriter to sell the Company's stock in an initial public offering. The
agreement calls for the underwriter to receive 7% of the gross funds raised, a
1.5% non-accountable expense allowance and a retainer of $125,000 to be applied
against the non-accountable expense allowance. In addition, the Company agreed
to issue warrants to purchase 100,000 shares of the Company's common stock at an
exercise price equal to 120% of the public offering price with an exercisable
term of five years.
As of September 27, 2000, 15,532,815 shares of common stock were reserved
for exercise of options and warrants and conversion of the Series A Preferred
Stock.
7. SALE OF SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
On May 24, 2000, the Board designated 4,914,005 shares of the preferred
stock as Series A Redeemable Convertible Preferred Stock (the "Preferred
Stock"). If and when the Company's Board declares dividends, holders of the
preferred stock shall be entitled to receive, in preference to the holders of
the Junior stock, dividends equal to that paid to a share of common stock. The
preferred stock is convertible into common shares on a one for one basis at
either (i) the option of the holder or (ii) automatically upon the occurrence of
a qualified initial public offering as defined in the Certificate of
Designation. The conversion ratio may also be adjusted in the event future sales
of stock are sold at prices less than $4.07 per share. Each share of Preferred
Stock shall be entitled to voting rights equal to the number of shares of common
stock into which the preferred shares are then convertible, for all matters upon
which common shareholders of the Company are entitled to vote (one vote per
common share). Each share of stock has a redemption price of $4.07 per share,
together with unpaid dividends, and redemption is at the option of the holder
any time after January 15, 2004. In addition, the holders of the Preferred Stock
shall be entitled to select two members of the Board as long as the holders own
at least five percent of the Company's outstanding shares of capital stock. In
the event of any liquidation, dissolution or winding up of the affairs of the
Company, holders of the Preferred Stock shall be paid the redemption price plus
all unpaid dividends to the date of liquidation, dissolution or wind up of
affairs before any payment to other stockholders.
On May 31, 2000, the Company entered into a subscription agreement with an
unrelated third party, to sell 4,914,005 shares of Series A Redeemable
Convertible Preferred Stock, for an aggregate purchase price of
F-16
<PAGE> 72
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
$20,000,000. The Company recorded the proceeds net of transaction expenses of
$772,992, primarily comprised of commissions and legal fees.
Unaudited pro forma stockholders' equity at July 31, 2000 as set forth on
the accompanying balance sheets reflects the conversion of the redeemable
convertible preferred stock, which will occur if a public offering is completed,
as if such conversion had occurred on July 31, 2000.
8. RELATED PARTY TRANSACTIONS
Material related party transactions that have been entered into by the
Company that are not disclosed otherwise in these notes are summarized below.
BACKGROUND
From May 1, 1998 through the date of the Company's incorporation (October
3, 1998) the Company's operations were limited to an administrative and
operational nature. These activities were conducted on behalf of ITC primarily
by Microtec Sistemas Ind. e Com. S.A. ("Microtec"), a wholly-owned subsidiary of
Vitech America, Inc. ("VAI"), a company with whom ITC has a joint marketing
agreement. Essentially, the Company conducted its affairs as a division of
Microtec during this period. Accordingly, the operating results of the Company
during this period have been presented on a historical cost basis in the
accompanying financial statements.
Certain members of our management and certain of our principal shareholders
are members of management and are principal shareholders of VAI. Specifically,
three of the Company's principal shareholders are also principal shareholders
and/or officers/directors of VAI.
SERVICE AGREEMENT
The Company has entered into a Service Agreement with VAI. Under this
agreement, the Company has agreed to provide telecommunications services,
integrated projects, consulting, network security, video surveillance
monitoring, network installation and maintenance, dedicated circuits, virtual
private networks, and Internet access for VAI and its subsidiaries. The
agreement calls for VAI to pay the Company $90,000 per month for an indefinite
term. However, the Company may terminate the agreement for the following
reasons: (i) a breach by a customer of any of the provisions in the Service
Agreement; (ii) any violation by the customer of any law, rule, or regulation;
(iii) the Company's inability to furnish service to VAI because of any law,
rule, court order, or other government regulation or interference; (iv) any
unauthorized or non-permitted use of the Company's service, and any event,
transaction, or occurrence outside the control of the Company. The Company's
revenues under this agreement for the years ended April 30, 1999 and 2000, and
the quarters ended July 31, 1999 and 2000 amounted to $780,000, $1,080,000, and
$270,000, $270,000, respectively.
COLLECTION OF TRADE ACCOUNTS RECEIVABLE
In connection with service contracts entered into with third parties, the
Company performs the service and receives the revenues. However, Microtec
collects a portion of the Company's revenues and applies them as payment toward
the various related accounts payable incurred by Microtec in relation to those
revenues. Net amounts earned to be collected by Microtec on behalf of the
Company were $0, $2,236,033, and $326,789 for the years ended April 30, 1999 and
2000, and the quarter ended July 31, 2000, respectively.
F-17
<PAGE> 73
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
LINK AGREEMENT
The Company has entered into a Telecommunications Link and Internet Service
Provider Cost Agreement ("Link Agreement") with VAI to procure international
link and Internet services. In turn, VAI procures these services from
MCI-World.com (2000) and AT&T (1999). Under the Link Agreement, the parties
agreed to bill the Company at the fair value of all international link costs and
Internet service provider costs incurred by VAI, with third party providers. The
Company's link costs incurred under this agreement for the years ended April 30,
1999 and 2000 and the quarters ended July 31, 1999 and 2000 amounted to
approximately $225,000 and $118,000 and $35,000 and $19,000, respectively.
JOINT MARKETING AGREEMENT
The Company has entered into a Joint Marketing Agreement with Microtec.
Under this agreement, Microtec grants the Company an exclusive right to sell
and/or provide Internet service, cabling, data link, data communications, and
other information technology and telecommunications services to its customers as
long as the Company's services are sold with Microtec's products and equipment.
The Company's services are bundled with Microtec's hardware and solutions, at
negotiated prices subject to adjustment to market conditions. Additionally,
under the terms of the agreement, Microtec has agreed to transfer to the Company
the communications licenses issued to Microtec by ANATEL, the governmental
telecommunications agency. However, this transfer has not occurred as of
September 27, 2000. In connection with the Joint Marketing Agreement, the
Company issued 3,518,810 stock purchase warrants to all VAI shareholders, except
the founders and principal shareholders of ITC, based on their pro rata
ownership in VAI. The warrants were issued on March 1, 1999. Each warrant
represents the right to purchase one share of the Company's common stock at an
exercise price of $0.15, terminating April 30, 2002. Since this was an exchange
of non-monetary assets between companies under common control, the intangible
assets transferred under the Joint Marketing Agreement were recorded at
Microtec's historical cost, which was zero.
EXPENSE ALLOCATION
The Company and VAI are related parties by way of common management and
ownership. The Company and VAI share in certain general and administrative
resources. The Company has recorded its allocable share of costs related to
these resources. In the opinion of management, this allocation is reasonable and
accurately reflects the cost of these services to the Company. The Company's
share of costs related to these resources for the years ended April 30, 1999 and
2000 and the quarters ended July 31,1999 and 2000 amounted to $65,549, $152,915
and $25,811, $69,028, respectively.
LINE OF CREDIT
On March 15, 1999, the Company entered into an unsecured Line of Credit
Agreement, pursuant to which Microtec agreed to lend, on an as needed basis,
approximately $2,800,000 at a 12% annual interest rate. The loan matures on
December 31, 2000, but can be extended upon the agreement of both parties. As of
April 30, 1999 and 2000 and July 31, 2000, the Company has outstanding
borrowings of $480,952, $2,274,484, and $2,363,494, respectively, under this
agreement.
NOTES RECEIVABLE FROM AND PAYABLE TO RELATED PARTY
During 2000, the Company entered into a financing arrangement with VAI,
whereby the Company will advance funds to VAI on a request basis. These advances
accrue interest at a ten percent per annum and principal and interest are due
upon demand. The Company had $797,000 and $36,995 in principal and interest
receivable, respectively at April 30, 2000 related to this financing
arrangement.
F-18
<PAGE> 74
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
During 2000, the Company entered into a financing arrangement with VAI,
whereby VAI will advance funds to the Company on a request basis. These advances
accrue interest at a ten percent annual rate and principal and interest are due
upon demand. The Company had $386,958 and $3,057 in principal and interest
payable, respectively at April 30, 2000 related to this financing arrangement.
The notes receivable and payable, including the respective accrued interest,
were netted for financial statement purposes.
The receivable balance of $443,980 as of April 30, 2000 was transferred as
a part of the balance of $3.6 million short-term notes receivable from related
party that occurred during the quarter ended July 31, 2000.
LEASE OF OFFICE SPACE FROM VAI
On February 1, 2000, the Company entered into a sublease agreement with
VAI, to lease a portion of its Miami, Florida office space for $2,500 per month
for a four-year term. The future minimum lease payments under this operating
lease are included in Note 9.
VENDOR FINANCING
On April 30, 1999, ITC-Brazil entered into a financing arrangement (the
Vendor Financing) with a wholly owned subsidiary of VAI. The Vendor Financing is
to provide the Company with financial capital for the purchase of computer and
network-related products. The terms of the Vendor Financing are as follows: (i)
maximum amount available is approximately $1.9 million, (ii) interest rate is
12% per annum, (iii) outstanding balance shall be repaid in 18 consecutive,
monthly, principal and interest payments starting on March 31, 2000, (iv) is
collateralized by the equipment being financed. According to the provisions of
the agreement, in the event any payment due under the agreement is not paid when
due, the entire balance shall be immediately due and payable upon demand. As of
April 30, 1999 and 2000 and July 31, 2000, the Company owed outstanding
principal of $1,883,697, $1,737,001 and $1,768,221, respectively, and interest
of $-0-, $36,545 and $90,248, respectively, under the Vendor Financing. To date,
the Company has not made any payments towards the outstanding balances. However,
the Company obtained a letter from VAI waiving VAI's rights to demand immediate
payment of the entire outstanding balance in the event of default related to
nonpayment.
Scheduled maturities on vendor financing are as follows:
<TABLE>
<CAPTION>
QUARTER
YEAR ENDED ENDED
APRIL 30, 2000 JULY 31, 2000
-------------- -------------
<S> <C> <C>
Year ending April 30:
2001................................................... $1,323,682 $1,323,682
2002................................................... 413,319 444,539
---------- ----------
Total....................................................... 1,737,001 1,768,221
Less current portion of vendor financing.................... 1,323,682 1,768,221
---------- ----------
Long term portion........................................... $ 413,319 $ --
========== ==========
</TABLE>
CAPITAL LEASES
In February 2000 Microtec entered into a capital lease for the purchase of
network equipment valued at $490,293. Microtec then immediately assigned the
rights and obligations thereunder to the Company. The lease requires an initial
down payment of $98,144 and monthly payments of $16,426 over a term of 36
months. As of April 30, 2000 and July 31, 2000, the Company was delinquent on
lease payments owed of $124,999
F-19
<PAGE> 75
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
and $124,113, respectively, of which $97,110 and $92,062, respectively, was
included in the short term portion of the capital leases.
At April 30, 2000 and July 31, 2000, future minimum lease payments under
this capital lease are as follows:
<TABLE>
<CAPTION>
APRIL 30, JULY 31,
2000 2000
--------- -----------
<S> <C> <C>
Year ending April 30:
2001...................................................... $ 322,111 $ 271,947
2002...................................................... 197,112 197,112
2003...................................................... 147,834 147,834
--------- ---------
Less amount representing interest........................... 667,057 616,893
Present value of minimum lease payments..................... (199,186) (170,795)
--------- ---------
Less current principal obligations.......................... 467,871 446,098
Long-term principal obligations............................. (199,751) (204,298)
--------- ---------
$ 268,120 $ 241,800
========= =========
</TABLE>
NOTES RECEIVABLE FROM RELATED PARTY
On June 30, 2000 and July 31, 2000, the Company received two senior
short-term notes from VAI for approximately $1.8 million each. Both notes bear
interest at 8% per annum and principal plus interest are due on the maturity
date of September 30, 2000 and October 30, 2000, respectively.
PMAT SOFTWARE PURCHASE
On July 1, 2000, the Company entered into an asset purchase agreement to
acquire a software package (PMAT Software) from VAI for $332,042 in cash and
767,677 shares of the Company's common stock. The agreement calls for some or
all of the shares to be returned to the Company in the event the Company fails
to generate certain levels of revenue from sales of the software over a
fifteen-month period following the acquisition. Since this is a noncash exchange
between companies under common control, the PMAT software was recorded at the
VAI's historical cost of the software of $5,262,735.
OTHER SOFTWARE TRANSACTIONS
During the year ended April 30, 2000 the Company acquired a software
package from a related party for approximately $1.5 million. This amount was
included in accounts payable and accrued expenses, related parties as of April
30, 2000.
The Company licenses certain management enterprise software package modules
from Microtec. The Company pays Microtec for the licenses on a per user basis.
No costs have been incurred to date.
F-20
<PAGE> 76
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS AND INFORMATION PERTAINING TO THE QUARTERS
ENDED JULY 31, 1999 AND 2000 ARE UNAUDITED)
9. COMMITMENTS
OPERATING LEASES
The Company leases office space under operating leases, which expire at
various dates through January 2004.
At July 31, 2000, future minimum lease payments under such leases are as
follows:
<TABLE>
<S> <C>
Year ending April 30:
2001................................................... $15,000
2002................................................... 30,000
2003................................................... 30,000
2004................................................... 6,250
-------
$81,250
=======
</TABLE>
Total rent expense for the years ended April 30, 1999 and 2000 and the
quarters ended July 31, 1999 and 2000 was $68,000 and $80,000 and $21,000 and
$52,000, respectively, of which $-0- and $48,482 and $-0- and $24,884,
respectively, was related to related parties.
10. SUPPLEMENTAL CASH FLOW DISCLOSURE
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30, QUARTERS ENDED JULY 31,
---------------------- ------------------------
1999 2000 1999 2000
---------- -------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash payments for:
Interest..................................... $ -- $ -- $ -- $ 28,391
========== ======== ======== ==========
Income taxes................................. $ -- $ 12,195 $ -- $ 3,738
========== ======== ======== ==========
Noncash investing and financing activities:
Common stock issued in connection with the
Cybervision acquisition................... $ -- $375,000 $ -- $ --
========== ======== ======== ==========
Equipment financed with vendor financing,
related party............................. $1,883,697 $ -- $ -- $ --
========== ======== ======== ==========
Equipment financed with capital lease,
related party............................. $ -- $490,293 $ -- $ --
========== ======== ======== ==========
Deferred compensation for unvested options... $ -- $242,552 $ -- $ --
========== ======== ======== ==========
Conversion of promissory note payable and
related accrued interest to equity........ $ -- $615,000 $ -- $ --
========== ======== ======== ==========
Common stock issued in connection with Probit
and IAS acquisitions...................... $ -- $ -- $ -- $ 894,046
========== ======== ======== ==========
Common stock issued in connection with
acquisition of PMAT software.............. $ -- $ -- $ -- $4,930,693
========== ======== ======== ==========
</TABLE>
11. INITIAL PUBLIC OFFERING
On October 17, 2000, the Company filed a registration statement with the
Securities and Exchange Commission to sell shares of its common stock in an
initial public offering.
F-21
<PAGE> 77
------------------------------------------------------
------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY THESE SHARES OF THE COMMON STOCK IN ANY CIRCUMSTANCES UNDER
WHICH THE OFFER OR SOLICITATION IS UNLAWFUL.
UNTIL , 2000 (25 DAYS AFTER COMMENCEMENT OF
THIS OFFERING), ALL DEALERS THAT BUY, SELL OR TRADE IN OUR COMMON SHARES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
[LOGO]
SHARES
INTERCONTINENTAL
TELECOMMUNICATIONS CORP.
COMMON STOCK
PROSPECTUS
JOSEPHTHAL & CO. INC.
, 2000
------------------------------------------------------
------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
<TABLE>
<S> <C>
Registration Fees -- Securities and Exchange Commission..... $ 13,200
Filing Fee -- National Association Securities Dealers..... $ 5,000
Nasdaq National Market Listing Fee........................ $ 40,000
Transfer Agent Fees....................................... $ 5,000
Cost of Printing and Engraving............................ $100,000
Legal Fees and Expenses................................... $200,000
Accounting Fees and Expenses.............................. $200,000
Blue Sky Fees and Expenses................................ $ 10,000
Miscellaneous............................................. $ 22,410
--------
Total............................................. $595,200
========
</TABLE>
---------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 607.0850 of the Florida Business Corporation Act, or FBCA, permits,
in general, a Florida corporation to indemnify any person who was or is a party
to any action or proceeding by reason of the fact that he or she was a director
or officer of the corporation, or served another entity in any capacity at the
request of the corporation, against liability incurred in connection with such
proceeding including the estimated expenses of litigating the proceeding to
conclusion and the expenses actually and reasonably incurred in connection with
the defense or settlement of such proceeding, including any appeal thereof, if
such person acted in good faith for a purpose he or she reasonably believed to
be in, or not opposed to, the best interest of the corporation and, in criminal
actions or proceedings, additionally had no reasonable cause to believe that his
or her conduct was unlawful. Section 607.0850(6) of the FBCA permits the
corporation to pay such costs or expenses in advance of a final disposition of
such action or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay such amount as and to the extent required by
statute. Section 607.0850 of the FBCA provides that the indemnification and
advancement of expense provisions contained in the FBCA shall not be deemed
exclusive of any rights to which a director or officer seeking indemnification
or advancement of expenses may be entitled.
Our amended and restated articles of incorporation provide, in general,
that we shall indemnify, to the fullest extent permitted by law, any and all
persons whom we shall have the power to indemnify under that section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said section. Our amended and restated articles of incorporation
also provide that the indemnification provided for therein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled as a
matter of law or which they may be lawfully granted.
In accordance with that provision of our amended and restated articles of
incorporation, we shall indemnify any officer or director (including officers
and directors serving another corporation, partnership, joint venture, trust, or
other enterprise in any capacity at our request) made, or threatened to be made,
a party to an action or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that he or she was serving in any of those
capacities against judgments, fines, amounts paid in settlement and reasonable
expenses (including attorney's fees) incurred as a result of such action or
proceeding. Indemnification would not be available if a judgment or other final
adjudication adverse to such director or officer establishes that (i) his or her
acts were committed in bad faith or were the result of active and deliberate
dishonesty or (ii) he or she personally gained in fact a financial profit or
other advantage to which he or she was not legally entitled.
II-1
<PAGE> 79
Prior to the completion of the offering, we intend to enter into
indemnification agreements with each of our current directors and officers to
give these directors and officers additional contractual assurances regarding
the scope of the indemnification set forth in our amended and restated articles
of incorporation and bylaws and to provide additional procedural protections. At
present, there is no pending litigation or proceeding involving a director,
officer or employee of ITC regarding which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
We are in the process of obtaining directors' and officers' liability
insurance with $6,000,000 of coverage.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During 1999 and 2000, we issued an aggregate of 9,032,085 common shares and
2,085,760 common shares, respectively, to new and existing shareholders for
aggregate cash proceeds of $1,233,907 and $306,964, respectively. These
securities were issued in reliance of Rule 506 of Regulation D and Section 4(2)
of the Securities Act.
On December 21, 1999, we issued 150,000 common shares as part of the
CyberVision acquisition. These securities were issued in reliance of Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
On April 26, 2000, we issued 147,420 common shares to Millennium Investment
Capital Corp., a corporation incorporated under the laws of the British Virgin
Islands, for cancellation of indebtedness in the aggregate amount of
$600,000.00. The investors were accredited and sophisticated and were provided
with and had access to relevant information concerning our company. These
securities were issued in reliance of Rule 506 of Regulation D and Section 4(2)
of the Securities Act.
On May 11, 2000, we issued 233,333 common shares in connection with the
acquisition of 51% of the outstanding common stock of Probit Technologia
Educacional Ltda. These securities were issued in reliance of Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
On May 31, 2000, we issued 4,914,005 shares of Series A Redeemable
Convertible Preferred Stock to Capital Communications CDPQ Inc., a corporation
incorporated under the laws of Quebec, Canada, for an aggregate consideration of
$20,000,000.35. The investors were accredited and sophisticated and were
provided with and had access to relevant information concerning our company.
These securities were issued in reliance of Rule 506 of Regulation D and Section
4(2) of the Securities Act.
On June 30, 2000 we issued 44,382 common shares in connection with the
acquisition of 51% of the outstanding common stock of Interactive Consultoria e
Desenvolvimiento de Sistemas Ltda. These securities were issued in reliance of
Rule 506 of Regulation D and Section 4(2) of the Securities Act.
On July 1, 2000, we issued 767,677 common shares to Vitech America, Inc. as
consideration for the purchase of software. These securities were issued in
reliance of Rule 506 of Regulation D and Section 4(2) of the Securities Act.
II-2
<PAGE> 80
ITEM 16. EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES.
a. The exhibits constituting part of the Registration Statement are as
follows:
<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C>
(1.1) Form of Underwriting Agreement.*
(3.1) Amended and Restated Articles of Incorporation.
(3.2) Amended and Restated By-Laws of the Company.
(4.1) Specimen of Common Stock Certificate.*
(4.2) Certificate of Designation for the Series A Redeemable
Convertible Preferred Stock.
(5.1) Opinion of Baker & McKenzie concerning legality of shares
being registered pursuant to this Registration Statement.*
(10.1) 1998 Stock Option Plan.(1)*
(10.2) Securities Purchase Agreement dated April 26, 2000, by and
between ITC and Millennium Investment Capital Corp.
(10.3) Investor Rights Agreement dated April 26, 2000, by and
between ITC and Millennium Investment Capital Corp.
(10.4) Subscription Agreement dated May 31, 2000, by and between
ITC and Capital Communications CDPQ Inc.
(10.5) Investor Rights Agreement dated May 31, 2000, by and between
ITC, Georges St. Laurent, Jr., Georges St. Laurent, III,
William St. Laurent and Capital Communications CDPQ Inc.
(10.6) Joint Marketing Agreement dated September 14, 2000 by and
between ITC and Microtec Sistemas Industriae e Comercio
S.A.*
(21) Subsidiaries of the Company.
(23.1) Consent of Independent Certified Public Accountants.
(23.3) Consent of Baker & McKenzie, counsel for ITC, is included in
an opinion filed in Exhibit 5.1.*
(25.1) Power of Attorney (included on the signature page of this
Registration Statement).
(27.1) Financial Data Schedule.*
</TABLE>
---------------
* To be filed by amendment.
(1) Management Compensation Plan or Arrangement
b. Financial Statement Schedules.
Schedule II -- Valuation and Qualifying Accounts.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(2) To provide to the underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to
each purchaser.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officer, and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is,
II-3
<PAGE> 81
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer, or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
(4) That, for the purpose of determining any liability under the
Securities 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 Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
II-4
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Miami, State of Florida on
this 17th day of October, 2000.
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
By: /s/ WILLIAM C. ST. LAURENT
---------------------------------------------
William C. St. Laurent, President
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints William C. St.
Laurent acting alone, his true and lawful attorney-in-fact with the authority to
execute in the name of each such person, any and all amendments (including
without limitation, post-effective amendments) to this Registration Statement on
Form S-1, to sign any and all additional registration statements relating to the
same offering of securities as this Registration Statement that are filed
pursuant to Rule 462 of the Securities Act, and to file such registration
statements with the Securities and Exchange Commission, together with any
exhibits thereto and other exhibits therewith, necessary or advisable to enable
the registrant to comply with the Securities Act, and any rules, regulations and
requirements of the Securities and Exchange Commission in respect thereof, which
amendments may make such other changes in the Registration Statement as the
aforesaid attorney-in-fact executing the same deems appropriate.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----------------
<S> <C> <C>
/s/ MICHAEL E. LAWRENCE Chief Executive Officer October 17, 2000
-----------------------------------------------------
Michael E. Lawrence
/s/ WILLIAM C. ST. LAURENT Director, President, Secretary October 17, 2000
----------------------------------------------------- and Treasurer
William C. St. Laurent
/s/ STEVEN A. EDWARDS Chief Financial Officer October 17, 2000
----------------------------------------------------- (Principal Accounting Officer)
Steven A. Edwards
/s/ GEORGES C. ST. LAURENT, JR Chairman of the Board of October 17, 2000
----------------------------------------------------- Directors
Georges C. St. Laurent, Jr
/s/ JAMES H. BOYLE Director October 17, 2000
-----------------------------------------------------
James H. Boyle
/s/ ADOLPHE M. DESLORIEUX Director October 17, 2000
-----------------------------------------------------
Adolphe M. Deslorieux
/s/ FRANCISCO SUAREZ WARDEN Director October 17, 2000
-----------------------------------------------------
Francisco Suarez Warden
</TABLE>
II-5
<PAGE> 83
INTERCONTINENTAL TELECOMMUNICATIONS CORP.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- ------------------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Period ended April 30, 1999 deducted
from asset accounts:
Valuation allowance for deferred tax
assets.............................. $ -- $357,000 $ -- $ -- $ 357,000
---------- -------- -------- ---- ----------
$ -- $357,000 $ -- $ -- $ 357,000
========== ======== ======== ==== ==========
Year ended April 30, 2000 deducted from
asset accounts:
Allowance for doubtful accounts....... $ -- $115,571 $ -- $ -- $ 115,571
Valuation allowance for deferred tax
assets.............................. 357,000 869,000 -- -- 1,226,000
---------- -------- -------- ---- ----------
$ 357,000 $984,571 $ -- $ -- $1,341,571
========== ======== ======== ==== ==========
Three months ended July 31, 2000
(unaudited):
Deducted from asset accounts:
Allowance for doubtful accounts..... $ 115,571 $ 21,534 $ -- $ -- $ 137,105
Valuation allowance for deferred tax
assets............................ 1,226,000 440,000 -- -- 1,666,000
---------- -------- -------- ---- ----------
$1,341,571 $461,534 $ -- $ -- $1,803,105
========== ======== ======== ==== ==========
</TABLE>
S-1
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C>
(3.1) Amended and Restated Articles of Incorporation.
(3.2) Amended and Restated By-Laws of the Company.
(4.2) Certificate of Designation for the Series A Redeemable
Convertible Preferred Stock.
(10.2) Securities Purchase Agreement dated April 26, 2000, by and
between the Company and Millennium Investment Capital Corp.
(10.3) Investor Rights Agreement dated April 26, 2000, by and
between the Company and Millennium Investment Capital Corp.
(10.4) Subscription Agreement dated May 31, 2000, by and between
the Company and Capital Communications CDPQ, Inc.
(10.5) Investor Rights Agreement dated May 31, 2000, by and between
the Company, Georges St. Laurent, Jr., Georges St. Laurent,
III, William St. Laurent and Capital Communications CDPQ,
Inc.
(21) Subsidiaries of the Company.
(23.1) Consent of Independent Certified Public Accountants
</TABLE>
