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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to ____________
Commission file number 33-25129-LA
CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 84-1097751
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
17100 EL CAMINO REAL
HOUSTON, TEXAS 77058
(Address of Principal Executive Offices) (Zip Code)
281-486-8337
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $.00001 PAR VALUE
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB ____.
State issuer's revenues for its most recent fiscal year: $8,231,602
State the aggregate market value of the voting stock held by non-
affiliates computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days.
The aggregate market value of such stock on March 31, 1997, based on the
average of the bid and asked prices on that date was $57,715,159.
The number of shares of the issuer's common stock outstanding on March 31,
1997 was 30,187,191.
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FORM 10-KSB
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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Page
P A R T I........................................................... 1
Item 1. DESCRIPTION OF BUSINESS................................. 1
Item 2. DESCRIPTION OF PROPERTY................................. 21
Item 3. LEGAL PROCEEDINGS....................................... 22
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS..... 23
PART II............................................................... 23
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................... 23
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION............................................. 24
Item 7. FINANCIAL STATEMENTS.................................... 27
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................... 27
PART III.............................................................. 28
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT.......................................... 28
Item 10. EXECUTIVE COMPENSATION.................................. 32
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................ 32
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......... 34
Item 13. EXHIBITS LIST AND REPORTS ON FORM 8-K................... 36
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P A R T I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE "RISK FACTORS" SECTION OF ITEM 1.
ITEM 1. DESCRIPTION OF BUSINESS
Charter Communications International, Inc. (the "COMPANY"), was
incorporated in Nevada on April 10, 1996, as a wholly owned subsidiary of
Maui Capital Corporation, a Colorado Corporation ("MAUI CAPITAL"), which
incorporated on August 8, 1988. On April 21, 1996, Maui Capital and the
Company merged with the Company being the surviving corporation and
succeeding to all the business, properties, assets and liabilities of Maui
Capital. The purpose of the merger of Maui Capital and the Company was to
change the name and state of incorporation of Maui Capital. Maui Capital had
no significant business or assets prior to September 21, 1995, when it acquired
TOPS Corporation, a Nevada corporation ("TOPS") (TOPS was named Charter
Communications International, Inc., until April 10, 1996, when its name was
changed so that the Company could be formed in Nevada with the same name).
TOPS was acquired by Maui Capital in exchange for the issuance of
5,798,391 shares of common stock, $.00001 par value per share ("COMMON
STOCK"), 550 shares of Series A Preferred Stock, $.01 par value per share
("SERIES A STOCK") and warrants to purchase 854,231 shares of Common Stock.
Each share of Series A Stock was converted into 3,177.135 shares of Common
Stock effective March 8, 1996. At the time of the acquisition, TOPS was the
sole stockholder of Charter Communicaciones Internacionales Grupo, S.A., a
Panama corporation ("CHARTER PANAMA"), which was engaged in developing a
private line telecommunications system in Panama and pursuing licenses to
provide such services in various other Latin American countries. Since the
acquisition of TOPS, the Company (and Maui Capital, its predecessor) has
endeavored to grow both through the development of its existing businesses
and through the acquisition of complementary businesses.
Accordingly, on January 8, 1996, Maui Capital acquired 90% of the
outstanding shares of Phoenix DataNet, Inc., a Texas corporation ("PDN"),
from Phoenix Data Systems, Inc., a Texas corporation ("PDS"), in exchange for
$525,000 cash. PDN is in the business of providing Internet access and a
full range of Internet services to individual and commercial subscribers,
predominately in the Houston, Texas area. On March 21, 1996, the Company
acquired the remaining 10% of the outstanding shares of PDN from Billie C.
Holbert, Jr., in exchange for the issuance of 150,000 shares of Common Stock.
On March 21, 1996, Maui Capital acquired PDS and issued 1,000,000 shares
of Common Stock to the former stockholders of PDS. The Company also granted
piggyback registration rights covering the shares of Common Stock issued in
the transaction to the former shareholders of PDS, including the 150,000
shares issued to Billie C. Holbert, Jr., for the remaining 10% of PDN's
stock. PDS is in the business of designing, installing, modifying and
managing computer networks.
On September 21, 1996, the Company acquired Overlook Communications
International Corporation, a North Carolina corporation ("OCI"), and issued
8,999,960 shares of Common Stock to the former stockholders of OCI. The
Company also granted demand registration rights to certain stockholders in
connection with the acquisition of OCI (See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" for a description of such agreement). OCI is in the
business of reselling long-distance services, providing interactive voice
response services and selling prepaid and post-paid calling cards.
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On October 5, 1996, the Company acquired WorldLink Communications, Inc., a
Georgia corporation ("WORLDLINK"), and issued 1,850,000 shares of Common Stock
to the former stockholders of WorldLink. WorldLink is in the business of
reselling long-distance services and selling prepaid and post-paid calling
cards.
The Company and its subsidiaries provide enhanced telecommunications
products and services, including international private line telecommunications
services, switched voice and data products, Internet access, interactive voice
response, conference calling, enhanced calling cards and call center services,
both domestically and internationally, as well as computer network design,
installation, modification and management. The Company's primary international
focus is in North, Central and South America. Additional information on the
products and services offered by the Company and its subsidiaries is set forth
below.
The Company's principal office is located at 17100 El Camino Real,
Houston, Texas 77058, and its telephone number at such address is (281) 486-
8337.
RECENT DEVELOPMENTS
Subsequent to year end, the Company completed a private placement
offering of its Common Stock. The Company issued 8,008,998 shares at $1 per
share as follows:
Common Stock sold for cash $ 5,426,665
Senior subordinated debt converted to Common Stock 2,175,000
Loans from shareholders converted to Common Stock 324,000
Accrued liabilities converted to Common Stock 50,000
Accounts payable converted to Common Stock 33,333
Total $ 8,008,998
All conversions of stock for liabilities were at the rate of $1 of the
related liability to $1 of Common Stock.
The following summary pro forma balance sheet information gives effect to
the private placement as if it had occurred on December 31, 1996:
As Reported Pro Forma
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Current Assets $ 3,021,620 $ 8,448,285
Total Assets 34,791,603 40,218,268
Current Liabilities 13,375,567 12,968,234
Long-term Liabilities 2,743,293 568,293
Common Stock 242 1,043
Additional Paid-in-Capital 28,302,025 36,310,222
Total Equity 18,672,744 26,681,742
In conjunction with the private placement, a few major shareholders
returned 2,500,000 shares of their shares, including 1,516,964 to be held to
extinguish potential guaranties in conjunction with the OCI and Worldlink
acquisitions, to the Company for no consideration and such shares were retired.
MISSION
The Company's mission is to deliver superior value through innovative
implementation of voice, data, video and Internet technologies. This mission
is accomplished by focusing on customer's needs and implementing appropriate
technologies to deliver solutions to those needs. The Company provides or
intends to provide these solutions throughout the Americas.
POSITIONING
The Company believes that the recent acquisitions have combined companies
with complementary technology, products and services. These capabilities, now
integrated, combine to deliver a unique "solutions oriented" product set that
the Company provides to businesses in North, Central and South America. The
basic product families are as follows:
PRODUCTS AND SERVICES
INTERNET SOLUTIONS: The Company provides a complete array of Internet
services including dedicated and dial up Internet access, virtual web hosting,
web page development, e-mail, web commerce, database management and remote
Internet access. However, the Company focuses on providing defined Internet
applications to businesses instead of simply selling the underlying component
services. When applicable, the Company's Internet Solutions are enhanced
through the addition of telephony applications such as Integrated Voice
Response (IVR), call center services, and 800 services. The Company's enhanced
Internet Solutions include:
CORPORATE WEB PRESENCE - The Corporate Web Presence is a turnkey package
that allows a company to establish a corporate web site that enhances a
company's ability to provide product information, public relations, and human
resource information and job posting. This offering is a complete solution
that not only allows a company to obtain a web presence but one that is both
functional and effective.
VIRTUAL COMMERCE - The Company provides all the necessary tools that a
business needs to sell products and services over the Internet. These
capabilities include web storefront development, secure web transactions,
credit card processing, customer service and call center support, product
inventory and fulfillment. This offering again, goes beyond the piece parts
and includes a complete set of capabilities to solve a customer's virtual
commerce needs.
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VIRTUAL SALES & MARKETING TOOLKITS - The Company has created a template
that integrates Internet and fax store-and-forward technology which allows a
company to support a dispersed sales and marketing organization. The Virtual
Sales & Marketing Toolkit provides a single source for a company to keep sales
position papers, contract precedents, marketing materials, presentations etc.,
that are easily maintained and accessed from anywhere in the world.
INTRANET SOLUTIONS: Intranet services are the implementation of Internet
technologies in a closed company environment to enhance the company's internal
communications capabilities. The Company uses it's internal capabilities and
infrastructure to build these services in a corporate environment, but again
differentiates itself from traditional Intranet providers by incorporating
telephony technology to further enhance and expand the Intranet solution. For
example the Company has developed a travel access card that can be used for
both traditional long distance calling and remote PC access to a company's
Intranet. By integrating Inter/Intranet technology with traditional IVR and
telephony technology the Company believes it is uniquely positioned to deliver
superior Intranet Solutions.
TELECOMMUTING SOLUTIONS: The Company provides a complete Telecommuting
Outsourcing solution. Telecommuting traditionally requires an advanced
integration of telephony and data services. However, most companies that have
deployed telecommuters also discover that there are a vast array of
maintenance, human resource and management issues involved in supporting a
telecommuting program. The Company has developed a complete turnkey offering
that includes the technical and the non-technical aspects of telecommuting in a
single program structured to simplify the telecommuting decision for
appropriate companies. The Company has demonstrated its ability to
successfully implement telecommuting programs with Fortune 500 firms and
strongly believes in the future of this offering.
CONSUMER COMMUNICATIONS SOLUTIONS: Consumer Communications Solutions are
targeted at consumer goods companies that desire to use telecommunications and
Internet technology to deliver or gather data from their customers. These
products are traditionally used in conjunction with marketing campaigns or
large promotional events. In its purest form, this product set offers a
company the ability to allow it's consumers to interface with a database via
the telephone or the Internet. Typical applications include Customer Surveys,
Store or event locator services, and promotional giveaways.
INTERNAL BUSINESS COMMUNICATIONS SOLUTIONS: The Company uses its core
technological capabilities to implement special purpose communications
offerings. The Company does not intend to compete in the traditional long
distance market, but rather in the specialized markets that utilize it
underlying technical capability or infrastructure. These products are sold to
companies to enhance their core communications capability. The offerings
include:
SYSTEMS INTEGRATION: The Company offers solution-based services for
initial design, installation, upgrades and management of computer networks.
The focus is to provide a single source for multi-vendor networking solutions.
The Company provides complete support of all products sold by maintaining
direct manufacturer relations and employing engineers and technicians who are
factory trained and authorized. The Company also specializes in assessing a
customer's needs and making recommendations regarding remote access to the
enterprise network, and/or the Internet. The Company's engineers are
knowledgeable experts in analog, ISDN, and LAN/WAN remote access techniques,
including remote node and remote control for protocols. This capability is a
vital link in the Company's development, installation and support of Latin
America Enterprise Networks requiring voice, data, video, and Internet
services.
INTERNATIONAL PRIVATE LINE (IPL): The Company currently provides or can
provide IPL services in Mexico, Panama, Venezuela, El Salvador and Honduras.
It also has obtained licenses to provide such services and is in the process
of constructing, or intends to construct in the near future, the facilities
to provide such services in Guatemala, Costa Rica, Nicaragua, and Peru. The
Company's licenses for IPL services
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are either "on premise" or country "gateway" stations and are composed of a
satellite earth station located in the service area and an earth station
located in the U.S. Earth stations may be located directly on customer
premises or at local telephone company facilities (with users connected to
the earth station via local lines). In instances where the local Telephone
Company does not have the capability to provide this local "loop," the
Company can provide wireless terrestrial systems to connect to the earth
station and will lease this service to the customer on a monthly basis in
cooperation with the serving telephone company. Generally, the Company will
build the earth station and install the necessary equipment.
CONSUMER PRODUCTS: The Company has used its technological capabilities to
develop a set of consumer products. These offerings include retail packaged
pre-paid calling cards, pre-paid Internet access, traditional consumer Internet
access, and enhanced personal assistance services. The Company sells these
consumer products through distribution channels to the public and through
private label.
SALES, MARKETING AND DISTRIBUTION
The Company has stratified its markets into three general categories -
major accounts, general business and consumer products. The Company has
developed and implemented specific strategies to address each market:
Major Accounts are mid to large businesses, often national or
international in scope, and will be sold to by a direct sales organization
located in six major metropolitan markets in the US (Atlanta, Houston, New
York, Chicago, Los Angeles, and Dallas). This organization will sell directly
to qualified accounts using traditional direct sales methods. This sales
organization represents all of the Company's products but focuses on larger
transactions that deliver total solutions.
General Business consists of small businesses and is sold by a sales
organization in the local market. Today, general business is only pursued in
Atlanta, Houston and various international markets (see international
strategy). This effort is supported through traditional advertising (radio,
print) to generate consumer awareness, and is primarily an inbound telephone
sale.
Consumer Products are sold through distributors or private branding.
Existing distributor networks or large consumer products companies are
identified which can support the distribution of the Company's products. The
products are then sold through these networks to consumers. The distributor
largely dictates the promotional and sales efforts. The Company supports their
efforts with point of sale materials.
The Company is strategically positioned to address the markets for its
products with both direct and distributor based sales organizations. The
Company believes it has a competitive advantage created by its open
architecture product platform and an infrastructure, which supports the quick
development and introduction of new and enhanced product offerings.
Historically, telecommunications networks were implemented in a closed
environment using proprietary hardware and software. These "legacy" systems
were not designed for the rapid deployment of enhanced services, the support of
heterogeneous network elements or adaptation to changing service provider and
subscriber requirements. The Company's platform has been assembled with
flexibility, reliability, and scale-ability as the basis for all development.
It is based on central office technology interfacing in client/server-based
environment. It is this architecture matched with an equally flexible
development organization, which will give the Company's sales organization a
competitive edge.
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INTERNATIONAL STRATEGY
The Company believes that many Latin American countries have
telecommunication infrastructure inadequacies, and as a result offer the
opportunity for the Company to establish and deliver a superior quality
telecommunication alternative and achieve significant market share. The
Company's international telecommunications strategy is to become the preferred
International Private Line (IPL) and Internet carrier in Latin America by
focusing on:
Developing systems in areas where telephone facilities are insufficient.
The Company intends to focus on developing and acquiring licenses in markets
where the populations are greatest and economic/political conditions are
conducive to the economical transmission of private satellite signals.
Typically, Latin American governments will only allow the "privatization" of
PTT's where it is perceived that additional facilities to serve the business
community are needed.
Developing a partnership with the proper government agency or telephone
company authority. In most Latin American countries, the PTT or an
equivalent administrative system exercises near total control of
communications and communications related activities and makes substantially
all decisions relating to the provision of telecommunication services. To be
successful, the Company must obtain the agreement of the proper authorities
and be licensed to offer private international services.
Maintaining a low cost structure to provide customers international
services at affordable prices. For those countries which have inadequate
access to sub-oceanic fiber optic cables, the Company believes that
communication via satellite is the most economical technology currently
available for international telecommunication services.
Making a commitment to system performance and customer service. The
Company intends to differentiate itself from competitors by maintaining high
levels of system performance and customer service and believes that its
responsiveness will minimize customer turnover and provide it with a competitive
advantage.
Adapting to new technologies such as digital compression and other network
management systems. The Company believes it's deployed international network
will have the flexibility to adapt to new technologies, such as digital
compression and DAMA (Demand Assigned, Multiple Access) space segment
management systems, while continuing to maintain its competitive economic
advantage.
As the Company deploys telecommunications structure into the appropriate
international markets, a local sales and support organization is established in
the local market to sell directly to local customers. When appropriate this
organization leverages it's US counterpart to jointly sell international
organizations.
In most foreign countries in which the Company operates,
telecommunications licenses must be held by a corporation organized under the
laws of such country. In Panama, Venezuela, Mexico and Honduras, the Company
has created a corporation in each such country, obtained appropriate licenses
with the assistance of local partners and obtained a majority ownership
position in exchange for the capital required to build out the system. The
Company intends to operate only in Latin American countries where foreign
majority ownership of the license-holding corporation is permitted. In the
case of Venezuela, the Company owns seventy-eight percent of the local
corporation. The remaining twenty-two percent of the stock of the
corporation is convertible into stock of the Company according to a formula
which provides that the Company will issue a number of shares of Common Stock
which, based upon the average market price for the thirty days prior to
conversion, is equal to $500,000 in the first year (assuming certain
financial performance goals are met by such subsidiary); seven times the
first year operating net income times twenty-two percent in the second year;
five times the second year operating net income times
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twenty-two percent in the third year; during the fourth and fifth years of
operation, three times the operating net income of the preceding year
multiplied by twenty-two percent. After the fifth year of operations, the
Company and the minority stockholders are to use their best efforts to
determine an appropriate value for the stock, taking into account, without
limitation, the remaining term of the license, current operating cash flow,
market and competitive factors.
In the case of Honduras, the Company owns all but four of the one thousand
issued and outstanding shares of capital stock, four shares being issued to
four other individual employees or agents of the Company pursuant to the laws
of Honduras requiring a minimum of five stockholders. With respect to the
corporations which have been formed by the Company in Nicaragua and Guatemala,
the Company owns seventy-five percent of the capital stock, with the remaining
twenty-five percent convertible into twenty-five thousand shares of Common
Stock of the Company at the Company's election.
PANAMA LICENSE. The Company has an agreement (the "INTEL AGREEMENT")
with Instituto Nacional de Telecomunicaciones de Panama ("INTEL"), the
national telephone company of the Republic of Panama, pursuant to which it
has constructed a digital teleport to provide IPL services for Panamanian
customers. The Company invoices and collects revenues from customers at
predetermined tariff rates for the services provided and distributes one-half
of its gross IPL revenues to INTEL.
The initial term of the INTEL Agreement is five years from the date
service began for the first customer (January 8, 1996), and will automatically
renew for subsequent one year terms unless terminated in writing twelve months
prior to the expiration of the current term. The INTEL Agreement may be
terminated prior to end of the initial term due to insufficient utilization,
failure to perform or comply with the terms of such agreement, and upon other
usual and customary conditions. In the event of termination, INTEL has the
option to purchase the satellite hub facility from the Company based on a value
determined by two appraisers, one each being appointed by INTEL and the
Company. The option price arrived at by the appraisers is to be determined
based on the following factors: the cost of replacement equipment; gross
revenue for the previous three (3) years; total of the system's current
customers; and the net book value of the facility.
VENEZUELAN LICENSE. The Company has an agreement with Commision
Nacional de Telecomunicaciones ("CONATEL") pursuant to which it has
constructed a digital teleport to provide IPL services for Venezuelan
customers. The term of the contract is for 10 years from March 28, 1997 with
a possible extension for an additional term of 10 years. The Conatel
Agreement may be terminated prior to the end of the initial term for
noncompliance with its provisions. In the event the Agreement is terminated
for any reason, all real estate and equipment may become the property of
Conatel upon the payment to the Company of the value determined by an
independent and expert appraiser selected by mutual agreement of the parties,
which amount must be paid within 1 year of the date of such valuation.
Pursuant to the license, the Company pays Conatel on an annual basis the
equivalent of 1/2 of 1% of gross invoicing for the services provided under
the Agreement.
HONDURAN LICENSE. The Company has an agreement with Honduran
Telecommunications Company ("HONDUTEL") pursuant to which it provides IPL
services in Honduras. The term of the contract is 5 years running from
December 5, 1996, and may be extended for subsequent periods of 1 year. The
contract may be terminated for failure of the parties to abide by the terms
of the contract and a variety of other usual and customary conditions.
Payments under the agreement are graduated depending upon transmission
velocity and commitments for capacity.
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NETWORK FACILITIES
THE INTERNET NETWORK
The Company's network has been designed for reliability, high speed,
efficient routing and low latency. The Company currently supports 6 internet
access points of presence (POPs) in the United States and four in Latin
America. Each node is located in secured facilities or computer rooms that
have 7x24 secured access. Each node has high performance Cisco or Xyplex
routers with multiple redundant Unix based servers on an FDDI ring. Dial in
access facilities are provided via fully managed Motorola modems. Each
facility is backed up by UPS, backup generators, and dual entrance fiber
facilities when available.
The Company operates a 7x24 Network Operation Center in its headquarters
in Houston. This primary location is served by physically diverse diagnostic
circuits to the rest of the Company's backbone. This location is served by a
UPS and an on-site generator. A backup 7x24 NOC runs at the Atlanta
location. The backup NOC is also served by physically diverse diagnostic
circuits and protected by a UPS and an on-site generator.
The Company's experienced NOC Staff has an excellent working
relationship with NOC's of other ISP's and a long standing tradition of
end-to-end trouble resolution. Trouble tickets are traced using a relational
database driven Remedy System.
SATELLITE NETWORK
The Company has implemented an international communications network. The
network is comprised of a series of large mutli-user fixed satellite ground
stations as well as a number of smaller single user on premise satellite ground
stations.
The Company's satellite communications network operates utilizing a star
topology with the Houston facility acting as the primary network control
center. The Houston facility is outfitted with two satellite ground stations.
The first unit is designed to support C-band communication links between
Central/South America and the United States and is composed of a single 6.1
meter antenna with fully redundant communications electronics. The satellite
ground station is equipped with 125 watt redundant amplifiers and is currently
configured for single transponder operation. The facility has been sized to
easily accommodate user requirements up to and including multiple T-1
bandwidth.
The second system installed at the Houston facility is a 6.1 meter Ku-band
ground earth station. The facility is also outfitted with redundant
communications electronics, has been outfitted with 8 watt amplifiers and is
capable of supporting multiple user requirements. This ground station is used
to carry services from the United States to Mexico and is serviced by an
uninterruptible power system. The system has been sized with growth in mind
and can easily be expanded should growth surpass Company projections.
The Company has aligned itself with Metropolitan Fiber Systems ("MFS") and
Southwestern Bell to accommodate extension of its satellite based service to
any office site customer facilities. By the Company's commitment with MFS for
DS3 service, the Company becomes an "On Net" facility and as such will be able
to offer externally competitive terrestrial connections to its US customer
base.
The C-band facility is currently supporting services between the Company's
Panama hub facility, the Company's Caracas shared hub facility, the Margarita
Island single user facility, and the El Salvador shared hub facility. Each of
these remote C-band facilities are equipped similarly to the Houston
facility, although the antenna and amplifier sizes are unique to the
installation location. Antenna and amplifier sizes have been selected based
on detailed and extensive link evaluation.
The Company's Ku-band facility is currently supporting services to a
number of single user on premise earth stations scattered throughout Mexico.
The remote facilities are sized and constructed with the limits of space placed
on us by the customer and the location of the installation.
All of the Company's satellite services are carried over the Solidaridad
satellite system. The Solidaridad system is a Mexican owned and operated
satellite system that offer a very broad coverage area that supports the
Company's stated mission, servicing the Central/South American community with
world class communications services.
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TELEPORT SERVICES
The Company's teleport facility in Panama is comprised of one RSI 9.2
meter C-bank 4 port linear polarized antenna. The antenna is outfitted with
a motor drive system which enables continuous azimuth travel from 216 to 326
degrees and continuous elevation travel from 5 to 90 degrees. This enables
the Company to operate on any linear polarized satellite such as Solidaridad
1 or 2. The antenna has also been outfitted with a step track system in
anticipation of a requirement to operate on an inclined orbit satellite.
The RF system is fully redundant to minimize any interruption in service
due to equipment failure. The uplink side of the system is comprised of two
EF Data synthesized up converters to service on line requirement. They are
protected via an EF Data protection switch and one EF Data synthesized down
converter. The combined output from the converters are fed into a 1:1
redundant MCL 700 watt TWT system. The downlink side of the system is
comprised of two on-line low noise amplifiers, one per polarization, with a
third unit acting as backup. The output from the LNA system is transmitted
to two EF Data synthesized down converts. The on-line down converters are
protected via EF Data protection switch and one synthesized down converter.
The transmit and receive IF is supported by Comstream variable rate modems.
These modems are capable of supporting services compatible with Intelsat IBS
(IESS 309), Intelsat IDR (IESS 308), and closed network Comstream proprietary
traffic.
The complete earth station is serviced by an uninterruptable power system.
This system has been sized with growth in mind and has capacity to support a
second 1:1 redundant HPA system and a total of 70 satellite modems. Primary
power is supplied via Intel's primary power plant that is composed of incoming
power from the local provider, redundant generators, and automatic transfer
switches.
The Company has co-located the earth station with Intel at one of their
international services central office. This arrangement lends itself to ease
of interconnection to Intel's terrestrial network and quick circuit activation.
Through the use of T-1/E-1 cross connection equipment CCI is capable of
providing T-1 access to the Intel network. The Company is also capable of
providing DSO and sub-DSO connections through the use of in place channel bank
equipment.
Through the Company's agreements with the Mexican government it can offer
space segment to support services via Solidaridad 1 or 2 to any locations
covered by either of these satellites.
Through the Company's agreement with Intel, it can offer the Panama
satellite circuit for SCPC, IBS services and IDR services for both domestic and
international destinations. The Company is able to provide local terrestrial
interconnection services from the earth station facility to customer locations
throughout Panama utilizing the existing Intel network. In addition the
Company is able to provide terrestrial facilities to locations that Intel
currently does not support or has no capacity to support new customer
requirements.
ENHANCED VOICE SERVICES
The Company's enhanced voice services are provided via dual Summa 4
switches driven by Unix host integrated with a SQL server backend. IVR
capability is provided using Dialogic technology and again supported with a
SQL backend. These technologies are integrated with the Company's Internet
capability through a combination of dedicated point-to-point and co-located
facilities.
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COMPETITION
The Company operates in extremely competitive service and geographical
markets which are influenced significantly by larger industry participants and
are expected to become more competitive in the future. There are no
substantial barriers to the entry of additional participants into any of the
service or geographical markets in which the Company competes.
TELECOMMUNICATIONS
The Company is seeking international telecommunication licenses in various
foreign countries. The Company faces competition for such licenses from major
international telecommunications entities as well as from local competitors in
each country. If a communications license is obtained, the Company's
international telecommunications operations will face competition from existing
government owned or monopolistic telephone service companies, and from other
operators who receive licenses. The Company may also face significant
potential competition from other communication technologies that are being or
may be developed or perfected in the future. Some of the Company's competitors
have substantially greater financial, marketing, and technical resources than
does the Company. Accordingly, there can be no assurance that the Company will
be able to obtain any additional licenses or that its international
telecommunication operations will be able to compete effectively.
The Company competes with (i) IXCs engaged in the provision of
long-distance access and other long-distance resellers and providers, including
large U.S. carriers, (ii) foreign PTTs, (iii) other marketers of international
long-distance and call reorigination services, (iv) wholesale providers of
international long distance services, (v) alliances for providing wholesale
carrier services, (vi) new entrants to the long distance market such as the
regional telephone operations companies ("RBOCs") in the United States, who
have entered or have announced plans to enter the U.S. interstate long-distance
market pursuant to recent legislation authorizing such entry, and utilities,
and (vii) small resellers and facility-based IXCs. Many of the Company's
competitors are significantly larger and have substantially greater market
presence and financial, technical, operational, marketing and other resources
and experience than the Company.
Because of their close ties to their national regulatory authorities,
foreign PTTs and newly-privatized versions thereof can influence their national
regulatory authorities to the detriment of the Company. With the increasing
privatization of international telecommunications in foreign countries, it is
also possible that new foreign service providers, with close ties to their
national regulatory authorities and customer bases, will enter into competition
with the Company, or that PTTs will become deregulated and gain the pricing
flexibility to compete more effectively with the Company. The ability of a
deregulated PTT to compete on the basis of greater size and resources and
long-standing relationships with customers in its own country could have a
material adverse effect on the Company's business, financial condition or
results of operations.
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The large U.S. long-distance carriers have, in the past, been reluctant to
compete directly with the PTTs. However, there can be no assurance that other
large carriers will not begin to compete in the industry. Because of their
ability to compete on the basis of superior financial and technical resources,
the entry of any large U.S. long-distance carrier into the business could have
a material adverse effect on the Company's business, financial condition or
results of operations.
Competition for customers in the Company's telecommunication markets is
primarily on the basis of price and, to a lesser extent, on the basis of the
type and quality of service offered. Increased competition could force the
Company to reduce its prices and profit margins if the Company's competitors
are able to procure rates or enter into service agreements comparable to or
better than those the Company obtains, or to offer other incentives to existing
and potential customers. Similarly, the Company has no control over the prices
set by its competitors in the long-distance resale carrier-to-carrier market.
The Company could also face significant pricing pressure if it experiences a
decrease in its market share of international long-distance traffic, as the
Company's ability to obtain favorable rates and tariffs depends, in large part,
on the volume of international long-distance call traffic the Company can
generate for third-party IXCs. There is no guarantee that the Company will be
able to maintain the volume of domestic and international long-distance traffic
necessary to obtain favorable rates and tariffs. In addition, the Company is
aware that its ability to market its carrier services depends upon the
existence of spreads between the rates offered by the Company and those offered
by the IXCs with whom it competes as well as those from whom it obtains
service. A decrease in such spreads could have a material adverse effect on
the Company's business, financial condition or results of operations.
INTERNET ACCESS
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, operational, marketing and other resources and experience than the
Company. The Company's Internet access business competes or expects to compete
directly or indirectly with the following categories of companies: (i) other
national and regional commercial Internet access providers; (ii) established
on-line services companies that offer Internet access; (iii) software and
technology companies; (iv) national long-distance telecommunications carriers;
(v) RBOCs; (vi) cable television operators; (vii) nonprofit or educational
Internet service providers; and (viii) newly licensed providers of
spectrum-based wireless data services.
Many of the established on-line services companies and telecommunications
companies have begun to offer or announced plans to offer expanded Internet
access services. The Company expects that all of the major on-line services
companies will eventually compete fully in the Internet access market. In
addition, the Company believes that new competitors, including large computer
hardware and software, cable, media, wireless, and wireline telecommunications
companies such as the RBOCs, will enter the Internet access market, resulting
in even greater competition for the Company. The ability of these competitors
or others to bundle services and products not offered by the Company with
Internet access services could place the Company at a significant competitive
disadvantage. In addition, certain of the Company's competitors that are
telecommunications companies may be able to offer customers reduced
communications charges in connection with their Internet access services or
other incentives, reducing the overall cost of their Internet access solution
and increasing price pressures on the Company. This price competition could
reduce the average selling price of the Company's services. In addition,
increased competition for new subscribers could result in increased sales and
marketing expenses and related subscriber acquisition costs, which could
materially adversely affect the Company's profitability. There can be no
assurance that the Company will be able to offset the effects of any such price
reductions or incentives with an increase in the number of its customers,
higher revenue from enhanced services, cost reductions or otherwise.
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Competition is also expected to increase in overseas markets, where
Internet access services are just beginning to be introduced. There can be no
assurance that the Company will be able to increase its presence in the
overseas markets it presently serves, or to enter other overseas markets.
There can be no assurance that the Company will be able to obtain the capital
required to finance such continued expansion. In addition, there can be no
assurance that the Company will be able to obtain the permits and operating
licenses required for it to operate, hire and train employees or market, sell
and deliver services in foreign countries. Further, entry into foreign markets
will result in competition from companies that may have long-standing
relationships with or possess a better understanding of their local markets,
regulatory authorities, customers and suppliers. There can be no assurance
that the Company can obtain similar levels of local knowledge, and failure to
obtain that knowledge could place the Company at a serious competitive
disadvantage. To the extent the ability to provide access to locations and
services overseas becomes a competitive advantage in the Internet access
industry, failure of the Company to penetrate overseas markets or to increase
its presence in the overseas markets it presently serves may result in the
Company being at a competitive disadvantage relative to other Internet access
providers.
The Company believes that its ability to compete successfully in the
Internet access market depends upon a number of factors, including: market
presence; the adequacy of the Company's customer support services; the
capacity, reliability and security of its network infrastructure; the ease of
access to and navigation of the Internet; the pricing policies of its
competitors and suppliers; regulatory price requirements for interconnection to
and use of existing local exchange networks by Internet services; the timing of
introductions of new products and services by the Company and its competitors;
the Company's ability to support existing and emerging industry standards; and
trends within the industry as well as the general economy. There can be no
assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities to continue to compete
successfully in the Internet access market.
LICENSES
A key objective of the Company, since its formation, has been to obtain
licenses and concessions in countries in Latin America to provide
telecommunications services. The Company has been successful in negotiating
and consummating the license agreements described below in Central and South
America.
PANAMA. Satellite license granted December, 1995 as a joint venture with
INTEL. The Company is authorized to provide international carrier voice and
data via the Solidaridad Satellite system. The Company was granted a separate
license in December, 1995 by INTEL to provide Internet services retail and
wholesale within Panama. These satellite licenses permit the Company to
provide "other communications services" which may be agreed on by the parties.
HONDURAS. Communications license to provide "on premise" authorized earth
stations, issued December 5, 1995 by HONDUTEL for private line and data
services. Pending final approval before year end, the Company has requested a
license to establish teleports for multiple users.
EL SALVADOR. Satellite license issued by ANATEL July 10, 1996 to provide
"on premise" private satellite earth stations using the Solidaridad Satellite
system.
GUATEMALA. The Company has secured two licenses. The first, issued by
GUATEL August 12, 1996 approves the Company to provide Internet services. The
second approved license is to provide satellite and teleport operations
effective February 1, 1997.
COSTA RICA. The Company has been approved by RACSA to provide "on premise"
private satellite earth stations using the Solidaridad Satellite system.
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NICARAGUA. Applications have been submitted for teleport and Internet
services. The approval for each of these licenses should be received during
1997.
MEXICO. The Company signed agreements with TELECOMM de Mexico on July
15, 1995 which permit it to provide satellite services within Mexico and for
complete use of the Mexican Solidaridad satellite system.
VENEZUELA. The Company was fully authorized by CONATEL on April 18, 1996
to provide voice, data, and video point to point and point to multipoint
services throughout Venezuela and internationally. The Company also received
a concession from CONATEL on July 19, 1996 to offer domestic and
international access to databases for offering enhanced services such as
Internet services, E-Mail, etc.
PERU. The Company has received a license from Telefonica de Espana on
October 17, 1996 to provide satellite communications and from OSIPTEL October
17, 1996 to provide Internet services.
The Company is actively pursuing expanded licensing authority in the
countries mentioned above and has licensees and concessions pending with
several additional foreign governments. Additionally, on April 24, 1995, the
Company was licensed by the United States Federal Communication Commission as
an international facilities based carrier.
REGULATION
TELECOMMUNICATIONS
While the domestic interstate long-distance business is generally not
subject to substantial regulation, domestic intrastate service is subject to
regulation that varies by state and can be substantial. The international long-
distance business is subject to the jurisdiction of foreign governments, some
of which limit or prohibit the Company's services. Local laws and regulations
differ significantly among the foreign jurisdictions in which the Company
operates, and the interpretation and enforcement of such laws and regulations
vary and are often based on the informal views of the local government
ministries which, in some cases, are subject to influence by the local PTTs.
Accordingly, in certain of the Company's principal existing and target markets,
there are laws and regulations that either prohibit or limit, or could be used
to prohibit or limit, certain services the Company markets. The Company
provides its services to the maximum extent it believes permissible under
applicable local laws and regulations and the licenses it has obtained. There
can be no assurance that a portion of the services the Company markets and
provides will not be or will not continue to be prohibited in certain
jurisdictions.
There can be no assurance that the Company has accurately predicted or
will accurately predict the interpretation of applicable laws and regulations
or regulatory and enforcement trends in state, federal and foreign
jurisdictions or will be found to be in compliance with all such laws and
regulations. Failure
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to predict accurately the enforcement of applicable laws and regulations in
particular jurisdictions, or incorrect interpretation of applicable laws and
regulations, could cause the Company to lose, or be unable to obtain,
regulatory approvals necessary for it to be able to provide certain of its
services in such jurisdictions or to use certain of its transmission methods
and could have monetary penalties imposed against the Company that could be
significant.
The Telecommunications Act of 1996 (the "1996 Telecommunications Act")
substantially alters the regulatory framework for the telecommunications
industry for domestic and international telecommunications services. The
Company cannot predict the ultimate effects of this legislation or the outcome
of the FCC rulemakings required by the 1996 Telecommunications Act. The
legislation does not impose substantial regulatory burdens on the Company's
international long-distance, Internet access or domestic interstate
telecommunications operations. However, depending on the outcome of FCC
rulemakings required by the 1996 Telecommunications Act, the Company could be
subjected to additional regulatory requirements, including that it contribute
some portion of its telecommunications revenues to subsidy mechanisms for
universal service. In addition, the legislation could result in increased
competition and affect interconnections and costs. Although the Company does
not believe that these changes will have a material effect on its business, no
assurance can be given at this time regarding the extent or impact of such
changes.
The regulatory framework in certain geographic regions in which the
Company operates is briefly discussed below.
UNITED STATES
The Company provides both telecommunications and information services.
The terms and conditions under which the Company provides its services are
potentially subject to regulation by the state and federal government agencies.
With regard to the Company's domestic telecommunications services, federal laws
and FCC regulations generally apply to interstate telecommunications, while
state regulatory authorities generally have jurisdiction over
telecommunications that originate and terminate within the same state.
The Telecommunications Act of 1996, will allow local exchange carriers,
including RBOC's, to provide inter-LATA long distance service and also grants
the FCC the authority to deregulate other aspects of the telecommunications
industry. The Company is classified by the FCC as a non-dominant carrier for
its common carrier telecommunications services. The Company has applied for
and received all necessary authority from the FCC to provide international
telecommunications service. The FCC reserves the right to condition, modify,
or revoke such international authority for violations of the Federal
Communications Act or its rules.
The FCC and the state commissions have jurisdiction to act upon complaints
against any common carrier for failure to comply with its statutory obligations.
If the FCC or state regulators find that the Company was engaging in activities
that required authorizations which the Company currently does not hold or
violated the regulatory requirements established by the relevant commissions,
the FCC or state regulators could impose financial penalties and order the
Company to comply with the applicable regulations or cease doing business.
Such penalties or action could have a material adverse effect on the Company's
business, financial condition or results of operations.
As a telecommunications carrier, the Company will likely be required to
contribute to universal service funds established by the FCC, the states or
both. The FCC and the states are in the process of determining what
universal service contribution requirements to adopt. Current proposals to
change the universal service support system do not entail the imposition of
universal services fees on enhanced service
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providers. However, there can be no guarantee that such fees will not be
assessed in the future. Similarly, individual states may determine that
enhanced services providers should be required to contribute to state
universal service funding mechanisms.
Moreover, information service providers traditionally have been treated
by the FCC as providing an "enhanced" computer processing service rather than
a "basic" telecommunications transmission service and, as a result, were
thought to be beyond the FCC's regulatory authority. A large portion of the
Company's business involves such unregulated enhanced services. Although the
1996 Act continues to distinguish between unregulated information or enhanced
and regulated telecommunications or basic services, the changes made by the
1996 Act may have important implications for the providers of unregulated
enhanced services.
The intrastate long distance telecommunications operations continue to
be subject to various state laws and regulations, including prior
certification, notification and registration requirements. In certain
states, prior regulatory approval may be required for changes in control of
telecommunications operations. The Company is currently subject to varying
levels of regulation in the states in which it provides "1+" and card
services (which are both generally considered "1+" services by the states).
The vast majority of states require the Company to apply for certification to
provide telecommunications services, or at least register or to be found
exempt from regulation, before commencing intrastate service. The vast
majority of the states require the Company to file and maintain detailed
tariffs listing rates for intrastate service. Many states also impose
various reporting requirements and/or require prior approval for transfers of
control of certified carriers, assignments of carrier assets, including
customer bases, carrier stock offerings and incurrence by carriers by
significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and/or the rules regulations
and policies of the state regulatory authorities. Fines and other penalties,
including the return of all monies received for intrastate traffic from
residents of a state, may be imposed for such violations.
The Company has made the filings and taken the actions it believes are
necessary to become certified or tariffed to provide intrastate long distance
and card services to customers throughout the United States except for Hawaii
and Alaska. The Company has received authorization to provide intrastate
long distance and card services in 44 states and the District of Columbia and
has applications pending in 4 states.
The Company uses LEC networks to connect its Internet customers to its
POPs. Under current federal and state regulations, the Company and its
Internet customers pay no charges for this use of the LECs' networks other
than the flat-rate, monthly service charges that apply to basic telephone
service. The LECs have asked the FCC to change its rules and require
Internet access providers to pay additional, per minute charges for their use
of local networks. Per minute access charges could significantly increase
the Company's cost of doing business and could, therefore, have a material
adverse effect on the Company's business, financial condition or results of
operations. The FCC is currently considering whether to propose such rule
changes.
OTHER OVERSEAS MARKETS
The Company is subject to the regulatory regimes in each of the countries
in which it conducts business. Local regulations range from permissive to
restrictive, depending upon the country.
INTERNET
Data network access providers are generally not regulated under the laws
and regulations governing the telecommunications industry. Accordingly, except
for regulations governing the ability of
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the Company to disclose the contents of communications by its customers, no
state or federal regulations currently exists pertaining to the pricing,
service characteristics or capabilities, geographic distribution or quality
control features of Internet access services. The Company cannot predict the
impact that future regulation or regulatory changes, if any, may have on its
Internet access business.
The 1996 Telecommunications Act imposes criminal liability on persons
sending or displaying in a manner available to minors indecent material on an
interactive computer service such as the Internet. The 1996 Telecommunications
Act also imposes criminal liability on an entity knowingly permitting facilities
under its control to be used for such activities. Entities solely providing
access to facilities not under their control are exempted from liability, as are
service providers that take good faith, reasonable, effective and appropriate
actions to restrict access by minors to the prohibited communications. The
constitutionality of these provisions has been successfully challenged in
lower federal courts and is now before the U.S. Supreme Court; the final
interpretation and enforcement of these provisions is uncertain. The Act may
decrease demand for Internet access, chill the development of Internet content,
or have other adverse effects on Internet access providers such as the Company.
In addition, in light of the uncertainty attached to interpretation and
application of this law, there can be no assurances that the Company would
not have to modify its operations to comply with the statute, including
prohibiting users from maintaining home pages on the WWW.
As of March 28, 1997, the Company had 133 full-time employees and 10 part-
time employees. None of the Company's employees is represented by a labor union
or covered by a collective bargaining agreement and the Company has never
experienced a work stoppage. The Company believes that its relations with its
employees are good.
RISK FACTORS
This Report on Form 10-KSB contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such forward-looking statements include,
among other things, the Company's plans to implement its growth strategy,
improve its financial performance, expand its infrastructure, develop new
products and services, expand its sales force, expand its customer base and
enter international markets. Such forward-looking statements also include the
Company's expectations concerning factors affecting the markets for its
products, such as demand for long-distance telecommunications and Internet
access. Actual results could differ from those projected in any
forward-looking statements for the reasons detailed in the "Risk Factors" below
as well as in other sections of this Report on Form 10-K. The forward-looking
statements are made as of the date of this Report on Form 10-K, and the Company
assumes no obligation to update the forward-looking statements, or to update
the reasons why actual results could differ from those projected in the
forward-looking statements.
LIMITED OPERATING HISTORY; OPERATING LOSSES
The Company has only a limited history upon which an evaluation of it
and its prospects can be based. Although the Company has experienced
substantial revenue growth since the inception of its business in April 1995,
it has incurred losses of totalling approximately $9,629,520 as of December
31, 1996. As of December 31, 1996, the Company had stockholder's equity of
$18,672,747. The Company's current focus is on increasing its customer and
subscriber bases, and the Company continues to hire additional personnel and
to increase its expenses related to product development, marketing, network
infrastructure, technical resources and customer support. As a result, the
Company expects that it will continue to incur net losses at least through
the end of the third quarter of 1997. There can be no assurance that revenue
growth will continue or that the Company will in the future achieve or
sustain profitability on either a quarterly or annual basis.
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The Company may implement its strategy to grow its customer and subscriber
bases through methods that may result in increases in costs as a percentage of
revenues, such as expansions of its promotional programs and implementation of
new pricing programs. In addition, an acceleration in the growth of the
Company's subscriber and customer bases or changes in usage patterns among
subscribers may also increase costs as a percentage of revenues. Consequently,
there can be no assurance that the Company's operating margins will not be
adversely affected in the future by these strategies or events.
NEED FOR ADDITIONAL CAPITAL TO FINANCE GROWTH AND CAPITAL REQUIREMENTS
The Company must continue to enhance and expand its network in order to
maintain its competitive position and continue to meet the increasing demands
for service quality, availability and competitive pricing. The Company's
ability to grow depends, in part, on its ability to expand its operations
through the establishment of new POP's and earth stations, each of which
requires significant advance capital equipment expenditures as well as advance
expenditures and commitments for leased telephone company facilities and
circuits and advertising. The Company will need to raise additional capital
from equity or debt sources to fund its anticipated development. There can be
no assurance that the Company will be able to raise such capital on favorable
terms or at all. If the Company is unable to obtain such additional capital,
the Company may be required to reduce the scope of its anticipated expansion,
which could have a material adverse effect on the Company's business, financial
condition or results of operations and its ability to compete.
RISKS OF GROWTH AND EXPANSION
The number of the Company's employees has grown rapidly and several
members of the Company's current management team have joined the Company
recently. The Company's growth has placed, and is expected to continue to
place, a significant strain on the Company's management, administrative,
operational, financial and technical resources and increased demands on its
systems and controls. The Company believes that it will need, both in the
short term and the long term, to hire additional qualified administrative
management personnel in the accounting and finance areas to manage its
financial control systems. In addition, there can be no assurance that the
Company's operating and financial control systems, infrastructure and existing
facilities will be adequate to support the Company's future operations or
maintain and effectively monitor future growth. Failure to manage the
Company's growth properly could have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company plans to build additional points-of-presence ("POPs"). There
can be no assurance that the Company will be able to add service in new cities
at the rate presently planned by it. In addition, increases in the Internet
subscriber base will result in additional demands on its customer support,
sales, marketing, administrative and technical resources and network
infrastructure. Increases in the Company's telecommunications customer base
will also produce increased demands on its sales, marketing and administrative
resources, as well as on its engineering resources and on its switching and
routing capabilities. The Company anticipates that its continued growth will
require it to recruit and hire a substantial number of new managerial,
technical and sales and marketing personnel. The inability to continue to
upgrade the networking systems of the operation and financial control systems,
the inability to recruit and hire necessary personnel or the emergence of
unexpected expansion difficulties could have a material adverse effect on the
Company's business, financial condition or results of operations.
Demands on the Company's network infrastructure and technical staff and
resources have grown rapidly with the Company's expanding customer base, and
the Company has in the past experienced difficulties satisfying the requests
for its Internet access and telecommunications services. The Company expects
to experience even greater strain on its billing and operational systems as it
develops, operates and maintains its network. There can be no assurance that
the Company's finance and technical staff will be adequate to facilitate the
Company's growth. The Company believes that its ability to provide timely
access for subscribers and adequate customer support services will largely
depend upon the Company's ability to attract, identify, train, integrate and
retain qualified personnel. There can be no assurance that the Company will be
able to do this. A failure to effectively manage its customer base and reduce
its subscriber cancellation rate and could therefore have a material adverse
effect on the Company's business, financial condition or results of operations.
DEPENDENCE ON KEY PERSONNEL; NEED TO HIRE ADDITIONAL QUALIFIED PERSONNEL
The Company is highly dependent on the technical and management skills of
its key employees, including technical, sales, marketing, financial and
executive personnel, and on its ability to identify, hire and retain additional
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to retain existing personnel or
identify or hire additional personnel. In
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addition, the Company is highly dependent on the services of Stephen E.
Raville, Chairman of the Board; David G. Olson, Chief Executive Officer;
William C. Comee; and Patrick E. Delaney, Chief Financial Officer. The loss
of the services of any of them could have a material adverse effect on the
Company's business, financial condition or results of operations.
SHARES AVAILABLE FOR FUTURE SALE
The Company has financed its operations and acquisitions principally
through the issuance of securities in the "private placements" exempt from
registration under federal and applicable state securities laws. As a
consequence, approximately ninety percent (90%) of the Company's issued and
outstanding common stock has been issued as "restricted securities" which
cannot be resold except in compliance with similar exemptions from federal and
applicable state securities laws. Under Rule 144 as currently in effect,
restricted securities are generally available for public resale after such
securities have been held by the purchasers thereof for a period of two years;
however the Securities and Exchange Commission has amended Rule 144 effective
April 29, 1997, to provide for the resale of such securities after one year.
After the expiration of the one year holding period, such securities may be
sold in "broker's transactions" provided that certain requirements are met and
that the sales by a holder of such securities during any three month period
do not exceed the greater of one percent (1%) of the then issued and
outstanding shares of the issuer or the average weekly trading volume of such
shares in the over-the counter market during the four calendar weeks preceding
the date on which a notice of such sale is sent to the Securities and Exchange
Commission. Under the new rules, at the end of two years, persons not
"affiliated" with the issuer may sell restricted securities without regard to
the volume limitations imposed by Rule 144. Persons "affiliated" with the issuer
are persons deemed to be in control of the issuer, including executive officers,
directors and ten percent or greater shareholders; such persons may sell shares
only in compliance with the requirements of Rule 144, including the volume
limitations imposed thereby, regardless of the length of time such securities
have been held. Most of the Common Stock of the Company will be available for
public sale within the next twelve months. The large numbers of the Company's
shares which will become available for public sale in the near future, along
with the demand and piggyback registration rights granted by the Company
(described elsewhere herein) create the possibility of volatility in the market
for the Company's stock and the possibility of adverse effects on the prevailing
market price of the Company's stock.
DEPENDENCE ON TECHNOLOGICAL DEVELOPMENT
The markets the Company serves are characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent
new service and product introductions. There can be no assurance that the
Company can successfully identify new service opportunities and develop and
bring new products and services to market in a timely and cost-effective
manner, or that products, services or technologies developed by others will
not render the Company's products, services or technologies noncompetitive or
obsolete. In addition, there can be no assurance that product or service
developments or enhancements introduced by the Company will achieve or
sustain market acceptance or be able to effectively address the compatibility
and inoperability issues raised by technological changes or new industry
standards.
The Company is also at risk to fundamental changes in the way Internet
access services are delivered. Currently, Internet services are accessed
primarily by computers through telephone lines. However, several companies
have recently introduced, on an experimental basis, delivery of Internet access
services through cable television lines. If the Internet becomes accessible by
cable modem, screen-based telephones, television or other consumer electronic
devices, or customer requirements change the way Internet access is provided,
the Company will need to develop new technology or modify its existing
technology to accommodate these developments. Required technological advances
by the Company as the industry evolves could include compression, full motion
video, and integration of video, voice, data and graphics. The Company's
pursuit of these technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in
adapting its Internet service business to alternate access devices and
conduits.
The Company's success is dependent in part upon its ability to enhance
existing products and services and to develop new products and services that
meet changing customer requirements on a timely and cost-effective basis.
There can be no assurance that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In addition, there can be no assurance that licenses for
any intellectual property that might be required for the Company's services or
products would be available on reasonable terms if at all.
DEPENDENCE ON SUPPLIERS
The Company is dependent on third party suppliers of hardware and network
connectivity for many of its products and services and generally does not have
long-term contracts with suppliers. Certain of these suppliers are or may
become competitors of the Company, and such suppliers are not subject to
restrictions upon their ability to compete with the Company. To the extent
that any of these suppliers change their pricing structure or terminate
service, as did Sprint in December 1996, the Company may be adversely affected.
The Company is dependent upon third party providers which are the primary
providers to the Company of data communications facilities and capacity and
lease to the Company physical space for switches, modems and other equipment.
If these suppliers are unable to expand their networks or unwilling to provide
or expand their current level of service to the Company in the future, the
Company's operations could be adversely affected.
The Company has from time to time experienced delays in the receipt of
network access and telecommunications services. In addition, the Company has
also from time to time experienced delays
17
<PAGE>
in the receipt of certain hardware components. A failure by a supplier to
deliver quality services or products on a timely basis, or the inability to
develop alternative sources if and as required, could result in delays which
could have a material adverse effect on the Company. In addition, the
Company maintains relationships with certain equipment suppliers in the
design of products which they sell to the Company. The Company's remedies
against suppliers who fail to deliver products on a timely basis are limited,
in many cases, by practical considerations relating to the Company's desire
to maintain relationships with the suppliers. As the Company's suppliers
revise and upgrade the technology of their equipment, the Company may
encounter difficulties in integrating the new technology into its network.
INTERNATIONAL EXPANSION
The Company's strategy includes expansion of its business into
international markets. There can be no assurance that the Company will be able
to obtain the permits and operating license, if any are required, necessary for
it to operate, to hire and train employees or to market, sell and deliver high
quality services in these markets. In many countries, the Company may need to
enter into a joint venture or other strategic relationship with one or more
third parties in order to successfully conduct its operations. There can be no
assurance that such factors will not have a material adverse effect on the
Company's future international operations and, consequently, on the Company's
business, financial condition or results of operations.
NEW AND UNCERTAIN MARKET
The market for Internet connectivity services and related software
products is in an early stage of growth. Since this market is relatively new
and because current and future competitors are likely to introduce Internet
connectivity and/or online services and products, it is difficult to predict
the rate at which the market will grow or at which new or increased connection
will result in market saturation. The novelty of the market for Internet
access services may also adversely affect the Company's ability to retain new
customers, as customers unfamiliar with the Internet may be more likely to
discontinue the Company's services after an initial trial period than other
subscribers. If demand for Internet services fails to grow, grows more slowly
than anticipated, or becomes saturated with competitors, the Company's
business, operating results and financial condition will be adversely affected.
To continue to realize customer growth in all its markets, the Company
must continue to replace terminating customers and attract additional
customers. However, the sales and marketing expenses and acquisition costs
associated with attracting new customers are substantial. Accordingly, the
Company's ability to improve operating margins will depend in part on the
Company's ability to retain its customers. The Company continues to invest
significant resources in its telecommunications infrastructure and customer
support resources in connection with all its businesses. There can be no
assurance that the Company's investments in telecommunications infrastructure
and customer support capabilities will improve customer retention. Since the
Company's markets are new and the utility of available service is not well
understood by new and potential customers, the Company is unable to predict
future customer retention rates.
RISK OF SYSTEM FAILURE
The success of the Company is largely dependent upon its ability to
deliver high quality, uninterrupted access to the Internet and other
telecommunication services. Any system failure that causes interruptions in
the Company's operations could have a material adverse effect on the Company.
The Company has experienced failure relating to individual POP's and the
Company's customers have experienced difficulties in accessing, and
maintaining connection to the Internet. The backbone of the Company's
network, in addition to the Company's overall telecommunications and Internet
network, is
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<PAGE>
currently leased from certain suppliers, such as MCI, Sprint and Metropolitan
Fiber Systems. If these suppliers are unable to expand their networks or are
unwilling to provide or expand their current level of service to the Company
in the future, the Company's operations could be adversely affected. As the
Company attempts to expand its network and data traffic grows, there will be
increased stress on network hardware and traffic management systems.
However, there can be no assurance that the Company will not experience
failures relating to individual POP's or even failure of the entire network.
The Company's operations also are dependent on its ability to successfully
expand its network and integrate new and emerging technologies and equipment
into its network, which are likely to increase the risk of system failure and
cause unforeseen strains upon the network. The Company attempts to minimize
customer inconvenience in the event of a system disruption by high quality
services and redundancy. However, significant or prolonged system failures,
or difficulties for subscribers in accessing, and maintaining connection with
the Internet could damage the reputation of the Company and result in the
loss of subscribers. Such damage or losses could have a material adverse
effect on the Company's ability to obtain new subscribers and on the
Company's business, financial condition or results of operations.
The Company's operations are dependent on its ability to protect its
software and hardware against damage from fire, earthquake, power loss,
telecommunications failure, natural disaster and similar events. A significant
portion of the Company's computer equipment is located at its facilities in
Houston, Texas. The Company's switches and other telephone equipment are
located in Houston, Panama City, Panama, Caracas, Venezuela and Atlanta,
Georgia. Any damage or failure that causes interruptions in the Company's
operations could have a material adverse effect on the Company's business and
results of operations. While the Company and its subsidiaries carry some
property and business interruption insurance, such coverage may not be adequate
to compensate the Company for all losses that may occur.
SECURITY RISKS
Despite the implementation of network security measures by the Company,
such as limiting physical and network access to its routers, its
telecommunications infrastructure is vulnerable to computer viruses,
break-ins and similar disruptive problems caused by its customers or other
Internet users. Computer viruses, break-ins or other problems caused by
third parties could lead to interruption, delays or cessation in service to
not only the Company's Internet customers, but also the Company's
telecommunication users. Furthermore, such inappropriate use of the voice
and data systems by third parties could also potentially jeopardize the
security of confidential information stored in the computer systems of the
Company's customers and other parties which may deter potential subscribers.
Persistent security problems continue to plague public and private data
networks. Recent break-ins reported in the press and otherwise have reached
computers connected to the Internet at major corporations and Internet access
providers and have included incidents involving hackers by-passing fire-walls
by posing as trusted computers and involving the theft of information.
Alleviating problems caused by computer viruses, break-ins or other problems
caused by third parties may require significant expenditures of capital and
resources by the Company, which could have a material adverse effect on the
Company. Moreover, until more comprehensive security technologies are
developed, the security and privacy concerns of existing and potential
customers may inhibit the growth of the Internet service industry in general
and the Company's customer base and revenues in particular.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK
Internet service providers face potential liability of uncertain scope for
the actions of subscribers and others using their systems, including liability
for infringement of intellectual property rights, rights of publicity,
defamation, libel and criminal activity under the laws of the U.S. and foreign
jurisdictions. For example, an action against Prodigy alleging libel and
negligence in connection with an electronic message posted by a Prodigy
subscriber through Prodigy's Internet access system presents the potential
19
<PAGE>
for increased focus and attempts to impose liability upon Internet service
providers for information, messages and other materials disseminated across
and through their systems. The Company carries errors and omissions
insurance; however, such insurance may not be adequate to compensate the
Company for all liability that may be imposed. Any imposition of liability
in excess of the Company's coverage could have a material adverse effect on
the Company. In addition, recent legislative enactments and pending
legislative proposals aimed at limiting the use of the Internet to transmit
indecent or pornographic materials could, depending upon their interpretation
and application, result in significant potential liability to Internet access
and service providers including the Company, as well as additional costs and
technological challenges in complying with any statutory or regulatory
requirements imposed by such legislation.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of a variety of factors,
some of which are outside the Company's control. These factors include general
economic conditions, acceptance and use of the Internet, user demand for long-
distance telecommunication services, capital expenditures and other costs
relating to the expansion of operations, the timing of new product
announcements by the Company or its competitors, changes in pricing strategies
by the Company or its competitors, market availability and acceptance of new
and enhanced versions of the Company's or its competitors' products and
services and the rates of new subscriber and customer acquisition and
retention. These factors could also have a material adverse effect on the
Company's annual results of operation and financial condition.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock may be highly volatile.
The "public float" of the Company's Common Stock is a small percentage of the
total issued and outstanding shares of Common Stock and substantial numbers of
shares have been subject to restrictions on transfer which will terminate in
the near future. Factors such as variations in the Company's revenue, earnings
and cash flow and announcements of new service offerings, technological
innovations or price reductions by the Company, its competitors or providers or
alternative services could cause the market price of the Common Stock to
fluctuate substantially. In addition, the stock markets recently have
experienced significant price and volume fluctuations that particularly have
affected companies in the technology sector and resulted in changes in the
market price of the stocks of many companies that have not been directly
related to the operating performance of those companies.
20
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ABILITY OF MANAGEMENT TO DICTATE CORPORATE POLICY AND THE COMPOSITION OF
THE BOARD OF DIRECTORS
Management and certain members of the Board of Directors of the Company
own or control, directly or indirectly, approximately one-third of the issued
and outstanding shares of the Common Stock of the Company. The Articles of
Incorporation and Bylaws of the Company provide that: (1) the presence of a
majority of the shareholders eligible to vote is required to constitute a
quorum at shareholders' meetings; (2) the vote of the holders of a majority
of the shares present at a meeting where a quorum is constituted is required
to adopt any resolution, unless a greater percentage is required by statute,
in which case a majority of the outstanding shares will be required; (3)
shareholder action may be taken by written consent, without prior notice,
signed by the holder(s) of the number of shares necessary to approve such
action; and (4) voting is noncumulative. As a consequence of the
concentrations of stock ownership in the hands of such persons, they have the
ability to significantly influence corporate policy, the persons elected to
the Board of Directors of the Company and may be able to block certain
corporate actions.
NO DIVIDENDS
The Company does not anticipate that it will pay any dividends in the
foreseeable future but plans to reinvest in the Company's business any funds
which might otherwise be available for the payment of dividends. The payment
of dividends out of legally available funds thereafter, if such funds are
available, will be at the discretion of the Company's Board of Directors.
21
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company has offices its principal offices in Houston, Texas and
Atlanta, Georgia. The Company leases approximately 10,000 square feet of
office space at 17100 El Camino Real, Houston, Texas 77058, from a company
owned by Billie C. Holbert, Jr., a former director and officer of the Company.
The lease is for an initial term of five years and expires on June 30, 2001,
unless the Company exercises its contractual right to renew the lease for two
additional terms of five years each. The monthly rental under the lease is
currently $9,800.
The Company has office and telecommunication operations located in Atlanta
and leases approximately 11,500 square feet of office space at 2839 Paces Ferry
Road, Suites 500 and 250, Atlanta, Georgia 30339. The term of the lease
commenced on October 1, 1995 and continues for sixty months, expiring September
30, 2000 with a base rent of $18,267.63 per month.
The Company has additional office space of approximately 5,600 square feet
leased in Atlanta which has been subleased as of May 1, 1997 to a third party.
The office space is located at 4360 Chamblee-Dunwoody Road, Suite 400, Atlanta,
Georgia. The lease has monthly rent of $8,368.50 and a term from September 1,
1996 to August 31, 1999. The sublease rental is $8,368.50 per month and extends
for the full term of the original lease to August 31, 1999.
Charter Panama leases approximately 1,600 square feet of office space in a
high rise office building in Panama City, Republic of Panama. The lease is for
a term of five years and expires on May 31, 2001. The monthly rental under the
lease is currently $4,500. Charter Panama's offices include Panamanian earth
station operations, local marketing activities, and administrative services.
Charter Panama's earth station antenna is mounted on the roof of the building in
which its offices are located.
The physical properties of the Company are in good condition.
ITEM 3. LEGAL PROCEEDINGS.
Other than the matters discussed below, the Company is not a party to any
legal proceeding or dispute which is not routine and incidental to the business
or which involves an amount, exclusive of interest and costs, which exceeds ten
percent of the current assets of the Company.
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OCI has, since mid-1996, been negotiating with Sprint Communications
L.P. ("Sprint") to resolve a dispute involving Sprint's past provision of
telecommunications services to OCI. On February 11, 1997, OCI notified Sprint
of certain concerns OCI had regarding, among other things, the pricing and
billing for certain services, the application of discounts to Sprint's bills,
and the improper termination of services to OCI which occurred on December
21, 1996. On March 11, 1997, Sprint sent a letter to OCI, claiming that OCI
owes Sprint $4,044,835 for telecommunications services already provided. The
agreement with Sprint calls for arbitration of this dispute. Sprint and OCI
are currently engaged in negotiations in an effort to resolve these issues.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted by the Company to a vote of the Company's
security holders, through the solicitation of proxies or otherwise, during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded in the over-the-counter market. The
table set forth below reflects high and low closing bid prices on a quarterly
basis for the period beginning October 1, 1995 and ending December 31, 1996.
Prior to the fourth quarter of 1995 (specifically December 7, 1995) the Company
had no business or assets and bid prices for its stock were not published. The
source of such information is National Quotation Bureau, Inc. The quotations
in the following table reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
=============================================================================
1996 HIGH BID LOW BID
- -----------------------------------------------------------------------------
First Quarter 3.375 .50
- -----------------------------------------------------------------------------
Second Quarter 7.75 3.25
- -----------------------------------------------------------------------------
Third Quarter 6.25 4.625
- -----------------------------------------------------------------------------
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- -----------------------------------------------------------------------------
Fourth Quarter 5.375 1.4375
- -----------------------------------------------------------------------------
1995
- -----------------------------------------------------------------------------
Fourth Quarter .50 .25
=============================================================================
The information was obtained from National Quotation Bureau. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
As of March 26, 1997, the Company's Common Stock was held by approximately
247 holders of record. The Company estimates that it has a significantly
larger number of shareholders because a substantial number of the Company's
shares are held of record by broker-dealers for their customers in street name.
The Company has not paid any cash dividends on its Common Stock to date. There
are no restrictions which limit the Company's ability to pay cash dividends on
its Common Stock; however, the Company's current policy is to retain earnings
to provide funds for the operation and expansion of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(a) PLAN OF OPERATION. Over the next twelve months, the Company will continue
to vigorously pursue the expansion of its International Private Lines, Long-
Distance Telephone, Calling Card, Phone Centers, and Internet Access services.
The Company intends to capitalize on the growing demand for these services and
gain market share by building its subscriber base both domestically and
internationally. Management believes that the expansion will be accomplished
through the acquisition of additional licenses and concessions allowing the
Company to provide these services both in the United States and in targeted
Latin American countries. The Company intends to aggressively pursue new
customers by combining the highest possible level of service with an expanded
sales force and intensive marketing efforts. After thoroughly investigating
market demand, the Company expects to expand in major cities in Latin America.
Strategic alliances are expected to be formed with local business groups and
individuals in order to create successful operations within the respective
target Latin countries.
The Company intends to continue to build an International Private Line
communication network that will provide voice, data, facsimile, Internet,
intranet, telecommuting, and video services to government and commercial
organizations operating throughout the United States and Latin America. The
building of this private line network is complementary to the Company objective
of providing Internet access services.
The Company is currently licensed to provide various telecommunication
services in the United States, El Salvador, Peru, Honduras, Venezuela, Mexico,
El Salvador, Guatemala, Costa Rica, and Panama. As of December 31, 1996, the
Company was providing service in the United States, Panama, and Venezuela. Over
the next twelve months, the Company intends to seek, through public and private
markets, an additional $25 to 30 million to build out and operate facilities in
these and other countries. The Company will not, however, begin expansion until
such financing is secured.
While the Company's telecommunication business is currently focused on the
provision of international private lines and prepaid calling cards, it has
established a venture in Mexico to provide Long Distance Telephone Services to
the United States. The initial investment by the Company was
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approximately $140,000. The Company is actively pursuing other opportunities
to provide long distance services in Mexico and other Latin American countries.
While there are presently no contractual commitments regarding the purchase of
facilities and equipment to provide these services, the Company anticipates
that approximately $3 to 4 million dollars over the next several quarters will
be required to expand its long distance service to meet the demand of existing
opportunities.
The Company's Internet business continues to expand and is currently
experiencing an annualized growth rate of approximately 100% in its domestic
INTERNET business. In March of 1996, the Company formed Phoenix DataNet de
Panama and commenced the offering of Internet services to business and
residential customers in Panama City, Panama. In the first nine months of
operation, the Company acquired over 1,000 new customers. On July 19, 1996,
the Company obtained an additional concession to provide Internet services to
both residences and businesses operating in Venezuela. In December of 1996,
the Company began offering Internet Service in Caracas, Venezuela. The Company
anticipates that it will spend approximately $130,000 per site in order to
provide Internet services at each of the seven areas targeted for private line
services in Venezuela.
See "Liquidity and Capital Resources" for a discussion of the Company's
ability to meet the aforementioned capital requirements.
(b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the years ended
December 31, 1996 and 1995 and the Period from Inception (January 26, 1994) to
December 31, 1994. Operating results for any period are not necessarily
indicative of results for any future period. Dollar amounts (except per share
data) are shown in thousands.
1996 1995 1994
-------------------- ------------------ -------
% OF % OF
(000'S) REVENUES (000'S) REVENUES (000'S)
---------- -------- ------- -------- -------
REVENUES:
Communications $ 3,162 38% $ 113 100% $ -
Hardware and Software 2,356 29 - - -
Internet Connection
services 1,827 22 - - -
Network services 887 11 - - -
---------- --- --------- ------ -----
Total revenues 8,232 100 113 100 -
---------- --- --------- ------ -----
Costs and expenses:
Cost of services 4,341 53 31 28 -
Cost of hardware
and software 1,934 23 - 0 -
Selling, general,
and administrative 7,816 95 1,365 1,210 323
Depreciation and
amortization 1,430 18 147 130 -
---------- --- --------- ------ -----
Total costs and
expenses 15,521 189 1,543 1,368 323
---------- --- --------- ------ -----
Operating loss (7,289) (89) (1,430) (1,268) (323)
Interest expense, net
and other (469) (6) (94) (83) (24)
---------- --- --------- ------ -----
Net Loss $ (7,758) (95) $ (1,524) (1,351) $(347)
---------- --- --------- ------ -----
---------- --- --------- ------ -----
PER SHARE DATA:
Net loss per share $(0.51) $(0.26)
Supplementary net loss
per share $(0.50) $(0.22)
Shares used in:
Net loss per share 15,088,376 5,799,735
Supplementary net loss
per share 15,603,250 6,977,691
In the first quarter of 1996, the Company's first international private
line customers went on-line, the acquisitions of PDN and PDS were completed,
and the military phone centers in Panama were purchased. During the third
quarter, the Company completed the acquisitions of OCI and Worldlink. The
acquisitions are more fully described in the Notes to the Financial
Statements and Forms 8-K filed with respect thereto.
Revenues increased $8,119,000 in 1996, operating expenses increased
$13,978,000 in 1996, and the net loss increased from ($1,524,000) to
($7,758,000). These increases were all the result of the significant
acquisitions in 1996 and the fact that the Company was a developmental stage
company prior to 1996.
Operations from January 24, 1994 through December 31, 1995 consisted
primarily of raising capital; obtaining financing; locating, acquiring,
installing, and testing equipment; and administrative activities, such as
license and concession acquisitions, and no significant revenue streams existed.
As a result of the significant changes in the nature of the Company, the
previously mentioned acquisitions in 1996, management believes that discussion
or comparison of 1995 annual results to 1996 annual results will not be
meaningful to the reader and therefore has not been included herein.
Consolidated revenues for the combined lines of business for the year
ended December 31, 1996 were $8,232,000, while cost of services and hardware
and software costs were $6,275,000 for the year ended December 31, 1996,
resulting in a 24% gross profit margin. Management anticipates that gross
profit margin will improve in future periods primarily because costs of
services and hardware do
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<PAGE>
not match revenue growth directly due to the significant amount of fixed
costs associated with the establishment of service capabilities in a
particular country or market which must be incurred regardless of the revenue
level.
Selling, general, and administrative expenses were $7,816,000 for the
year ended December 31, 1996. The overall increase in expenses was primarily
attributable to the expansion of the Company's operations and acquisitions.
The Company anticipates benefiting in 1997 from economies of scale with
respect to such costs, as salaries and wages are not expected to continue to
increase in direct proportion to increases in revenue.
Depreciation and amortization expense was $1,430,000 for the year ended
December 31, 1996. The increase is attributable to the increase in property,
plant, and equipment related to the acquisitions and expansion of operations
and the amortization associated with the PDS, PDN, OCI, and Worldlink
acquisitions during 1996. Amortization expense related to the acquisitions for
the year ended December 31, 1996 was $827,000. Refer to Notes 2 and 3 of the
Notes to the Financial Statements for further discussion.
Interest expense was $485,000 for the year ended December 31, 1996. The
majority of this amount, $344,000, related to the 12% Senior Subordinated Notes
issued in late 1995 and 1996. The remaining interest amounts were related to
borrowings under various credit facilities and advances from shareholders.
Interest costs should decrease as a result of the conversion of $2,175,000 of
the 12% Senior Subordinated Notes to common stock subsequent to year end.
Other interest costs, however, will continue to increase until such time as
additional equity funding is obtained to finance the business expansion
program. The Company's credit facilities are variable rate notes tied to the
prime rate. Increases in the prime lending rate could negatively affect the
Company's earnings.
There was no income tax benefit recorded in 1996, as management recorded
a valuation reserve due to the uncertainty of the timing of future taxable
income. The net loss for the year ended December 31, 1996 was $7,758,000, or
$(0.51) per share.
LIQUIDITY AND CAPITAL RESOURCES
The Company has not generated net cash from operations for any period
presented. The Company has primarily financed its operations to date through
private sales of equity securities and debt to principals and outside
investors. During 1996, funding was obtained from several sources: bank
lines of credit, sale leaseback transactions, private placement of notes and
warrants, shareholder loans, and issuance of common stock. Such vehicles net
of repayment of loans, provided the Company with $6,212,000 to fund
operations. Additionally, in 1995, the Company received approximately
$173,000 from Senior Note issuances during the latter part of the year.
These funds were utilized to fund a net operating cash flow deficiency of
approximately $1,870,000 in 1996 as well as capital expenditures of $3,528,000
for the purchase of equipment and installation at domestic and international
locations to expand business capacity as well as the acquisition of 90% of PDN
in January 1996 for $483,000, net of cash received of $42,000. The remainder
of the 1996 acquisitions were all completed as stock transactions.
As of December 31, 1996, the Company had cash on hand of approximately
$320,000. During the first quarter of 1997, the Company completed a private
placement offering of its $0.00001 par value common stock and received cash
in the amount of approximately $5.4 million and reduced its liabilities
(through the conversion of debt to Common Stock) by approximately $2.6 million.
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<PAGE>
All conversions of stock for liabilities were at the rate of $1 of the
related liability to $1 of Common Stock.
The Company's significant capital commitments through 1997 include
$2,292,000 related to debt due in 1996, and capital expenditures will be
approximately $3,000,000 for the current businesses. The amount of debt due
is net of borrowings under a line of credit facility of $600,000 that came due
in February 1997 and was subsequently renewed for $500,000 and the conversion
of loans from shareholders to Common Stock.
The Company estimates that its cash and financing needs for its current
business through 1997 will be met by the cash on hand following the private
placement and cash flows from operations. However, any increases in the
Company's growth rate, shortfalls in anticipated revenues, increases in
anticipated expenses, or significant acquisition or expansion opportunities
could have a material adverse effect on the Company's liquidity and capital
resources and would require the Company to raise additional capital from public
or private equity or debt sources in order to finance operating losses,
anticipated growth, and contemplated capital expenditures and expansions. The
Company does not have adequate resources available to achieve all of the
potential expansion plans noted in "Plan of Operation" and will not engage in
such expansion until adequate capital sources have been arranged. Accordingly,
the Company anticipates that additional future private placements and/or public
offerings of debt or equity securities will be necessary to fund such plans.
If such sources of financing are insufficient or unavailable, the Company will
be required to modify its growth and operating plans in accordance with the
extent of available funding and attempt to attain profitability in its existing
markets. The Company may need to raise additional funds in order to take
advantage of unanticipated opportunities, such as acquisitions of complementary
businesses or the development of new products, or to otherwise respond to
unanticipated competitive pressures. There can be no assurance that the
Company will be able to raise any such capital on terms acceptable to the
Company or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("FAS 121") "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which becomes effective for fiscal years beginning after December 15, 1995.
FAS 121 established standards for determining when impairment losses on long-
lived assets have occurred and how impairment losses should be measured. The
Company adopted FAS 121 in 1996. The adoption of FAS 121 did not have a material
impact on the Company's financial statements.
In October 1995, the FASB issued Statements of Financial Accounting
Standards No. 123 ("FAS 123") "Accounting for Stock-Based Compensation,"
which became effective for fiscal years beginning after December 15, 1995.
FAS 123 established new financial accounting and reporting standards for
stock-based compensation plans. Entities will be allowed to measure
compensation cost for stock-based compensation under FAS 123 or APB Opinion
No. 25, "Accounting for Stock Issued to Employees." Entities electing to
remain with the accounting in APB Opinion No. 25 will be required to make pro
forma disclosures of net income and earnings per share as if the provisions
of FAS 123 had been applied. The Company adopted FAS 123 on January 1, 1996
and elected to continue to measure compensation cost for stock-based
compensation under APB Opinion No. 25. Accordingly, the adoption of FAS 123
did not impact the 1996 statement of operations. See Note 6 to the
consolidated financial statements included elsewhere for a pro forma
disclosure as if the provisions of FAS 123 had been applied.
ITEM 7. FINANCIAL STATEMENTS.
Attached following the Signature Pages and Exhibits. See the index to
the financial statements following the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
The Company has not had any disagreements with its independent accountants
and auditors, however it has changed accounting firms during the past year, as
disclosed in the Company's Forms 8-K filed with the Commission on March 23,
1996; April 23, 1996 (as amended by Form 8-K/A filed May 4, 1996); April 30,
1996; and March 13, 1997 (as amended by Form 8-K/A filed March 25, 1997).
27
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PART III
Pursuant to instruction E(3) to Form 10-KSB, the information in Items
9-12 is incorporated by reference from the Company's definitive proxy
statement which will be filed with the Commission pursuant to Regulation 14A
on or about April 30, 1997.
28
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ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K
Exhibit No. Description Location
----------- ----------- --------
3.01 Articles of Incorporation Form 10-QSB for the quarter
ended March 31, 1996
3.03 Bylaws Form 10-QSB for the quarter
ended June 30, 1996
4.2 Form of 12% Promissory Note and Form 10-KSB for year ended
Warrant 12/31/95
10.1 Agreement of Merger between Maui Form 8-K filed with the
Capital Corportion and Charter Commission on October 12,
Communications International, Inc. 1995
10.2 Agreement and Plan of Merger with Form 10-KSB for the year
Phoenix Data Systems, Inc. ended 12/31/95
10.3 Consulting Agreement with Charter Form 10-KSB for the year
Trading Corporation ended 12/31/95
10.4 Consulting Agreement with Potere Form 10-KSB for the year
Management, Inc. ended 12/31/95
10.5 Contract with INTEL Form 10-KSB for the year
ended 12/31/95
10.6 1996 Nonemployee Director Stock Form 10-KSB for the year
Option Plan and Agreement ended 12/31/95
10.7 Agreement with Hondutel Form 10-QSB for the quarter
ended June 30, 1996
10.8 Agreement with Telecommunicaciones Form 10-QSB for the quarter
de Mexico ended June 30, 1996
10.9 Agreement with Comison Nacional de Form 10-QSB for the quarter
Telecommunications (Conatel) ended June 30, 1996
10.10 Registration Rights Agreement Filed herewith
11.1 Earnings Per Share Calculation Filed herewith
21.1 List of subsidiaries Filed herewith
27 Financial Data Schedule Filed herewith
The Company filed a report on Form 8-K on October 15, 1996, reporting
its acquisition of WorldLink, which was subsequently amended on December 16,
1996, to indicate that no financial statements relating to the acquisition
were required to be filed in connection therewith.
The Company also filed a Form 8-K/A on November 19, 1996, which amended
the Form 8-K filed on September 20, 1996, relating to the acquisition of OCI.
The amendment filed November 19, 1996, included the unaudited financial
statements of OCI for the three and six months ended June 30, 1996, and the
pro forma financial information required in connection with the acquisition.
29
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT, THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY
AUTHORIZED.
CHARTER COMMUNICATIONS INTERNATIONAL, INC.
By: /s/ DAVID G. OLSON Date: March 31, 1997
-------------------------
DAVID G. OLSON, CHIEF EXECUTIVE OFFICER
IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON
THE DATE INDICATED.
Signature Title Date
--------- ----- ----
By: /s/ DAVID G. OLSON Chief Executive Officer, President March 31, 1997
------------------------ and Director
DAVID G. OLSON
By: /s/ PATRICK E. DELANEY Chief Financial Officer and March 31, 1997
------------------------ Director
PATRICK E. DELANEY
By: /s/ CALVIN R. PATTERSON Controller March 31, 1997
------------------------
CALVIN R. PATTERSON
By: /s/ ROBERT E. CONN Director March 31, 1997
------------------------
ROBERT E. CONN
By: Director March __, 1997
------------------------
STEPHEN F. RAVILLE
By: /s/ WILLIAM P. O'REILLY Director March __, 1997
------------------------
WILLIAM P. O'REILLY
By: /s/ GERALD F. SCHMIDT Director March 31, 1997
------------------------
GERALD F. SCHMIDT
By: /s/ F. SCOTT YEAGER Director March 31, 1997
------------------------
F. SCOTT YEAGER
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants................................. F-1
Report of Former Independent Public Accountants.......................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1995, for the Period from Inception (January 26,
1994) to December 31, 1994, and for the Developmental Stage Period
from January 26, 1994 to March 31, 1996................................ F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1996 and 1995 and for the Period from Inception
(January 26, 1994) to December 31, 1994, and for the Developmental
Stage Period from January 26, 1994 to March 31, 1996................... F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996 and 1995, for the Period from Inception (January 26,
1994) to December 31, 1994, and for the Developmental Stage Period
from January 26, 1994 to March 31, 1996................................ F-8
Notes to Consolidated Financial Statements............................... F-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Charter Communications International, Inc.:
We have audited the accompanying consolidated balance sheet of CHARTER
COMMUNICATIONS INTERNATIONAL, INC. and subsidiaries (a Nevada corporation)
(formerly, "Maui Capital Corporation") as of December 31, 1996 and the
related consolidated statements of operations, changes in stockholders'
equity (deficit), and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Charter Communications
International, Inc. and subsidiaries as of December 31, 1996 and the results
of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 28, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Charter Communications International, Inc.
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows
present fairly, in all material respects, the financial position of Charter
Communications International, Inc. (formerly Maui Capital Corporation) and
its subsidiaries, collectively a development state enterprise, at December
31, 1995 and the results of their operations and their cash flows for the
year ended December 31, 1995 and the period from inception on January 26,
1994 to December 31, 1994 in conformity with generally accepted accounting
principles (appearing on pages F-3 through F-6 in this Annual Report on Form
10-K). These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Charter Communications International,
Inc. for any period subsequent to December 31, 1995.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As described in Note 1 to the
financial statements, the Company is in the development stages and has had
minimal revenues since inception, which raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in
regard to this matter are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
PRICE WATERHOUSE
Houston, Texas
March 29, 1996
F-2
<PAGE>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 320,252 $ 43,841
Accounts receivable, net of allowance for
doubtful accounts of $435,000 and $3,762 1,675,939 43,155
Accounts receivable--affiliate 385,951 34,181
Inventory 307,940 0
Prepaid expenses and other 331,538 28,169
----------- -----------
Total current assets 3,021,620 149,346
----------- -----------
PROPERTY AND EQUIPMENT, at cost:
Equipment and machinery 4,345,137 822,158
Earth station facility 618,497 70,581
Software 664,486 0
Furniture and fixtures 297,329 11,187
Other 240,714 29,710
----------- -----------
6,166,163 933,636
Accumulated depreciation and amortization (791,892) (146,681)
----------- -----------
Property and equipment, net 5,374,271 786,955
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated amortization
of $378,895 and $0 22,077,423 0
Acquired customer bases, net of accumulated
amortization of $261,151 and $0 1,867,117 0
Other intangibles, net of accumulated
amortization of $186,888 and $0 2,369,390 0
Investments 0 150,000
Other 81,783 0
----------- -----------
Total other assets 26,395,713 150,000
----------- -----------
TOTAL ASSETS $34,791,604 $ 1,086,301
----------- -----------
----------- -----------
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-3
<PAGE>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
CURRENT LIABILITIES:
Current portion of notes payable (Note 4) $ 50,264 $ 0
Lines of credit (Note 4) 1,646,092 129,443
Loans from shareholders (Note 4) 1,520,548 1,828
Accounts payable 7,234,129 195,730
Accounts payable--affiliate 222,999 129,167
Accrued liabilities 870,804 93,008
Unearned revenue 1,830,731 0
----------- -----------
Total current liabilities 13,375,567 549,176
----------- -----------
LONG-TERM LIABILITIES (Note 4):
Senior subordinated notes 2,513,492 172,819
Notes payable 229,801 0
----------- -----------
Total long-term liabilities 2,743,293 172,819
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 100,000 shares
authorized, 550 shares issued, 0 and 550 shares
outstanding at December 31, 1996 and 1995,
respectively 0 6
Common stock, $0.0001 par value; 45,000,000 shares
authorized, 24,202,779 and 7,298,393 shares
issued and outstanding at December 31, 1996
and 1995, respectively 242 73
Additional paid-in-capital 28,302,025 2,235,902
Accumulated deficit during developmental stage (2,579,324) (1,871,675)
Accumulated deficit subsequent to developmental
stage (7,050,199) 0
----------- -----------
Total stockholders' equity 18,672,744 364,306
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,791,604 $ 1,086,301
----------- -----------
----------- -----------
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE PERIOD
FROM INCEPTION (JANUARY 26, 1994) TO DECEMBER 31, 1994 AND FOR
THE DEVELOPMENTAL STAGE PERIOD FROM JANUARY 24, 1994 TO MARCH 31, 1996
<TABLE>
Developmental
1996 1995 1994 Stage
----------- ----------- --------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Communications services $ 3,161,957 $ 112,819 $ - $ 170,662
Hardware and software 2,356,436 - - 50,030
Internet connection services 1,826,742 - - 323,849
Network services 886,467 - - -
----------- ----------- --------- -----------
8,231,602 112,819 - 544,541
----------- ----------- --------- -----------
COSTS AND EXPENSES:
Cost of services 4,341,432 31,438 - 251,123
Cost of hardware and software 1,933,401 - - 37,205
Selling, general, and administrative 7,816,076 1,364,966 323,084 2,445,785
Depreciation and amortization 1,429,243 146,681 - 240,633
----------- ----------- --------- -----------
Total costs and expenses 15,520,152 1,543,085 323,084 2,974,746
----------- ----------- --------- -----------
OPERATING LOSS (7,288,550) (1,430,266) (323,084) (2,430,205)
----------- ----------- --------- -----------
MINORITY INTEREST 12,783 - - 12,783
INTEREST EXPENSE, NET (482,081) (93,658) (24,667) (161,902)
----------- ----------- --------- -----------
(469,298) (93,658) (24,667) (149,119)
----------- ----------- --------- -----------
NET LOSS BEFORE INCOME TAXES (7,757,848) (1,523,924) (347,751) (2,579,324)
INCOME TAX BENEFIT - - - -
----------- ----------- --------- -----------
NET LOSS $(7,757,848) $(1,523,924) $(347,751) $(2,579,324)
----------- ----------- --------- -----------
----------- ----------- --------- -----------
NET LOSS PER SHARE $ (0.51) $ (0.26) $ (0.44)
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTARY NET LOSS PER SHARE $ (0.50) $ (0.22) $ (0.39)
----------- ----------- -----------
----------- ----------- -----------
SHARES USED IN COMPUTING:
NET LOSS PER SHARE 15,088,376 5,799,735 5,824,194
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTARY NET LOSS PER SHARE 15,603,250 6,977,691 6,604,993
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
FOR THE PERIOD FROM INCEPTION (JANUARY 26, 1994) TO DECEMBER 31, 1994, AND
FOR THE DEVELOPMENTAL STAGE FROM JANUARY 26, 1994 TO MARCH 31, 1996
<TABLE>
Preferred Stock Common Stock Additional
---------------- ----------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock at inception ($0.0039 per share) 0 $0 5,177,136 $52 $19,948
Net loss 0 0 0 0 0
------ ------ ---------- --- ----------
Balance at December 31, 1994 0 0 5,177,136 52 19,948
Issuance of Series A Convertible Preferred Stock, ($3,636
per share) 550 6 0 0 1,999,794
Common stock issued in exchange for services ($0.0966
per share) 0 0 103,544 1 9,999
Warrant exercised 0 0 517,713 5 49,995
Issuance of common stock in conjunction with merger 0 0 1,250,000 12 (12)
Issuance of common stock in conjunction with merger 0 0 250,000 3 (3)
Issuance of common stock warrants in exchange for services 0 0 0 0 129,000
Issuance of common stock warrants in conjunction
with senior subordinated debt ($0.2424 per warrant) 0 0 0 0 27,181
Net loss 0 0 0 0 0
------ ------ ---------- ---- ----------
Balance at December 31, 1995 550 6 7,298,393 73 2,235,902
Issuance of common stock ($.070 per share) 0 0 303,428 5 212,395
Issuance of common stock in exchange for services ($2.65
per share) 0 0 25,586 1 67,762
Issuance of common stock in conjunction with PDS acquisition
(Note 3)($2 per share) 0 0 1,000,000 10 1,999,990
Issuance of common stock in conjunction with PDN acquisition
(Note 3)($2 per share) 0 0 150,000 2 299,999
Conversion of preferred stock into common stock (Note 5) (550) (6) 2,847,412 28 (22)
Issuance of common stock in conjunction with OCI acquisition
(Note 3)($2 per share) 0 0 8,999,960 90 17,999,830
Issuance of common stock in conjunction with Worldlink
acquisition (Note 3)($2 per share) 0 0 1,850,000 18 3,699,982
Issuance of common stock in conjunction with Panama Phone
purchase (Note 3)($2 per share) 0 0 2,000 0 4,000
Issuance of common stock warrants in exchange for Telecommute
Solutions (Note 3)($2.38 per share) 0 0 0 0 47,500
Issuance of common stock warrants in exchange for services
($0.1642 per warrant) 0 0 0 0 3,677
Exercise of service warrants ($0.70 per warrant) 0 0 186,000 0 130,200
Issuance of common stock warrants in conjunction with senior
subordinated debt ($0.1679 per warrant) 0 0 0 0 318,047
Exercise of debt warrants ($0.70 per warrant) 0 0 1,540,000 16 1,077,984
Issuance of common stock options for services ($0.594 per
option) 0 0 0 0 204,779
Loss for the three months ended March 31, 1996 0 0 0 0 0
Loss for the nine months ended December 31, 1996 0 0 0 0 0
------ ------ ---------- ---- ----------
Balance at December 31, 1996 0 $ 0 24,202,779 $242 28,302,025
------ ------ ---------- ---- ----------
------ ------ ---------- ---- ----------
<CAPTION>
Accumulated Deficit
-----------------------------
During Subsequent to Total
Developmental Developmental Stockholders'
Stage Stage Equity (Deficit)
------------- ------------- ----------------
<S> <C> <C> <C>
Issuance of common stock at inception ($0.0039 per share) $0 $0 $20,000
Net loss (347,751) 0 (347,751)
----------- ----------- -----------
Balance at December 31, 1994 (347,751) 0 (327,751)
Issuance of Series A Convertible Preferred Stock,($3,636
per share) 0 0 1,999,800
Common stock issued in exchange for services ($0.0966
per share) 0 0 10,000
Warrant exercised 0 0 50,000
Issuance of common stock in conjunction with merger 0 0 0
Issuance of common stock in conjunction with merger 0 0 0
Issuance of common stock warrants in exchange for services 0 0 129,000
Issuance of common stock warrants in conjunction with
senior subordinated debt ($0.2424 per warrant) 0 0 27,181
Net loss (1,523,924) 0 (1,523,924)
----------- ----------- -----------
Balance at December 31, 1995 (1,871,675) 0 364,306
Issuance of common stock ($0.70 per share) 0 0 212,400
Issuance of common stock in exchange for services
($2.65 per share) 0 0 67,763
Issuance of common stock in conjunction with PDS acquisition
(Note 3)($2 per share) 0 0 2,000,000
Issuance of common stock in conjunction with PDN acquisition
(Note 3)($2 per share) 0 0 300,000
Conversion of preferred stock into common stock (Note 5) 0 0 0
Issuance of common stock in conjunction with OCI acquisition
(Note 3)($2 per share) 0 0 17,999,920
Issuance of common stock in conjunction with Worldlink
acquisition (Note 3)($2 per share) 0 0 3,700,000
Issuance of common stock in conjunction with Panama Phone
Purchase (Note 3)($2 per share) 0 0 4,000
Issuance of common stock warrants in exchange for Telecommute
Solutions (Note 3)($2.38 per share) 0 0 47,500
Issuance of common stock warrants in exchange for services
($0.1642 per share) 0 0 3,677
Exercise of service warrants ($0.70 per warrant) 0 0 130,200
Issuance of common stock warrants in conjunction with senior
subordinated debt ($0.1679 per warrant) 0 0 318,047
Exercise of debt warrants ($0.70 per warrant) 0 0 1,078,000
Issuance of common stock options for services ($0.594
per option) 0 0 204,779
Loss for the three months ended March 31, 1996 (707,649) 0 (707,649)
Loss for the nine months ended December 31, 1996 0 (7,050,199) (7,050,199)
----------- ----------- -----------
Balance at December 31, 1996 $(2,579,324) $(7,050,199) $18,672,744
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND FOR THE PERIOD FROM
INCEPTION (JANUARY 26, 1994) TO DECEMBER 31, 1994, AND FOR THE DEVELOPMENTAL
STAGE PERIOD FROM JANUARY 24, 1994 TO MARCH 31, 1996
<TABLE>
Developmental
1996 1995 1994 Stage
---------- ---------- -------- -------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss $(7,757,848) $(1,523,924) $(347,751) $(2,579,324)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,429,243 146,681 0 240,633
Noncash consulting and service expenses 276,219 177,000 0 197,597
Bad debt expense 461,060 3,762 0 3,762
Amortization of discounts on senior subordinated
notes 45,492 0 0 914
Changes in current assets and current liabilities:
Accounts receivable, net 375,307 (46,917) 0 (101,941)
Accounts receivable--affiliate (351,720) 11,858 (46,039) (15,945)
Inventory (104,565) 0 0 (42,399)
Prepaid and other current assets (133,838) (16,169) 0 (269,066)
Accounts payable and accrued liabilities 3,560,968 155,527 133,211 577,750
Accounts payable--affiliate (35,206) 129,167
Deferred revenue 439,059 0 0 38,299
Other (74,274) 0 0 (123,802)
----------- ---------- -------- -----------
Total Adjustments 5,887,695 560,909 87,172 505,802
----------- ---------- -------- -----------
Net cash used in operating activities (1,870,153) (963,015) (260,579) (2,073,525)
----------- ---------- -------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment (3,581,874) (231,713) (701,923) (1,781,590)
Acquistion of subsidiary, net of cash acquired of $41,814 (483,186) (150,000) 0 (483,186)
----------- ---------- -------- -----------
Net cash used in investing activities (4,065,060) (381,713) (701,923) (2,264,776)
----------- ---------- -------- -----------
Cash Flows From Financing Activities:
Proceeds from repayments on senior subordinated notes 2,327,032 172,819 0 1,927,513
Proceeds from repayments on issuance of common stock 1,420,600 0 20,000 443,319
Proceeds from repayments on stock warrants 317,968 27,181 0 292,487
Proceeds from repayments on preferred stock 0 1,999,800 0 1,999,800
Proceeds from repayments on line of credit, net 1,046,092 93,285 36,158 121,332
Proceeds from repayments on shareholders 1,000,000 (930,672) 932,500 1,828
Repayment of notes (174,233) 0 0 0
Proceeds from sale and leaseback transactions 274,165 0 0 208,000
----------- ---------- -------- -----------
Net Cash provided by financing activities 6,211,624 1,362,413 988,658 4,994,279
----------- ---------- -------- -----------
Increase In Cash And Cash Equivalents 276,411 17,685 26,156 655,067
Cash And Cash Equivalents at Beginning Of Period 43,541 26,156 0 0
----------- ---------- -------- -----------
Cash At End Of Period $ 320,252 $ 43,841 $ 26,156 $ 655,067
----------- ---------- -------- -----------
----------- ---------- -------- -----------
Supplemental Non-Cash Disclosures:
Cash paid for interest 279,698 106,248 15,000 126,635
Cash paid for income taxes 0 0 0 0
Assets acquired under capital lease
Assets acquired in excess of liabilities assumed:
PDS acqusition 2,000,000 0 0 0
PDN acquistion 300,000 0 0 0
Telecommute acquistion 47,500 0 0 0
OCI acqusition 18,000,000 0 0 0
Worldlink acqusition 3,700,000 0 0 0
</TABLE>
F-8
<PAGE>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
1. ORGANIZATION AND NATURE OF BUSINESS
Charter Communications International, Inc. (Charter or the "COMPANY"),
was incorporated in Nevada on April 10, 1996, as a wholly owned subsidiary of
Maui Capital Corporation, a Colorado Corporation ("MAUI CAPITAL"), which
incorporated on August 8, 1988. On April 21, 1996, Maui Capital and the
Company merged with the Company being the surviving corporation and
succeeding to all the business, properties, assets and liabilities of Maui
Capital. The purpose of the merger of Maui Capital and the Company was to
change the name and state of incorporation of Maui Capital. Maui Capital had
no business or assets prior to September 21, 1995, when it acquired TOPS
Corporation, a Nevada corporation ("TOPS") (TOPS was named Charter
Communications International, Inc., until April 10, 1996, when its name was
changed so that the Company could be formed in Nevada with the same name).
At the time of the acquisition, TOPS was the sole stockholder of Charter
Communicaciones Internacionales Grupo, S.A., a Panama corporation ("CHARTER
PANAMA"), which was engaged in developing a private line telecommunication
system in Panama and pursuing licenses to provide such services in various
other Latin American countries. Since the acquisition of TOPS, the Company
(and Maui Capital, its predecessor) has endeavored to grow both through the
development of its existing businesses and through the acquisition of
complementary businesses. Proceeds from private placements of securities
with principals and outside investors have funded the development of the
Company to date.
The Company was formed to provide enhanced telecommunication products
and services to domestic and international markets, with a primary focus on
Latin America. The telecommunication services and products provided include
enhanced calling cards, switch voice products, international private line
services, Internet access, interactive voice response, conference calling,
call center services, and telecommuting services.
On January 8, 1996, Charter completed the cash acquisition of 90% of
Phoenix DataNet ("PDN"), a provider of domestic and international Internet
access. On March 21, 1996, the Company acquired Phoenix Data Systems ("PDS")
and the remaining 10% of PDN in a stock transaction that allowed the Company
to enter the network integration business. On July 31, 1996, the Company
acquired Telecommute Solutions, Inc. ("Telecommute") in a stock transaction
that allowed the Company to offer various telecommuting services. On
September 21, 1996, the Company acquired Overlook Communications
International Corporation ("OCI") in a stock transaction that allowed the
Company to offer a variety of both domestic and international enhanced
telecommunications and long distance services, including prepaid phone
calling cards. On October 5, 1996, the Company acquired Worldlink
Communications, Inc. ("Worldlink"), a provider of prepaid long-distance
calling cards in a stock transaction. See Note 3.
Some of the telecommunication services offered by Charter require
licensing by United States federal and state agencies and the foreign
countries wherein services are offered. Charter has formed wholly owned or
majority owned foreign corporations. Charter maintains financial control of
all subsidiaries.
The Company has been licensed by the United States Federal Communication
Commission as a facilities based carrier. Charter has selected the Mexican
Solidaridad system as its primary satellite carrier. A variety of U.S.
carriers are used to provide domestic long-distance services. The Company is
licensed to provide enhanced communications services in Panama, Mexico,
Honduras, Venezuela, El Salvador, Guatemala, the Dominican Republic, Costa
Rica, and Peru. Generally, licensing of enhanced services in the United
States is not required. As of December 31, 1996, the Company was operating
in the United States, Panama, and Venezuela.
The Company is seeking international telecommunication licenses in various
foreign countries. The Company faces competition for such licenses from major
international telecommunications entities as well as from local competitors in
each country. If a communications license is obtained, the Company's
international telecommunications operations will face competition from existing
government owned or monopolistic telephone service companies and from other
operators who receive licenses. The Company may also face significant
potential competition from other communication technologies that are being or
may be developed or perfected in the future. Some of the Company's competitors
have substantially greater financial, marketing, and technical resources than
does the Company. Accordingly, there can be no assurance that the Company
will be able to obtain any additional licenses or that its international
telecommunications operations will be able to compete effectively.
F-9
<PAGE>
Operations prior to the second quarter of 1996 consisted primarily of
raising capital, obtaining financing, locating and acquiring equipment,
obtaining customers and suppliers, installing and testing equipment, and
administrative activities. Accordingly, such operations for the period from
inception (January 24, 1994) through March 31, 1996 (the "developmental stage")
were reflected in the accompanying financial statements as those of a
developmental stage enterprise. Since the Company has only recently made the
transition from being a developmental stage company to an operating company,
the Company's ability to manage its growth and expansion will require it to
implement and continually expand its operational and financial systems, recruit
additional employees, and train and manage both current and new employees.
Growth may place a significant strain on the Company's operational resources
and systems, and failure to effectively manage this projected growth would have
a material adverse effect on the Company's business.
The Company, which has never operated at a profit, has experienced increasing
operating losses since its inception as a result of efforts to build its
customer base and develop its operations. The Company estimates that its cash
and financing needs for its current business through 1997 will be met by the
cash on hand following the private placement offering of its common stock in
the first quarter of 1997 (see Note 11) and cash flows from operations.
However, any increases in the Company's growth rate, shortfalls in anticipated
revenues, increases in anticipated expenses, or significant acquisition or
expansion opportunities could have a material adverse effect on the Company's
liquidity and capital resources and would require the Company to raise
additional capital from public or private equity or debt sources in order to
finance operating losses, anticipated growth, and contemplated capital
expenditures and expansions. The Company has significant expansion plans but
does not currently have adequate resources available to achieve all of its
potential expansion plans. The Company will not engage in such expansion until
adequate capital sources have been arranged. Accordingly, the Company
anticipates additional future private placements and/or public offerings of
debt or equity securities will be necessary to fund such plans. If such
sources of financing are insufficient or unavailable, the Company will be
required to modify its growth and operating plans in accordance with the extent
of available funding and attempt to attain profitability in its existing
markets. The Company may need to raise additional funds in order to take
advantage of unanticipated opportunities, such as acquisitions of complementary
businesses or the development of new products, or otherwise respond to
unanticipated competitive pressures. There can be no assurance that the
Company will be able to raise any such capital on terms acceptable to the
Company or at all.
The Company expects to continue to focus on developing and expanding its
enhanced telecommunication services offerings, while continuing to expand its
current operation market penetration. Accordingly, the Company expects its
capital expenditures and cost of revenues and depreciation and amortization
expenses will continue to increase significantly, all of which could have a
negative impact on short-term operating results. In addition, the Company
may change its strategy to respond to a changing competitive environment.
There can be no assurance that growth in the Company's revenue or market
penetration will continue, that its expansion efforts will be profitable, or
that the Company will be able to achieve or sustain profitability or positive
cash flow. Further, the Company will require substantial financing to
accomplish any significant acquisition or merger transaction and for working
capital to operate its current and proposed expanded operations until
profitability is achieved, if ever. While the Company currently expects to
meet its 1997 operating cash flow and capital expenditure requirements
through cash on hand after the private placement and through internally
generated funds, there can be no assurance that this will be achieved. The
Company does not currently have commitments or arrangements for such
financing, and accordingly, the availability of such financing on terms
acceptable to the Company is not assured. Accordingly, there can be no
assurance that the Company's planned expansion of its operations will be
successful.
2. SUMMARY OF ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
F-10
<PAGE>
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting and include the accounts of the Company and all
of its majority-owned subsidiaries. All significant intercompany balances
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
SOURCE OF SUPPLIES
The Company relies on local and long distance telephone companies to
provide certain communications services. Although management feels alternative
telecommunication facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results. During
December 1996, the Company's long-distance provider discontinued service in a
dispute over payment of invoices resulting in the Company's prepaid calling
card platform not being accessible for a period of approximately ten days.
Subsequently, alternative long distance providers have been found, but any such
recurrence of this situation could have a material adverse effect on the
Company's operating results.
PRESENTATION
Certain prior periods amounts have been reclassified to conform with the
current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, demand deposits, and
short-term investments with original maturities of three months or less. The
carrying value of the cash and cash equivalents approximates fair market value
at December 31, 1996 and 1995.
CONCENTRATION OF RISK
A significant portion of the Company's assets and operations are located
in the country of Panama. The Company's business cannot operate unless the
government of Panama provides licenses, privileges or other regulatory
clearances. No such assurance can be given that such rights, once granted,
could not be revoked without due cause.
The Company's accounts receivable potentially subject the Company to
credit risk, as collateral is generally not required. The Company's risk of
loss is limited due to advance billings to customers for services and the
ability to terminate access on delinquent accounts. The concentration of credit
risk is mitigated by the large number of customers comprising the customer
base. The carrying amount of the Company's receivables approximates their fair
value. During 1995, however, two customers accounted for all contract revenues
as a result of the relatively minimal amount of sales in the period.
INVENTORIES
Inventories consist of network computer products as well as prepackaged
software used for Internet access. All inventory is recorded as finished goods
and is available for sale. Inventories are stated at the lower of cost or
market. Cost is determined on the first-in, first-out method.
<PAGE>
PROPERTY AND DEPRECIATION
Property and equipment are recorded at cost, including certain engineering
costs. The property and equipment acquired in conjunction with the 1996
acquisitions was recorded on the Company's books at net book value, which
approximated fair market value at the dates of acquisition. The Company
records depreciation using the straight-line method over the estimated useful
lives of the assets, which are:
Classification Estimated Useful Lives
Equipment and machinery 5 years
Earth station facility 25 years
Software 5 years
Furniture and fixtures 7 years
Other property 3-5 years
Leasehold improvements are amortized over the shorter of the useful life
of the improvement or the life of the lease. The Company's policy is to remove
the cost and accumulated depreciation of retirements from the accounts and
recognize the related gain or loss upon the disposition of assets. Such gains
and losses were not material for any period presented.
INTANGIBLES
In conjunction with the mergers in 1996 (see Note 3), the Company recorded
intangible assets of approximately $27,140,000 due to the purchase prices
exceeding the values of the tangible net assets acquired subject to adjustment
for up to one year from the date of acquisition. After identifying the tangible
assets and liabilities, the Company allocated the excess to identifiable
intangible assets and the remainder to goodwill. Amortization of these costs is
included in depreciation and amortization in the accompanying statements of
operations. The following table summarizes the amounts recorded to the following
classifications of intangibles and their respective amortization periods:
Category Amount Amortization Period
Acquired Customer Base $ 2,128,000 3-10 years
Other Intangibles 2,556,000 3-5 years
Goodwill 22,456,000 10-30 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the value assigned to long-lived
assets, including property, plant and equipment and intangibles, to determine
if any impairments are other than temporary. Management believes that the
long-lived assets in the accompanying balance sheets are appropriately valued.
MINORITY INTEREST
Minority interest represents the 10% ownership interest in PDN not
acquired in the initial acquisition. As noted previously, this 10% was
outstanding from January 8, 1996 to March 21, 1996.
<PAGE>
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). Effective in 1996, the Company adopted the disclosure
option of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") (Note 6), for all options granted
subsequent to January 1, 1995. SFAS 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. SFAS 123 requires that companies which do
not choose to account for stock-based compensation as prescribed by this
statement shall disclose the pro forma effects on earnings and earnings per
share as if SFAS 123 had been adopted. Additionally, certain other disclosures
are required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS 123. See Note 6.
REVENUE RECOGNITION
Revenues from telecommunications, Internet access services, and network
computer sales and services are generally recognized when the services are
provided. Invoices rendered and payments received for telecommunications
services and Internet access in advance of the period when revenues are earned
are recorded as unearned revenues and are recognized ratably over the period the
services are provided or the term of the Internet subscription agreements,
which are generally 3 to 12 months. Sales of prepaid phone calling cards are
recorded as unearned revenues and revenue is recognized as minutes are used
or when the cards expire. Sales of hardware are recognized when installation
has occurred and no further performance obligation remains. Sales of
prepackaged software are recognized upon delivery of the product.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
exchange rates in effect at the balance sheet date, except that fixed assets
are translated at exchange rates in effect when these assets are acquired.
Revenues and expenses of foreign operations are translated at average monthly
exchange rates prevailing during the year, except that depreciation and
amortization charges are translated at the exchange rates in effect when the
related assets are acquired.
The national currency of Panama is the U.S. dollar. Accordingly, no
foreign currency translation is required upon the consolidation of the
Company's Panamanian operations, which account for all of the revenue and
approximately 90% of the net loss of all foreign operations during 1996. The
effects of foreign currency translation on the Company's Venezuelan
operations, which did not begin until the fourth quarter of 1996, was not
material. Prior to 1996, the Company had no foreign operations outside of
Panama, and no foreign currency translation was required.
NET LOSS PER SHARE
Net loss per share was computed using the weighted average number of
shares outstanding, adjusted for common stock equivalents, when dilutive.
SUPPLEMENTARY NET LOSS PER SHARE
On March 8, 1996, the Series A Preferred Stock was automatically converted
into 2,847,412
<PAGE>
shares of the Company's common stock. Supplementary loss per share is the
loss per share amount adjusted to reflect the conversion of preferred stock
on March 8, 1996 as if the conversion had occurred on the day that the
preferred stock was issued.
3. BUSINESS COMBINATIONS AND ACQUISITIONS
BUSINESS COMBINATIONS
Effective September 21, 1995, Charter consummated a reverse triangular merger
with Maui Acquisition Corp., a subsidiary of Maui. Maui was a public shell
having essentially no operations, cash, or stockholders' equity. In connection
with the reverse triangular merger, each share of the Company's common stock
was converted into 5,177.136 shares of newly issued Maui common stock so that
Charter's stockholders received 5,798,393 shares of Maui common stock, 550
shares of Maui Series A preferred stock (convertible into 2,847,412 shares of
Maui common stock), and warrants to purchase 854,231 shares of Maui common
stock. Maui previously had issued 1,250,000 shares of common stock
outstanding; therefore, Charter obtained control. In connection with the
merger, Maui changed its name to Charter, members of Maui's Board of Directors
resigned and were replaced by Directors of Charter and Charter's management
assumed direct control of Maui. For accounting purposes, the transaction has
been accounted for as an acquisition of Maui and a 5,177.136-for-1 common stock
split by Charter. The financial advisors of the Company were issued 250,000
shares of Maui common stock in exchange for services.
Charter Panama was combined with the Company in a transaction accounted for
as a combination of entities under common control effective May 15, 1995. The
shares exchanged represent all outstanding common stock of the Company and of
Charter Panama at the time of the business combination.
The financial statements for all periods presented reflect the results of
these business combinations as if they had occurred at the inception of the
Company.
ACQUISITIONS
During 1996, the Company engaged in the following significant acquisitions
(see Note 2 for description of the purchase price allocation):
PDN
On January 8, 1996, the Company acquired 90% of the issued and
outstanding capital stock of PDN, in exchange for $525,000 in cash. PDN, a
Texas corporation, was formerly a subsidiary of Phoenix Data Systems, Inc.
("PDS"). PDN was originally incorporated on February 21, 1995 and prior to
that date had operated as a division of PDS. PDS entered into an agreement
on December 22, 1995 to sell its 90% ownership of the issued and outstanding
shares of common stock of PDN. On March 21, 1996, the Company acquired the
remaining 10% in PDN through the issuance of 150,000 shares of the Company's
common stock, at an estimated fair market value of $2 per share at the time
the transaction was consummated. The acquisition has been accounted for as a
purchase.
PDN engages in the business of providing Internet access to businesses
and individuals and a full range of related services, including the creation
and development on behalf of its customers of Internet based advertising,
customer service functions, on-line sales and services, and other on-line
interactive services. Additionally, PDN sells and services a complete line
of products for Internet
<PAGE>
access.
PDS
On March 21, 1996, the Company acquired 100% of the issued and
outstanding capital stock of PDS. PDS is in the business of providing
computer network integration, service, consulting, and support for commercial
businesses. The transaction involved the exchange of 1,000,000 shares of the
Company's common stock, 825,000 shares of which were immediately issued free
and clear of any adverse claims or encumbrances and 175,000 shares of which
were retained by the Company in order to secure representations and
warranties and covenants of PDS, and PDS shareholders and will be subject to
offset against claims against PDS. All claims against PDS have been settled,
and the 175,000 shares were issued on September 20, 1996. The shares issued
in the transaction were valued at $2 per share, the estimated fair market
value as of the date the transaction was consummated. The acquisition has
been accounted for as a purchase.
OCI
On July 15, 1996, the Company entered into an agreement to acquire 100% of
the issued and outstanding capital stock of OCI. OCI, a North Carolina
corporation, is an independent telecommunications service bureau and reseller
of domestic and international long-distance services including prepaid
calling cards and 800 and 900 traffic to customers in the United States.
OCI's operations commenced in 1992. The transaction was consummated on
September 21, 1996 and involved the issuance of 8,999,960 shares of the
Company's common stock. The shares issued in the transaction were valued at
$2 per share, the estimated fair market value as of the date the transaction
was consummated. The acquisition has been accounted for as a purchase.
WORLDLINK
On September 13, 1996, the Company entered into an agreement to acquire
100% of the issued and outstanding capital stock of Worldlink. Worldlink, a
Georgia corporation, is a switch based reseller of long distance service
which uses debit cards to market its service. The transaction was
consummated on October 1, 1996, and involved the issuance of 1,850,000 shares
of the Company's common stock. The shares issued in the transaction were
valued at $2 per share, the estimated fair market value as of the date the
transaction was consummated. The acquisition has been accounted for as a
purchase.
The following unaudited pro forma condensed consolidated statements of
operations assume the acquisitions occurred at the beginning of each period
presented. In the opinion of management, all adjustments necessary to present
fairly such unaudited pro forma condensed statement of operations have been
made.
1996 1995
Revenues $ 13,245,000 $ 8,260,000
Net loss (12,310,000) (4,002,000)
Net loss per share $ (0.48) $ (0.21)
OTHER
PANAMA PHONE CENTERS
<PAGE>
On March 30, 1996, the Company acquired the assets and rights to operate
long-distance telephone centers at various U.S. military installations in the
Republic of Panama. Prior to March 30, 1996, the Company had been receiving
royalties from telephone calls placed at these phone centers, under a separate
contract. The phone centers and rights to provide these services were acquired
for $224,000 in cash and 2,000 shares of common stock of the Company
valued at $2 per share. Simultaneously with the purchase, the Company
entered into an agreement with a lease finance company to sell and lease back
a portion of the assets acquired. Lease financing was obtained in the amount
of $168,000, the acquisition price of the majority of the phone center assets.
The term of the lease provides for monthly payments of $5,712, beginning on
April 1, 1996 and continuing through March 1, 1999. This transaction is not
considered to be a significant business combination, and accordingly, no pro
forma information is presented.
TELECOMMUTE
In July 1996, the Company entered into an agreement to acquire 100%
of the issued and outstanding capital stock of Telecommute, a provider of
telecommuting hardware and services. The transaction was consummated on July
31, 1996, and involved the issuance of 20,000 warrants to purchase shares of
the Company's common stock. The shares issued in the transaction were valued
at $2.38 per share, the estimated fair market value as of the date the
transaction was consummated. The acquisition has been accounted for as a
purchase. This transaction is not considered to be a significant business
combination, and accordingly, no pro forma information is presented.
JOINT VENTURE AGREEMENT
On January 24, 1996, the Company entered into an agreement for joint
operations of international telecommunications service into and out of various
locations in the country of Mexico. The Company has agreed to incur various
expenses to reactivate the international telecommunications service to various
hotel facilities, arrange for agreements with international carriers to provide
call termination and other services, and contribute future funds for equipment
to connect new customers. Subsequent to year end, this agreement was
terminated with the Company owing two months worth of fees, or $12,000, which
is included in accounts payable at December 31, 1996.
4. LONG-TERM OBLIGATIONS
Obligations consist of the following:
DECEMBER 31, DECEMBER 31,
1996 1995
- -----------------------------------------------------------------------------
12% Senior Subordinated Notes due December
2000, net of discount of $331,508 and $27,181
as of December 31, 1996 and 1995, respectively $2,513,492 $172,819
Notes Payable 280,065 0
Lines of Credit:
Due December, 1996 96,092 129,443
Due February, 1997 600,000 0
Due May, 1997 500,000 0
Due June, 1997 450,000 0
Loans from shareholders 1,520,548 1,828
- -----------------------------------------------------------------------------
5,960,197 304,090
Less current portion 3,216,904 131,271
- -----------------------------------------------------------------------------
Long-term obligations $2,743,293 $172,819
---------- --------
<PAGE>
Beginning in December 1995, the Company made a private offering of
$2,500,000, subsequently increased to $2,873,000, of its 12% Senior
Subordinated Notes due December 31, 2000 with attached warrants which grant
the purchasers of the Notes the right to buy 2,000,000 shares, subsequently
increased to 2,298,400 shares, of Company's Common Stock. The warrants grant
the purchasers the right to exercise the warrants at prices of $0.70 per
share in 1996, $1.25 in 1997, $1.75 in 1998, $2.25 in 1999 and $2.50 in 2000.
Interest is payable quarterly at the rate of 12% per annum, in arrears. The
notes are not secured by any assets of the Company or guaranty.
Of the $2,873,000 in notes offered, $2,845,000 was issued at December
31, 1996. The fair market value of the 2,244,000 warrants issued in
conjunction with the notes was estimated by the Company to be $345,000 and is
recorded as additional paid-in capital and a discount on the notes. The
notes are stated net of discount, which is being amortized over the term of
the notes. Amortization of this discount included in the accompanying
financial statements as interest expense.
The Company had shareholder loans of $1,520,548 outstanding at December
31, 1996. A portion of these loans was subsequently converted to common
stock in the private placement discussed in Note 12. Interest rates on these
loans are generally the prime rate (8.25% at December 31, 1996) plus 3% and
all mature in 1997.
The company has established three lines of credit with a commercial bank
that provide for borrowings up to $146,000, $500,000 and $500,000. The
revolving credit lines are secured by a security interest in certain
electronic equipment and securities of a shareholder of the Company. Interest
is payable monthly on two of the credit lines and quarterly on one, all at the
bank's prime rate (8.25% at December 31, 1996) plus 1%. The $146,000 line of
credit was extended until April, 1997. Further, at December 31, 1996, OCI had
established an additional line of credit with a commercial bank that provided
for borrowings up to $600,000. This line of credit was repaid in February
1997, and subsequently reissued for $500,000. This line of credit is
personally guaranteed by two officers of the Company. Repayments of principal
on these lines of credit are due as follows:
Balance at
December 31, Principal Periodic
1996 Payment Due Principal Due Balance Due
$96,092 Monthly $ 4,056 April, 1997
500,000 Quarterly 25,000 May, 1997
600,000 --- --- February, 1997
450,000 --- --- June, 1997
At December 31, 1996, the Company had other outstanding term notes
payable with varying terms and conditions in the total amount of $280,065.
The interest rates on these notes range from prime (8.25% at December 31, 1996)
to prime plus 3%, with maturities dates between January 1996 and December
1998. A portion of these notes are collateralized by property, plant and
equipment owned by the Company. The portion of the total notes payable that
will become due within the next twelve months amounted to $50,624 at December
31, 1996.
Financing of the Company's startup activities was provided by certain
stockholders and a related corporation, primarily in the form of a Master
Revolving Promissory Note and subordinated line of credit, in the amount of
$1,500,000 and $200,000, respectively. These borrowings were repaid prior to
December
<PAGE>
31, 1995, and the facility is no longer available to the Company.
The carrying value of the Notes and Lines of Credit approximated market
value at December 31, 1996.
Scheduled maturities of long-term obligations are as follows (in
millions):
1997 $3,216,904
1998 224,867
1999 0
2000 2,845,000
Total $6,286,771
See Note 12 for conversion of certain debt amounts subsequent to year end
into common stock.
5. STOCKHOLDERS' EQUITY
The articles of incorporation provide for the issuance of 45,000,000
shares of $0.0001 par value Common Stock and 100,000 shares of $0.01 par value
preferred stock. All of the preferred stock has been designated as Series A
Convertible Preferred Stock by the Board of Directors.
PREFERRED STOCK
On August 3, 1995, the Company received subscriptions for 550 shares of
Series A Convertible Preferred Stock at the rate of $3,636 per share, or gross
proceeds of $1,999,800. Additionally, the subscribers to the Series A
Convertible Preferred Stock were issued warrants to purchase a total of 854,231
shares of common stock at a price of $0.70 per share, exercisable for three
years from the date of issuance of the warrants. The shares and warrants were
issued to existing shareholders as well as other outside investors. On March
8, 1996, the Series A Preferred Stock was automatically converted into
2,847,412 shares of the Company's common stock.
COMMON STOCK
During 1996, the Company issued 303,428 shares of common stock at $0.70
per share, or $212,400. Additionally, the Company issued 25,586 shares of
common stock at $2.65 per share, or $67,763, for services rendered. In
addition, the Company issued 12,001,960 shares of common stock at $2 per share
in connection with the acquisitions discussed in Note 3 during 1996. During
1995, the company issued 103,544 shares of common stock at $0.0966 per share,
or $10,000, for services rendered.
COMMON STOCK WARRANTS
At December 31, 1996, the Company had outstanding warrants that gave the
holders the right to purchase 1,905,631 shares of the Company's common stock
at $0.70 per share, 20,000 shares at $4 per share, and 160,000 shares at $1 per
share. Warrants of 1,726,000, 1,540,000 in connection with the Senior
Subordinated Notes and 186,000 in connection with services rendered, were
exercised in 1996 at a price per share of $0.70.
<PAGE>
OPTIONS AND WARRANTS FOR SERVICES PROVIDED
During 1996, the Company granted the following options and warrants for
services provided:
Number Price Per Share
Warrants 22,400 $0.70
Options 142,464 $2.00-7.03
The Company has assigned the fair market value to these options and
warrants and has recorded a charge to expense of $208,456 during 1996.
6. STOCK OPTION PLANS
1995 OPTIONS
During 1995, the Company granted 1,250,000 stock options to certain key
employees and directors. The director shares were subsequently changed to
be issued under the Nonemployee Director Stock Option Plan ("NEDSOP"). The
exercise price of the stock options granted to the employees and directors is
$0.70 per share, the estimated fair market value of the Company's common stock
at the date of grant. Options generally vest ratably over five years and expire
five years after becoming fully vested. As of December 31, 1996, 290,500 of
the non-NEDSOP options were exercisable.
1996 STOCK OPTION PLANS
During 1996, the Company established three stock option plans:
Long-Term Stock Option Plan ("LTSOP"), the Incentive Stock Option Plan
("ISOP"), and the NEDSOP (collectively, the "1996 Plans"); 500,000 shares of
Common Stock are authorized for issuance in each plan. Options are
exercisable at the fair market value of the Common Stock (as determined by
the Board of Directors) on the date of grant. Options generally vest ratably
over five years (except the NEPSOP which vest over 4 years) and expire five
years after becoming fully vested. The plans contain various provisions
pertaining to accelerated vesting in the event of significant corporate
changes. The following table summarizes the status of the 1996 Plans as of
December 31, 1996:
LTSOP ISOP NEDSOP
Balance at December 31, 1995 0 0 300,000
Granted 300,002 226,000 100,000
Forfeited (40,000) (84,000) 0
Exercised 0 0 0
Outstanding 260,002 142,000 400,000
Exercisable 0 6,000 100,000
In addition, the Company granted the following options outside of the
above plans during 1996:
Shares Option Price Vesting Period Vesting Period
250,000 $2.00 Four years 4 years from initial vesting date
100,000 $2.50 Five years 5 years from initial vesting date
80,000 $6.00 Three years 3 years from initial vesting date
<PAGE>
35,000 $2.50 Five years 5 years from initial vesting date
The exercise price of the stock options granted to the employees is equal
to the estimated fair market value of the Company's common stock at the date of
grant; 185,000 of these options at a weighted average exercise price of $3.82
per share were forfeited during 1996.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company accounts for its stock-based compensation related to the Stock
Option Plans under APB 25; accordingly, no compensation expense has been
recognized, as all options have been granted with an exercise price equal to
the fair value of the Company's stock on the date of grant. For SFAS 123 pro
forma purposes, the fair value of each option grant has been estimated as of
the date of grant using the Black-Scholes option pricing model with the
following assumptions:
1996 1995
---- ----
Risk-free interest rate 6.29% 5.53%
Expected dividend yield 0 0
Expected lives 6.2 years 6.4 years
Expected volatility 64% 64%
Using these assumptions, the fair value of the stock options granted in
1996 and 1995 is $440,891 and $930,924, respectively, which would be amortized
as compensation expense over the vesting period of the options. Had
compensation cost been determined consistent with the provisions of SFAS 123,
the Company's net loss and pro forma net loss per share for 1996 and 1995 would
have been as follows :
1996 1995
Net loss:
As reported ($7,757,848) ($1,523,924)
Pro forma ($8,188,359) ($1,628,965)
Net loss per share:
As reported ($0.51) ($0.26)
Pro forma ($0.54) ($0.28)
There were no issues prior to January 1, 1995 and the resulting pro forma
compensation cost may not be representative of that expected in future years.
A summary of the status of the Company's Stock Plans at December 31, 1994,
1995, and 1996 and changes during the years ended December 31, 1995 and 1996 is
presented in the following table:
Weighted
Number of Average
Shares Exercise Price
Outstanding at December 31, 1994 0 $ 0.00
Granted 1,550,000 0.70
Forfeited 0 0.00
Exercised 0 0.00
Outstanding at December 31, 1995 1,550,000 $ 0.70
Granted 1,091,002 2.79
Forfeited (309,000) 3.77
Exercised 0 0.00
<PAGE>
Outstanding at December 31, 1996 2,332,002 $ 1.27
The following table summarizes, as of December 31, 1996, for the number of
options outstanding, the exercise price range, weighted average exercise price,
and remaining contractual lives by year of grant:
Weighted
Average
Number of Exercise Weighted Remaining
Grant Shares Price Range Average Price Contractual Life
1996--Quarter 4 241,500 $2.00-3.75 $2.01 4.0 years
1996--Quarter 3 144,000 $4.75-6.00 $5.73 4.1 years
1996--Quarter 2 124,000 $3.00-6.00 $3.88 5.2 years
1996--Quarter 1 272,502 $0.70-2.50 $1.57 5.6 years
1995 1,550,000 $0.70 $0.70 4.4 years
Total stock options exercisable at December 31, 1996 were 390,500 at a
weighted average exercise price of $0.70.
7. INCOME TAXES
The amount of loss before income taxes attributable to domestic and
foreign operations is as follows for the years ended December 31, 1996 and
1995, the period from inception (January 24, 1994) to December 31, 1994, and
the developmental stage:
DEVELOPMENTAL
1996 1995 1994 STAGE
Domestic 70% 38% 0 22%
Foreign 30 62 100 78
The following is a summary of the items which caused recorded income taxes
to differ from taxes computed using the statutory federal income tax rate:
YEARS ENDED DECEMBER 31, DEVELOPMENTAL
1996 1995 1994 STAGE
Statutory federal tax benefit (34)% (34)% (34)% (34)%
Increase (decrease) in tax benefit
resulting from --
State taxes, net of Federal benefit (2) (2) (2) (2)
Valuation Allowance 36 36 36 36
--- --- --- ---
Actual income tax benefit 0% 0% 0% 0%
--- --- --- ---
--- --- --- ---
The sources of differences between the financial accounting and tax
bases of assets and liabilities which gave rise to the net deferred tax asset
are as follows:
December 31, December 31,
1996 1995
------------------------------
Deferred assets:
Net operating loss carryforwards $2,916,000 $ 540,486
Unearned Revenue 660,000 0
Start Up Costs Capitalized 132,000 80,461
<PAGE>
Intangible amortization 46,000 0
----------- ----------
3,754,000 620,947
----------- ----------
Deferred liabilities
Depreciation (441,000) (53,502)
----------- ----------
Net Deferred Tax Asset Before Valuation
Allowance 3,313,000 567,445
Valuation Allowance (3,313,000) (567,445)
----------- ----------
Net Deferred Tax Asset $ 0 $ 0
----------- ----------
----------- ----------
The Tax Reform Act of 1986 provided for certain limitations on the
utilization of net operating loss carryforwards ("NOLs") if certain events
occur, such as a 50% change in ownership. The reverse merger in 1995 and the
1996 acquisitions were such events and, accordingly, the Company's ability to
utilize the carryforwards is limited. Also, the ("NOLs") carryforwards used
to affect any taxes calculated as alternative minimum tax could be
significantly less than the regular tax net operating loss carryforwards.
Further, each of the companies acquired in 1996 had available ("NOLs") that
the Company acquired and will be able to utilized subject to the
aforementioned limitations. The ("NOLs") carryforwards ("NOLs") will be
utilized to offset taxable income generated in future years, subject to the
applicable limitations and their expiration between 2006 and 2011. Since it
currently cannot be determined that it is not more likely than not that the
net deferred tax assets resulting from the NOLs will be realized, a valuation
allowance has been provided in the accompanying consolidated financial
statements.
8. COMMITMENTS AND CONTINGENCIES
LEASES
Lease expenses relate to the lease of office space and include leases with
affiliates (Note a). Rents charged to expense were approximately $312,000,
$66,000, $17,000, and $122,000 for the years ended December 31, 1996 and 1995,
the Inception Period, and the Developmental Stage, respectively.
At December 31, 1996, future minimum lease payments under noncancelable
operating leases with initial remaining terms of more than one year are as
follows:
1997 $ 437,226
1998 437,226
1999 403,752
2000 282,003
2001 58,800
----------
Total $1,619,007
----------
----------
See Note 12 for discussion of a sublease of one of the Company's office
spaces.
LITIGATION
The Company is subject to litigation related to matters arising in the
normal course of business. Management is not aware of any asserted or pending
litigation or claims against the Company that would have a material adverse
effect on the results of operations or liquidity.
10. TRANSACTIONS WITH AFFILIATES
<PAGE>
The Company has a consulting agreement with Charter Trading Corporation
("CTC"), an unaffiliated company whose president and principal stockholder is
a former director. The Company compensates CTC $100,000 per annum for
consulting services. The Company has a similar arrangement with Potere
Management, Inc., of which the Company's Chief Executive Officer and member
of the Board of Directors is President and controlling shareholder. The
Company has accrued approximately $63,000 related to this arrangement, which
is payable on demand.
Prior to 1996, CTC also performed certain accounting, administrative, and
on-site operating services for Charter Panama for which it received $72,000 in
1995 pursuant to a month-to-month agreement. The Company also subleased office
space from CTC for $2,000 per month during 1996 and 1995.
The Company leases office space from a company whose only shareholder is
a former officer of the Company and a member of the Board of Directors. The
Company has a five year lease agreement with monthly payments of $9,800.
This individual also owned in excess of 90% of the capital stock of PDS at
the time of the acquisition of PDS by the Company and was a member of the
board of directors and an officer of the Company. This individual also owned
10% of PDN at the time of its acquisition by the Company.
The Chairman of the Company's Board of Directors and the Company's Chief
Financial Officer were significant shareholders, officers, and directors of
OCI at the time of its acquisition by the Company. Further, the OCI's
Chairman of the Board of Directors was on the Company's board of the
directors at the time of the acquisition. These individuals were both
serving as directors of the Company at the time of the acquisition of
Worldlink, of which they were also significant shareholders.
As discussed in Note 4, the Company's lines of credit have been guaranteed
by the Aurum Group Limited Partnership ("Aurum") and the Chairman of the
Company's Board of Directors and its Chief Financial Officer. 100,000, 30,000,
and 30,000 warrants to purchase shares of Common Stock at $1 per share have
been granted to this group and individuals, respectively. The Company's Chief
Executive Officer and member of the Board of Directors controls Aurum, a
significant stockholder and debt holder of the Company.
Accounts payable--affiliate represents payables to CTC and officers for
services and advances.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table summarizes the Company's quarterly results of
operations for 1996 and 1995:
1996 Quarters FIRST SECOND THIRD FOURTH
Revenues $ 431,722 $ 2,282,705 $ 2,589,805 $ 2,927,370
Operating Loss (676,855) (994,760) (1,742,629) (3,874,306)
Net Loss (707,652) (1,103,575) (1,874,750) (4,071,871)
Net Loss Per Share ($0.09) ($0.09) ($0.12) ($0.27)
1995 Quarters
Revenues $ 10,156 $ 30,126 $ 29,098 $ 53,595
Operating Loss (142,184) (286,493) (289,796) (711,793)
Net Loss (162,341) (334,225) (314,806) (712,752)
Net Loss Per Share ($0.03) ($0.06) ($0.05) ($0.12)
11. SUBSEQUENT EVENTS
<PAGE>
Subsequent to year end, the Company completed a private placement
offering of its $0.00001 par value common stock. The Company issued
8,008,998 shares at $1 per share as follows:
Common stock sold for cash $ 5,426,665
Senior subordinated debt converted to common stock 2,175,000
Loans from shareholders converted to common stock 324,000
Accrued liabilities converted to common stock 50,000
Accounts payable converted to common stock 33,333
Total $ 8,008,998
All conversions of stock for liabilities were the rate of $1 of the related
liability to $1 of common stock.
The following summary pro forma balance sheet information gives effect to
the private placement as if it had occurred on December 31, 1996:
As Reported Pro Forma
------------ -------------
Current Assets $ 3,021,620 $ 8,448,285
Total Assets 34,791,603 40,218,268
Current Liabilities 13,375,567 12,968,234
Long-term Liabilities 2,743,293 568,293
Common Stock 242 1,043
Additional Paid-in-Capital 28,302,025 36,310,222
Total Equity 18,672,744 26,681,742
In conjunction with the private placement, a few major shareholders
returned 2,500,000 shares of their shares, including 1,516,964 to be held to
extinguish potential guaranties in conjunction with the OCI and Worldlink
acquisitions, to the Company for no consideration and such shares were retired.
The Company entered into a one year agreement with a long-distance
provider with a minimum commitment of $100,000 per month.
100,000 options at an exercise price of $2 per share, equal to the fair
market value on the date of grant, have been granted to a new member of the
Company's Board of Directors under the NEDSOP.
Subsequent to year end, the Company entered into an agreement to
sublease the office space formerly utilized by Worldlink, at a price equal to
the scheduled lease payments exclusive of the escalation provisions of the
original lease. The current lease payment is $8,369 per month.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of CHARTER COMMUNICATIONS INTERNATIONAL,
INC. and its subsidiaries as of and for the year ended December 31, 1996
included in this Form 10-KSB and have issued our report thereon dated March
31, 1997. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index
is the responsibility of the Company's management, and is presented for
purposes of complying with the Securities and Exchange Commission's rules,
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 28, 1997
<PAGE>
CHARTER COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
Column A Column B Column C Column D Column E
- -------------------------------------- ---------- --------- ---------- ----------
Balance at Write-offs, Balance at
Beginning Net of End of
Classification of Period Additions Recoveries Period
- -------------------------------------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
For the Year Ended December 31, 1996
Allowance for Doubtful Accounts 3,762 1,040,275 (609,037) 435,000
Allowance for Obsolete Inventory 0 70,000 0 70,000
----- --------- -------- -------
3,762 1,110,275 (609,037) 505,000
----- --------- -------- -------
----- --------- -------- -------
For the Year Ended December 31, 1995
Allowance for Doubtful Accounts 0 3,762 0 3,762
Allowance for Obsolete Inventory 0 0 0 0
----- --------- -------- -------
0 3,762 0 3,762
----- --------- -------- -------
----- --------- -------- -------
For the Year Ended December 31, 1994
Allowance for Doubtful Accounts 0 0 0 0
Allowance for Obsolete Inventory 0 0 0 0
----- --------- -------- -------
0 0 0 0
----- --------- -------- -------
----- --------- -------- -------
</TABLE>
Page 2
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") dated as of September
4, 1996, is entered into by and between Charter Communications International,
Inc., a Nevada corporation (the "COMPANY"), Stephen E. Raville, Patrick E.
Delaney (collectively, the "NEW HOLDERS"), The Aurum Group Limited Partnership,
a Texas limited partnership, Potere Management, Inc., a Texas corporation and
David G. Olson (collectively, "OLSON").
WHEREAS, pursuant to Section 6.05 of that certain Acquisition Agreement
dated July 15, 1996 between the Company, Overlook Communications International
Corporation, the New Holders and OCI Acquisition Corp., a subsidiary of the
Company (the "OVERLOOK AGREEMENT"), the Company has agreed to use its best
efforts to register shares of Charter Stock in order to provide the New Holders
the right to sell the Charter Stock acquired by them pursuant to the Overlook
Agreement (the "NEW HOLDER STOCK") on and after September 27, 1997; and
WHEREAS, Olson is a founding shareholder of the Company who has made
significant and additional contributions to the well being of the Company, and
the Company has agreed to provide registration rights to Olson consistent with
those provided to the New Holders.
NOW, THEREFORE, in consideration for and as an inducement to the New
Holders to enter into the Overlook Agreement and in consideration of the mutual
covenants and premises set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged and
confessed, the parties agree as follows:
1. REGISTRATION.
1.1 REGISTRATION OBLIGATION.
1.1.1 DEMAND REGISTRATION. The Company hereby agrees, upon
written request of either New Holder or Olson, to use its reasonable best
efforts to register for sale by filing with the U.S. Securities and Exchange
Commission (the "COMMISSION") such registration statements necessary for public
sale of Charter Stock (hereinafter, a "REGISTRATION") on behalf of each of the
New Holders and Olson, covering all, or such lesser number of shares as may be
agreed upon in writing by the New Holders and Olson, of the shares of Charter
Stock beneficially owned by each of the New Holders and Olson (collectively, the
"ELIGIBLE SHARES"), subject to the terms and conditions of this Agreement. For
purposes of this Agreement, the number of shares beneficially owned by such
persons shall be determined by reference to the Form 3 or 4 filed by each such
person, which indicates (or permits the determination of) the number of Charter
Stock beneficially owned by such persons as of the close of business on the date
of this Agreement.
1.1.2 SHELF REGISTRATION. The Company shall at the request
of any holder of Eligible Shares fulfill its registration obligations under
Section 1.1.1 by filing a "shelf registration" registering all, or such lesser
number of shares as may be agreed upon in writing by the New Holders and Olson,
of the Eligible Shares. The Company's obligation to maintain the effectiveness
of any such shelf registration shall terminate on the date of termination of
this Agreement or the date that the New Holders and Olson have sold or otherwise
transferred or disposed of all shares registered in the shelf registration,
whichever date is earlier.
<PAGE>
1.2 LIMITATIONS ON REGISTRATION OBLIGATION.
1.2.1 GENERAL. The Company shall not be obligated to file a
Registration or maintain the effectiveness thereof unless all the participants
in such Registration agree to accomplish the distribution of shares offered
thereby in an organized manner, which agreement shall be satisfactory to the
Company, in its reasonable discretion, and may be subject to conditions to
promote the orderly and organized distribution of such Eligible Shares,
including, without limitation, requiring that all persons participating in such
offering agree to utilize not more than one brokerage firm on any trading day,
and to limit the number of shares which may be sold in any single day.
1.2.2 OPINION LETTER AND BLUE SKY REGISTRATION. The Company
shall not be required to file any Registration or shelf registration if, prior
to the time same is required, counsel for the Company delivers an opinion to
each of the New Holders and Olson that all of the Eligible Shares may be sold
pursuant to the provisions of Rule 144 within a period of not more than 90 days
from the date of such opinion. Upon a Registration, or shelf registration, the
Company shall use its reasonable efforts to cause the Eligible Shares to be
registered or qualified under the state securities laws or blue sky laws of such
jurisdictions as the New Holders or Olson may reasonably request; provided,
however, that the Company shall not be required to register or qualify Eligible
Shares in any jurisdiction where such registration or qualification would
require the Company to subject itself to taxation in such jurisdiction or to
register or require it to qualify for authority to do business as a foreign
corporation or would subject the Company to general service of process.
1.3 OBLIGATIONS OF NEW HOLDERS AND OLSON. It shall be a condition
precedent to the obligations of the Company to file a Registration that the New
Holders and Olson shall furnish promptly to the Company instruments in writing
duly executed containing all information as the Company shall reasonably request
for use in connection with the preparation of the Registration, any registration
statement, or prospectus or preliminary prospectus included therein, as well as
all undertakings which the Commission may request or the Company may reasonably
request as to compliance with Rule 10b-6 under the Securities Exchange Act of
1934 (the "Exchange Act"). In connection with any underwritten registration of
shares held by the New Holders and Olson, if requested by the underwriter, the
New Holders and Olson will agree not to sell or otherwise transfer or dispose of
any Charter Stock (except that this obligation shall not apply to Eligible
Shares included in such underwritten registration) for the period requested by
such underwriter.
2. WAITING PERIOD. Olson hereby agrees that, notwithstanding any rights
he may have to sell or otherwise transfer or dispose of Charter Stock pursuant
to Rule 144 or otherwise, he will only sell or otherwise transfer or dispose of
Charter Stock at such times and in such amounts as each of the New Holders are
eligible to sell shares of New Holder Stock pursuant to a Registration or shelf
registration as set forth herein.
3. EXPENSES. With respect to any Registration or shelf registration:
(i) which registers for sale only New Holder Stock and Charter Stock owned
by Olson, the Company shall bear all usual and customary expenses relating to
registration up to a maximum amount of $5,000 for each such registration,
including all registration, filing and
2
<PAGE>
qualification fees and expenses of counsel to the Company, all fees and
expenses of the Company's independent auditors, all fees and expenses of
underwriters (except as set forth below) and all printing costs and all fees
and expenses incidental to complying with the state securities or "blue sky"
laws with regard to Eligible Shares;
(ii) which registers for sale shares of Charter Stock in addition to New
Holder Stock and Charter Stock owned by Olson, the Company shall bear all usual
and customary expenses relating to registration, including all registration,
filing and qualification fees and expenses of counsel to the Company, all fees
and expenses of the Company's independent auditors, all fees and expenses of
underwriters (except as set forth below) and all printing costs and all fees and
expenses incidental to complying with the state securities or "blue sky" laws
with regard to Eligible Shares; and
(iii) the New Holders and Olson shall bear (a) all commissions and other
expenses that are customarily paid by selling stockholders relating to the
sale of such stockholders' shares pursuant to registration, such as all
selling expenses and underwriter discounts and commissions attributable to
the shares offered by either of the New Holders or Olson; (b) all fees and
expenses of any special counsel or experts retained by either of the New
Holders or Olson plus all out-of-pocket expenses of either of the New Holders
or Olson or any agent(s) who manages the account of either of the New Holders
or Olson, in connection with the registration; and (c) with respect to any
registration covered by 3(i) above, on a pro-rata basis, all usual and
customary expenses relating to registration that are in excess of $5,000.
4. INDEMNIFICATION.
4.1 INDEMNIFICATION BY THE COMPANY. In the event of any registration
of Charter Stock pursuant to this Agreement, the Company will indemnify and hold
harmless each New Holder or Olson (the "INDEMNIFIED PERSON") against any and all
losses, claims, damages or liabilities, joint or several, to which the
Indemnified Person may become subject under the Securities Act of 1933, the
Exchange Act, or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any registration statement filed in a registration pursuant to this Agreement
under which such Charter Shares were registered, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereto
(collectively, the "REGISTRATION DOCUMENTS"), or arise out of or are based upon
the omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances under which they were made; PROVIDED HOWEVER, that the Company
will not be liable in any such case to: (i) the Indemnified Person to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or omission made in the Registration Documents, in
reliance upon and in conformity with information furnished to the Company by or
on behalf of the Indemnified Person, or (ii) the Indemnified Person from whom
the person asserting any such loss, claim, damage or liability purchased the
Charter Stock if the Indemnified Person failed to send or give a copy of the
final prospectus to the person asserting such loss, claim, damage or liability,
unless such failure is by an underwriter or investment banking firm which agrees
to act on behalf of both the Company and the Indemnified Person in such
registration.
3
<PAGE>
4.2 INDEMNIFICATION BY THE NEW HOLDERS AND OLSON. In the event of
any registration of any Charter Stock under the Securities Act of 1933 pursuant
to this Agreement, each of the New Holders and Olson will, to the extent
permitted by law, indemnify and hold harmless the Company, each of its directors
and officers, each underwriter, each officer and director of each underwriter,
and each person, if any, who controls the Company (within the meaning of Section
15 of the Securities Act) and each New Holder and Olson against any and all
losses, claims, damages or liabilities, joint or several, to which the Company,
the directors and officers of the Company, the underwriter, the officers and
directors of underwriter, or controlling person may become subject under the
Securities Act of 1933, Exchange Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in any Registration Documents under which the Charter Shares were
registered or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which they
were made, if the statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company by such New
Holder and Olson for use in connection with the preparation of such Registration
Documents.
4.3 INDEMNIFICATION PROCEDURE. The procedure for notice of any claim
for indemnity shall be made in accordance with the terms and provisions of
Section 4.03(h) of the Overlook Agreement, provided, however, that the
"Indemnity Period" shall expire at midnight of the first anniversary following
the termination of this Agreement.
5. ADDITIONAL INFORMATION. If at any time during which the delivery of a
prospectus relating to Charter Stock registered pursuant to this Agreement is
required under the Securities Act of 1933 and the Company has a current
obligation under this Agreement to maintain the effectiveness of any such
registration any event occurs as a result of which the prospectus as then
supplemented or amended would include any untrue statement of a material fact,
or omit to state a material fact necessary to make the statements therein not
misleading, the Company shall promptly notify the New Holders and Olson of such
event and (i) to the extent such statement or omission can be corrected by a
supplement, the Company will promptly prepare and file a supplement with the
Commission, or (ii) to the extent such statement or omission can only be
corrected by an amendment, the Company will notify the New Holders and Olson of
the occurrence of such event and will promptly prepare and file an appropriate
amendment with the Commission and will use its reasonable best efforts to cause
such amendment to be declared effective.
6. MISCELLANEOUS.
6.1 SUCCESSORS AND ASSIGNS. Neither the New Holders nor Olson may
assign their rights under this Agreement in connection with the transfer or sale
of any Charter Stock held by them. This Agreement shall inure to the benefit of
and be binding upon any successors and assigns of the parties hereto (only to
the extent agreed by all the parties hereto).
6.2 NOTICES. All notices under this Agreement shall be made in
accordance with Section 12.02 of the Overlook Agreement.
4
<PAGE>
6.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.4 HEADINGS. The headings of the sections, subsections, and
paragraphs of this Agreement have been added for convenience only and shall not
be deemed to be a part of this Agreement.
6.5 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas.
6.6 ENTIRE AGREEMENT. All other prior or contemporary
representations, warranties, covenants or agreements, if any, between the
parties hereto, or their representatives, with respect to the subject matter
hereof are superseded by and merged into this Agreement, and this Agreement
shall constitute the entire understanding between the parties with respect to
the matters included herein. No waiver, amendment or modification of the terms
hereof shall be valid unless made in writing signed by the party to be charged
and only then to the extent expressly set forth therein. A party may waive in
writing compliance by another party with any of the terms contained in this
Agreement. No waiver, however, shall be a waiver of any other matter or
constitute a continuing waiver.
6.7 TERMINATION. This Agreement shall terminate on the date that any
New Holder Stock is eligible for resale by the New Holders pursuant to Rule 144
or the date an instrument is signed by all of the parties hereto specifically
terminating this Agreement.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth on the first page hereof.
NEW HOLDERS: COMPANY:
STEPHEN E. RAVILLE CHARTER COMMUNICATIONS
INTERNATIONAL, INC.
/s/ STEPHEN E. RAVILLE By: /s/ DAVID G. OLSON
- ----------------------------------- --------------------------------
David G. Olson
President and Chief Executive
Officer
PATRICK E. DELANEY
/s/ PATRICK E. DELANEY
- -----------------------------------
DAVID G. OLSON
/s/ DAVID G. OLSON
- -----------------------------------
6
<PAGE>
Calculation of Net Loss Per Share
For the Year For the Year
Ended Ended
December 31, 1995 December 31, 1996
----------------- -----------------
Weighted Average Shares Outstanding 5,799,735 15,088,376
Net Loss $(1,523,924) $(7,757,848)
----------- -----------
Primary Net Loss Per Share $(0.26) $(0.51)
----------- -----------
----------- -----------
Weighted Average Shares for Primary 5,799,735 15,088,376
Adjustments 0 0
----------- -----------
Total Shares for Fully Diluted
Net Loss Per Share 5,799,735 15,088,376
----------- -----------
Net Loss $(1,523,924) $(7,757,848)
Adjustments 0 0
----------- -----------
Net Loss Attributable to Fully
Diluted Net Loss Per Share $(1,523,924) $(7,757,848)
----------- -----------
Fully Diluted Net Loss Per Share $(0.26) $(0.51)
----------- -----------
----------- -----------
Page 1
<PAGE>
Exhibit 21
NAME JURISDICTION OF INCORPORATION
---- -----------------------------
TOPS Corporation Nevada
Overlook Communications International
Corporation North Carolina
WorldLink Communications, Inc. Georgia
Phoenix DataNet, Inc. Texas
Phoenix Data Systems, Inc. Texas
Telecommute Solutions, Inc. Texas
Charter Communicaciones Internacionales
Grupo, S.A. Panama
Charter Communications International
de Venezuela, S.A. Venezuela
Charter Communications International
de Mexico Mexico
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 320,252
<SECURITIES> 0
<RECEIVABLES> 2,110,999
<ALLOWANCES> (435,000)
<INVENTORY> 307,940
<CURRENT-ASSETS> 3,021,620
<PP&E> 6,166,163
<DEPRECIATION> (791,892)
<TOTAL-ASSETS> 34,791,603
<CURRENT-LIABILITIES> 13,375,564
<BONDS> 2,743,293
0
0
<COMMON> 242
<OTHER-SE> (9,629,520)
<TOTAL-LIABILITY-AND-EQUITY> 34,791,603
<SALES> 2,356,436
<TOTAL-REVENUES> 8,231,602
<CGS> 1,933,401
<TOTAL-COSTS> 4,341,432
<OTHER-EXPENSES> 9,245,319
<LOSS-PROVISION> 461,060
<INTEREST-EXPENSE> 482,081
<INCOME-PRETAX> (7,757,848)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,757,848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,757,848)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
