SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission file number 0-25194
INTERAMERICAS COMMUNICATIONS CORPORATION
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(Name of small business issuer in its charter)
Texas 87-0464860
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
2600 Douglas Road, Suite 501, Coral Gables, Florida 33134
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (305) 448-4422
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
(Title of class)
Common Stock Purchase Rights
(Title of class)
Check whether the issuer (1) 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 / /
<PAGE>
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 the definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes / / No /X/
The Registrant's revenues for the year ended December 31, 1997 were
$1,130,000.
The aggregate market value at August 11, 1998 of the Registrant's
shares of Common Stock, $.001 par value (based upon the closing price of $2.31
per share of such shares on the Nasdaq SmallCap Market), held by non-affiliates
of the Registrant was approximately $38,194,233. Solely for the purposes of
this calculation, shares held by directors and officers of the Registrant have
been excluded. Such exclusion should not be deemed a determination or an
admission by the Registrant that such individuals are, in fact, affiliates of
the Registrant.
At August 12, 1998, there were outstanding 19,084,300 shares of the
Registrant's Common Stock.
Transitional Small Business Disclosure Format (check one): Yes / /
No /X/
<PAGE>
EXPLANATORY NOTE
The Registrant hereby amends and restates in its entirety the
Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1997.
During August 1998, the Company restated its December 31, 1997 and 1996
annual financial statements and second and third quarter 1996 and all 1997
quarterly unaudited financial statements to reflect the effect of revising the
price per share of Company common stock issued in connection with the May 1996
acquisition of Resetel from $2.25 to $5.99 per share. The revised price per
share is based on the average closing price of the Company's common stock for
the period of 14 days before and after the date the terms of the acquisition
were announced. The previously recorded purchase price was based on the
Company's March 1996 private placement.
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TABLE OF CONTENTS
PAGE
PART I
Item 1 Description of Business.......................................... 1
Item 2 Description of Property.......................................... 28
Item 3 Legal Proceedings................................................ 28
Item 4 Submission of Matters to a Vote of Security Holders.............. 28
PART II
Item 5 Market for Common Equity and Related Stockholder Matters......... 28
Item 6 Management's Discussion and Analysis
Of Financial Condition and Results of Operations................. 29
Item 7 Financial Statements............................................. 40
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 40
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act................ 40
Item 10 Executive Compensation........................................... 42
Item 11 Security Ownership of Certain Beneficial Owners and Management... 45
Item 12 Certain Relationships and Related Party Transactions............. 45
Item 13 Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 49
i
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PART I
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE DETAILED
INFORMATION, INCLUDING RISK FACTORS AND FINANCIAL STATEMENTS AND NOTES THERETO,
LOCATED ELSEWHERE IN THIS PROSPECTUS. CERTAIN OF THE INFORMATION CONTAINED IN
THIS SUMMARY AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING INFORMATION WITH
RESPECT TO THE COMPANY'S PLANS AND STRATEGY FOR ITS BUSINESS, ACQUISITIONS AND
RELATED FINANCINGS, ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
FEDERAL SECURITIES LAWS, INCLUDING THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, THERE CAN BE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY
STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION,
THE INFORMATION UNDER "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." ALL SUCH
FORWARD-LOOKING STATEMENTS ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE
CAUTIONARY STATEMENTS. ASUSED HEREIN, THE TERM "LATIN AMERICA" MEANS CENTRAL
AMERICA, SOUTH AMERICA AND MEXICO. EXCEPT AS OTHERWISE INDICATED, ALL DOLLAR
AMOUNTS ARE EXPRESSED IN UNITED STATES DOLLARS AND REFERENCES TO "DOLLARS" AND
"$" ARE TO UNITED STATES DOLLARS. SEE "GLOSSARY OF DEFINED TERMS," FOR
DEFINITIONS OF CERTAIN TECHNICAL TELECOMMUNICATIONS AND INDUSTRY TERMS USED
HEREIN WHICH ARE CAPITALIZED.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
The Company is a new provider of high bandwidth integrated
telecommunications services to high volume users in Santiago, Chile and Lima,
Peru, including business customers and other telecommunications carriers. The
Company believes that the size, expected growth and increasing deregulation of
the telecommunications industry in Latin America offers the Company
considerable opportunities to broaden its existing service offerings and to
expand its recently commenced operations into additional key Latin American
business centers.
Prior to November 1996, the Company operated as a development stage
company whose activities primarily consisted of the acquisition of licenses,
concessions and rights-of way in certain key Latin American markets. Beginning
in November 1996, with the hiring of a new management team, the Company has
focused on the development and operation of high capacity fiber optic networks
in Lima, Peru and Santiago, Chile.
In May 1996, the Company acquired an operating company in Lima, Peru which
holds one of only two local concessions that compete with Telefonica to provide
local private line voice and data services. The Company intends to expand its
existing service offerings to provide local public switched telephony upon the
planned 1999 liberalization of Peru's telecommunications markets. The Company
also intends to apply for a concession to provide public switched long distance
services as regulation permits. The Company currently offers high speed data
transmission services on a private line basis, including area network
interconnection, remote terminal access, dedicated channels for access to the
Internet and voice services on a private line basis. The Company's services are
provided through its 230 kilometer digital fiber optic network in Lima, Peru,
which the Company intends to expand to approximately 400 kilometers. When
completed, the Company's fiber optic network will extend throughout the major
commercial and industrial districts of Lima and the port city of Callao
(combined population of 7.5 million). The Company anticipates substantial
completion of its ATM network in Peru, including last mile connections to
approximately 150 buildings before the end of 1998. The Company believes that
its planned fiber optic network expansion and early implementation of private
line and value-added services prior to the scheduled expiration of Telefonica's
exclusive concession for public switched local and long distance services in
July 1999 will enable the Company to develop a strong customer base and network
presence.
1
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In Chile, the Company currently holds concessions to provide (i) voice and
data transmission services and value-added services on a private line basis and
(ii) public switched domestic and international long distance services. The
Company also maintains a concession to own and operate satellite earth stations
throughout Chile and anticipates being granted in the fourth quarter of 1998 a
concession to provide local public switched telephony services in Santiago. The
Company currently provides similar services to those offered in Peru, as well
as (i) private line remote analog digital telephone access and digital links
for PBX to PBX connections, (ii) local and wide area network design and
engineering and (iii) systems installation, integration and support services.
The Company's services are provided through its 120 kilometer digital fiber
optic network which currently extends through most of Santiago's downtown
business district and the outlying industrial park and airport corridors. With
the completion of last mile connections to approximately 150 buildings,
scheduled for the end of 1998, and approval of a local telephony concession,
the Company believes that it will be able to substantially broaden its product
and service offerings and significantly increase its revenues in Chile.
In December 1997, the Company acquired Iusatel Chile, S.A. (currently
operating under a new name--FirstCom Long Distance S.A.), a company located in
Santiago, Chile, which provides domestic and international long distance
services. FirstCom Long Distance's long distance traffic is switched and
transported, in part, through its own gateway switch and satellite earth
station, as well as through interconnections with other Chilean long distance
carriers. The Company believes that the acquisition of FirstCom Long Distance
will enable the Company to: (i) provide long distance services to its existing
corporate customers; (ii) bundle a variety of service offerings, including long
distance and data services, to attract additional customers; and (iii) access
the approximately $178.2 million Chilean international long distance market.
Local and long distance telecommunications revenues in Peru were
approximately $885.5 million in 1996 and are estimated by Pyramid to increase
to approximately $1.9 billion in the year 2000, representing a compound annual
growth rate of 21%. Local and long distance telecommunications revenues in
Chile were approximately $1.1 billion in 1996 and are estimated by the Pyramid
to increase to approximately $2.2 billion in the year 2000, representing a
compound annual growth rate of 16%.
Upon completion of its anticipated upgrades, scheduled for the end of
1998, all of the Company's existing and planned fiber optic networks will
employ ATM transmission technology with centralized network monitoring control
and maintenance. The Company believes its networks allow it to provide its
customers with uniform, reliable, high quality services which are competitive
with or exceed those services provided by former PTTs and other carriers in the
markets in which it operates.
While the Company only recently commenced its current operations, the
Company's customers already include, among others, Xerox de Chile S.A.,
Autorentas del Pacifico (Hertz) Ltda, and Nike de Chile S.A. in Chile and Sony
Music Entertainment Peru S.A., Banco Interbank and one ISP in Peru. Upon the
substantial completion of its networks, including last mile connections to 150
buildings in each of Peru and Chile scheduled for the end of 1998, the Company
will be able to market aggressively its service offerings to additional
business customers and other telecommunications carriers. The Company also
believes that dedicated access to ISPs will represent a significant source of
new customer relationships in both Chile and Peru because of the anticipated
rapid increase in the number of Internet users throughout Latin America.
2
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BUSINESS STRATEGY
The Company's goal is to become a leading provider of high bandwidth
telecommunications services to business and other high volume users and
carriers operating in key Latin American business centers. The Company follows
a regional business strategy in Latin America as set forth below. The Company
has modified this strategy to adapt to the specific economic and regulatory
environments of each market in which the Company operates. The Company's
ability to implement its business strategy may be affected by a number of
factors including among others, the following: general national and
international economic and business conditions, as well as conditions in the
regions in which the Company operates; demographic change; existing government
regulations and changes in, or the failure to comply with, government
regulations; competition; the loss of any significant customers; changes in
business strategy or development plans; technological developments; the ability
to attract and retain qualified personnel; the significant indebtedness of the
Company; the availability and terms of capital to fund the expansion of the
Company's business; and other factors referenced in this Prospectus. Each of
these factors is, to a large extent, subject to economic, financial,
competitive, regulatory and other factors, many of which are beyond the
Company's control. Accordingly, there can be no assurance that the Company will
successfully implement its business strategy, in whole or in part. The
Company's viability, profitability and growth depend upon the successful
implementation of its business plan.
FOCUS ON KEY MARKETS IN LATIN AMERICA
The Company believes that the size and growth potential of key Latin
American business centers coupled with the ongoing liberalization of the
telecommunications markets throughout the region offer the Company considerable
growth opportunities. The Company intends to build upon its existing operations
and expertise and expand the geographic reach and density of its existing
networks as well as enter additional key Latin American business centers that
have (i) a significant level of unsatisfied demand for high quality,
state-of-the art telecommunications services, (ii) a favorable regulatory
environment and (iii) significant projected economic growth.
ENTER MARKETS EARLY
The Company seeks to enter markets where it can construct or acquire fiber
optic networks and offer telecommunications services in advance of full market
liberalization. The Company has already implemented this strategy in Lima, Peru
where it is one of the first companies to have established a telecommunications
system prior to the liberalization of Peru's telecommunications markets in
August 1998. The Company believes that this early entry into the Lima market
will enable the Company to establish strong business relationships with its
targeted customers prior to onset of widespread competition.
PROVIDE A BROAD RANGE OF HIGH QUALITY TELECOMMUNICATIONS SERVICES
The Company intends to follow the strategy implemented by CLECs in the
United States of installing advanced equipment into their existing fiber optic
networks that enable interconnections with existing public networks and the
provision of switched telephone services. As regulation permits, the Company
will seek to secure a growing portion of its customers' existing and targeted
telecommunications business by adding local, long distance, enhanced voice and
data services to the private line services it currently offers. The Company
believes its customers require maximum reliability, high quality service, broad
geographic coverage, strong customer service and the opportune introduction of
innovative services delivered in a timely and cost-effective manner. The
Company believes that these needs are often left unmet by the former PTT in
markets where the Company currently operates.
3
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TARGET BUSINESS CUSTOMERS AND TELECOMMUNICATIONS CARRIERS
The Company's strategy is to target business customers and
telecommunications carriers in key Latin American business centers. These
customers are typically located in major metropolitan areas, require high
reliability, high volume data transmission and voice capabilities and, in the
case of telecommunications carriers, very large capacity to interconnect POPs.
In addition, many of the Company's existing and targeted customers have
operations in more than one key Latin American business center in which the
Company currently operates or may operate in the future. The Company believes
that by targeting customers with multiple geographic locations it will achieve
operating synergies through the reduction of advertising and other related
costs.
GROWTH THROUGH ACQUISITIONS AND NEW LICENSES
The Company expects to opportunistically enter additional key Latin
American business centers in part by acquiring controlling interests in
existing companies that have licenses, concessions and rights-of-way to install
and operate fiber optic networks or by applying for such licenses and
concessions and negotiating for such rights-of-way directly. The Company may
also acquire other telecommunications service providers in existing and
targeted markets that enable the Company to expand or enhance its current
operations. The Company believes that many emerging local and long distance
carriers, cellular providers and recently privatized PTTs are likely to seek
alliances with local access providers with fiber optic systems, such as the
Company, to compete more effectively in the growing telecommunications markets.
GROWTH THROUGH STRATEGIC ALLIANCES
The Company intends to establish strategic alliances with the following
entities for the following purposes: (i) to engage major international carriers
to facilitate the termination or completion of dedicated international calls to
or from the countries where carriers' customers operate and (ii) to enter into
joint bids with local turnkey integrators and equipment vendors for the sale of
value-added services, such as video-conferencing, Internet, frame relay, ATM
networks, LAN to LAN interconnections, PBX and private telephone networks.
4
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UNIFY MARKETING IDENTITY
The Company intends to conduct its business under a single brand name in
the markets in which it operates to develop name recognition for its services.
In this regard, the Company has filed an application to register the name
"FirstCom" in Chile, Peru and the United States. The Company believes that the
use of a recognized brand name will facilitate customer referrals and achieve
economies of scale through a unified marketing campaign.
SENIOR NOTE OFFERING
On October 27, 1997, the Company consummated the Senior Note Offering of
150,000 units pursuant to Rule 144A and Regulation S under the Securities Act,
consisting of (i) $150.0 million aggregate principal amount of 14% Senior Notes
due October 27, 2007 and (ii) 5,250,000 Unit Warrants to purchase an aggregate
of 5,250,000 shares of Common Stock, at an exercise price of $4.40 per share.
The Senior Note Offering resulted in net proceeds to the Company of
approximately $142.5 million. The Units were originally issued and sold by the
Company in a transaction which was exempt from the registration requirements of
the Securities Act. The Company has filed a Form S-4 and Form S-1 Registration
Statements with the SEC to register under the Securities Act (i) New Notes
which contain substantially identical terms as the Senior Notes and are being
offered in exchange for the Senior Notes and (ii) the Common Stock underlying
the Unit Warrants, respectively. The form and terms of the New Notes are the
same as the form and terms of the Existing Notes for which they may be
exchanged, except that the New Notes will have been registered under the
Securities Act, and hence the New Notes will not bear legends restricting the
transfer thereof.
INDUSTRY OVERVIEW
GENERAL
The continuing liberalization of the telecommunications industry and
technological change have resulted in an increasingly information-intensive
business environment. Regulatory, technological, marketing and competitive
trends have significantly expanded the Company's opportunities in the
converging voice and data telecommunications markets. Rapid liberalization of
the telecommunications industry in Latin America is expected to expand
opportunities in the local telecommunications services market. Technological
advances, including growth of the Internet, the increased use of packet
switching technology for voice communications and the growth of multimedia
applications, are expected to result in growth in the high-speed data services
market. The Company believes that the current deregulation in many Latin
American countries, coupled with technological innovation, will lead to market
developments similar to those that occurred upon deregulation of long distance
telecommunications services in the United States and the United Kingdom,
including an increase in traffic volume and the continued introduction of new
providers of telecommunications services of varying sizes.
Telecommunications traffic of business customers and telecommunications
carriers has increased dramatically and these customers now insist upon the
quality and high capacity inherent in fiber optic transmission technology such
as the technology used by the Company. As customers require increased bandwidth
capabilities to handle complex voice, video and data telecommunications, the
Company believes that demand for transmission capacity will continue to
increase. Digital signals carried over optical fibers are superior in many
respects to analog signals carried over copper wires, an older technology which
many PTTs continue to use for parts of their networks, although many PTTs are
using fiber optic technology to expand their existing networks. In addition to
offering faster and more accurate transmission of voice and data
communications, digital fiber optic networks generally require less maintenance
than comparable copper wire networks, thereby decreasing operating costs. The
capacity of fiber optic cable is determined in part by the interface of
electronic equipment with the network, thereby allowing network capacity to be
increased through a change in electronics, rather than the fiber itself. Fiber
optic cable also provides enhanced transmission quality as signals are largely
immune to electromagnetic interference.
5
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LATIN AMERICAN MARKETS
Many countries in Latin America, and most of the region's major
metropolitan markets, have economies that are growing faster than many other
areas of the world. The Company believes that this growth is attributable in
part to an increase in foreign investments, new trade agreements, such as the
NAFTA, Mercosur and the Andean Pact, and the privatization of many industries,
including the telecommunications industry. Many of Latin America's major
metropolitan centers are among the largest cities in the world, are centers of
trade and commerce for a wide region or for an entire country, and are home to
a high concentration of large domestic and multinational corporations that
require advanced telecommunications services. Following the economic recovery
of many Latin American countries in the early 1990's, multinational
corporations headquartered in North America, Europe and Asia began to invest in
Latin America by either establishing new operations or expanding existing
operations. In conducting their activities in Latin America, these
multinational corporations require state-of-the-art telecommunications networks
to handle the flow of information between their headquarters and their branches
throughout Latin America. The telecommunications infrastructure in many of
these markets is very limited or obsolete, resulting in significant unmet
demand for advanced telecommunications services including reliable, high
capacity data circuits, private line LANs and domestic and international long
distance connectivity. The telecommunications industry in Latin America has
experienced rapid growth in large part because most Latin American governments
are opening their telecommunications markets to competition. By the year 2000,
the telecommunications markets in most countries in the region are expected to
be deregulated.
The following table sets forth certain historical and projected economic
data and selected information regarding the telecommunications markets in the
Latin American countries where the Company operates:
<TABLE>
<CAPTION>
PERU
1993 1994 1995 1996
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
ECONOMIC DATA*
Population (millions) 22.5 22.9 23.4 23.8
Real GDP (in constant 1990 US$ billions) 36.5 41.2 44.1 45.3
Inflation (%) 39.5 15.4 10.2 11.8
TELECOMMUNICATIONS DATA**
Main Lines in Service (in thousands) 673.0 772.4 1,109.2 1,435.1
Penetration Rate (main lines per 100 pop) 2.9 3.4 4.7 5.9
Service Revenues (US$ millions) 655.8 590.7 825.9 880.4
Local Services (US$ millions) 190.7 251.4 459.1 506.9
Toll Services (US$ millions) 235.2 123.2 130.9 143.1
International Services (US$ millions) 229.9 216.1 235.9 230.5
CHILE
1993 1994 1995 1996
----- ----- ------- -------
ECONOMIC DATA*
Population (in millions) 13.8 14.0 14.3 14.5
Real GDP (constant 1990 US$ billions) 38.2 39.8 43.1 46.1
Inflation (%) 12.2 8.9 8.2 6.6
TELECOMMUNICATIONS DATA**
Main Lines in Service (in millions) 1.5 1.6 1.8 2.2
Penetration Rate (main lines per 100 pop) 11.0 11.6 13.0 14.9
Service Revenues (US$ millions) 714.10 765.10 1,016.0 1,186.7
Local Services (US$ millions) 479.0 560.6 627.8 733.3
Toll Services (US$ millions) 135.2 118.9 235.6 275.2
International Services (US$ millions) 99.9 85.6 152.6 178.2
6
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<CAPTION>
PERU
1997 1998 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ECONOMIC DATA*
Population (millions) 24.3 24.8 25.3 25.8
Real GDP (in constant 1990 US$ billions) 47.6 50.2 53.1 56.5
Inflation (%) 10.0 9.1 8.3 7.5
TELECOMMUNICATIONS DATA**
Main Lines in Service (in thousands) 1,595.5 1,850.8 2,093.6 2,437.7
Penetration Rate (main lines per 100 pop) 6.6 7.5 8.3 9.4
Service Revenues (US$ millions) 1,216.2 1,410.8 1,595.9 1,858.2
Local Services (US$ millions) 676.0 784.2 887.1 1,032.9
Toll Services (US$ millions) 192.8 223.6 253.0 294.5
International Services (US$ millions) 347.4 403.0 455.8 530.8
CHILE
1997 1998 1999 2000
------- ------- ------- -------
ECONOMIC DATA*
Population (in millions) 14.7 15.0 15.2 15.4
Real GDP (constant 1990 US$ billions) 48.8 52.3 55.9 59.8
Inflation (%) 5.7 5.0 5.1 4.7
TELECOMMUNICATIONS DATA**
Main Lines in Service (in millions) 2.6 3.0 3.5 3.9
Penetration Rate (main lines per 100 pop) 17.8 20.3 22.9 25.4
Service Revenues (US$ millions) 1,443.1 1,668.4 1,911.7 2,157.1
Local Services (US$ millions) 891.7 1,030.9 1,181.3 1,332.9
Toll Services (US$ millions) 334.6 386.9 443.3 500.2
International Services (US$ millions) 216.8 250.6 287.1 324.0
</TABLE>
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Sources: Bank of America World Information Services (March 1997) and Pyramid
Research Report (October 1996)
* Economic Data includes historical information for the years 1993-1996 and
projections for the years 1997-2000.
** Telecommunications Data includes historical information for the years
1993-1995 and projections for the years 1996-2000.
7
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COMPETITIVE LOCAL MARKET ACCESS
Once the domain of PTTs, the local access market in both developed and
emerging countries is increasingly open to competition. Where permitted, local
markets may be entered via any combination of (i) construction of proprietary
wired network infrastructure, (ii) construction of wireless local loop, PCS or
cellular networks and (iii) resale of the existing local carrier's network.
Companies gaining local access through the use of a fiber optic rings using ATM
technology are uniquely positioned to provide services for large business
customers due to the high capacity of such systems.
In the United States and other developed countries, CAPs have been allowed
to enter markets in advance of complete deregulation through their provision of
special access services and private line services. Typically, CAPs begin
providing such services through their own fiber optic loop networks, which are
built over existing facilities and often exceed existing providers in terms of
bandwidth, reliability and enhanced service capability. Frequently, fixed
wireless technologies are used to cost effectively extend the network from the
fiber optic network to customer locations. Special access services provide high
capacity voice, data and video circuits to connect long distance carriers with
their respective customers. Private line services provide high capacity
circuits to transmit voice, data and video between two or more end-user
locations locally or internationally.
Long distance carriers have traditionally been the first customers for
CAPs. Local access in the markets in which the Company operates in some cases
comprises over forty percent of the cost of a long distance call. For this
reason, long distance carriers, as well as high volume corporate customers,
have great demand for the lower cost local access provided by CAPs. In
addition, as any communications failure can result in significant expenses
and/or lost revenue to businesses, corporate and carrier customers often
utilize CAPs as a back-up to their primary carrier. CAPs typically market their
private line and special access services by offering lower prices, higher
network reliability and higher quality transmissions and customer service.
Corporate customers utilize such private lines to interconnect their branch
offices and computer networks, and even to connect their internal PBX networks
with the local PTT. Telecommunications carrier networks utilize CAPs to
interconnect their switching centers, to connect major customers to their
networks, and to connect their cellular, microwave and satellite transmitters.
With direct connection to customers, CAPs may also market higher margin
value-added services such as Internet access, database access and Centrex.
Depending on local regulation, the CAP may also provide dial tone for any calls
made to points outside of the local market. In most markets, corporate
customers will begin by transferring a small portion of their
telecommunications requirements to the CAP. As these customers experience the
CAP's competitive cost and superior service, they often transfer increasing
amounts of their business to the new operator.
As deregulation has permitted, most CAPs have attempted to expand their
services from the provision of private line and special access services to the
provision of CLEC switched or dial tone services that are provided through a
combination of the CAP's own network and through interconnection with the local
PTT network. This evolution has enabled CAPs to achieve increased gross margins
over time. Typically, private line services are provided on a flat fee, monthly
rental basis. Switched services, on the other hand, are billed on a volume or
minutes of use basis which generally generates substantially higher revenues
and margins. Through interconnection with the local PTT, new carriers are able
to offer services immediately to any customer on the PTT's network, thereby
significantly increasing the number of customers and markets that they serve
without physically expanding their own networks. The PTTs receive a
volume-based payment for the use of their network.
Although the Company has based its strategy in part on the experiences of
CAPs and CLECs in the United States and other developed countries, there can be
no assurance that the liberalizing Latin American markets will be characterized
by the same trends as were found in such other markets.
8
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BUSINESS AND SERVICES
Peru
COUNTRY OVERVIEW. Peru is the fourth largest country in South America with
an estimated population of 23.9 million people. Lima, the capital of Peru and
the major economic center in Peru, has a population of approximately 6.8
million people. According to the 1996 report issued by the Peruvian National
Bureau of Statistics, as of 1993, approximately 70.1% of Peru's population
lived in cities. In 1990, Alberto Fujimori, a political outsider, was elected
President and embarked on a series of economic and political measures to
curtail inflation and restore economic stability. From 1991 through 1996, GDP
increased by an average annual growth rate of 5.2%, although GDP increased by
only 2.8% in 1996. The lower GDP growth rate in 1996 has been largely
attributed to the Peruvian government's effort to reduce expenditures to avoid
an overheated economy and to reduce Peru's current account deficit. Inflation
has been dramatically curtailed as a result of President Fujimori's economic
plan, falling from 7,649.7% in 1990 to 11.8% in 1996. GDP is expected to grow
at a compound annual growth rate of 6.2% from 1997 to 2002.
MARKET OVERVIEW. The Company believes that demand for telephone service in
Peru has historically been unmet due to lack of investment, high prices, poor
service and long waiting periods for service. One of the goals of the
privatization of Peru's former local and long distance PTT, Telefonica, in 1994
(the "Privatization") was to expand significantly the national
telecommunications network and improve service quality. The number of lines in
service has increased since the Privatization from approximately 772,000 to
over 1.4 million at December 31, 1996. Notwithstanding the significant recent
growth in lines in service, Peru continues to have a relatively low penetration
rate with 5.9 lines in service per 100 inhabitants at December 31, 1996. The
Company believes that continued growth in demand for telecommunication services
in Peru will be influenced by the growth of the Peruvian economy, foreign
investment and international trade, the continued expansion of the
telecommunications network and the re-balancing of tariffs. Based on 1996
operating results for Telefonica, the local and long distance
telecommunications markets in Peru are estimated to have accounted for
approximately $880.5 million in total revenues, of which approximately $506.9
million are local access and service revenues and approximately $373.6 million
are domestic and international long distance revenues. The Company believes
that Peru's telecommunications market offers an excellent environment for
telecommunications business growth. The Company believes that the Peruvian
economy is also a source of growing demand for telecommunication services with
growing domestic and multinational businesses attracting significant foreign
investment. The following chart presents certain historical and projected
information with respect to the telecommunications market in Peru for the
periods indicated:
<TABLE>
<CAPTION>
TELECOMMUNICATIONS DATA--PERU*
--------------------------------------------------------
1993 1994 1995
------------------ ------------------ ------------------
<S> <C> <C> <C>
TELEPHONE
Minutes (in millions)
Local Services 3,600.0 (1) 4,240.0 (1) 4,954.0 (1)
Long Distance Domestic 388.0 (1) 394.0 (1) 461.0 (1)
Long Distance International 179.2 (1) 232.4 (1) 262.1 (1)
MAIN LINES IN SERVICE
(IN THOUSANDS) 673.0 (2) 772.4 (2) 1,109.2 (2)
PENETRATION RATE
(main lines per 100 pop) 2.9 (4) 3.4 (4) 4.7 (4)
SERVICE REVENUES
Local Services (US$ millions) 190.7 (1) 251.4 (4) 459.1 (4)
Toll Services (US$ millions) 235.2 (1) 123.2 (4) 130.9 (4)
International Services (US$ millions) 229.9 (1) 216.1 (4) 235.9 (4)
DATA
X-25/Frame Relay Ports (in thousands) 0.5 (1) 0.7 (1) 0.9 (1)
ISP Host Penetration
(main lines per 100 pop) 0.000(5) 0.001(5) 0.003(5)
9
<PAGE>
<CAPTION>
TELECOMMUNICATIONS DATA--PERU*
----------------------------------------------------------------------------
1996 1997 1998 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
TELEPHONE
Minutes (in millions)
Local Services 7,806.2 (2) 4,193.4 (3) n/a n/a
Long Distance Domestic 577.0 (2) 326.4 (3) n/a n/a
Long Distance International 294.5 (2) 164.6 (3) n/a n/a
MAIN LINES IN SERVICE
(IN THOUSANDS) 1,435.1 (2) 1,595.5 (1) 1,850.8 (1) 2,093.6 (1)
PENETRATION RATE
(main lines per 100 pop) 5.9 (2) 6.6 (1) 7.5 (1) 8.3 (1)
SERVICE REVENUES
Local Services (US$ millions) 506.9 (3) 676.0 (1) 784.2 (1) 887.1 (1)
1,032.9 (1)
Toll Services (US$ millions) 143.15 (3) 192.8 (1) 223.6 (1) 253.0 (1)
International Services (US$ millions) 230.5 (3) 347.4 (1) 403.0 (1) 455.8 (1)
DATA
X-25/Frame Relay Ports (in thousands) 1.2 (1) 1.5 (1) 14.0 (1) 29.9 (1)
ISP Host Penetration
(main lines per 100 pop) 0.021(5) 0.084(5) 0.208(5) 0.361(5)
<CAPTION>
TELECOMMUNICATION
NS DATA--PERU*
------------------
2000
------------------
<S> <C>
TELEPHONE
Minutes (in millions)
Local Services n/a
Long Distance Domestic n/a
Long Distance International n/a
MAIN LINES IN SERVICE
(IN THOUSANDS) 2,437.7 (1)
PENETRATION RATE
(main lines per 100 pop) 9.4 (1)
SERVICE REVENUES
Local Services (US$ millions)
Toll Services (US$ millions) 294.5 (1)
International Services (US$ millions) 530.8 (1)
DATA
X-25/Frame Relay Ports (in thousands) 46.6 (1)
ISP Host Penetration
(main lines per 100 pop) 0.515(5)
</TABLE>
- ----------------
(1) Source: Pyramid Research Report.
(2) Source: Telefonica del Peru, S.A. 1996 Annual Report.
(3) Source: Telefonica del Peru S.A., 2nd Quarter Report: July 31, 1997.
Translations from 6/30/97 Peruvian Nuevo Sol into US$ at the
6/30/97 exchange rate of 0.377 US$/Peruvian Nuevo Sol.
(4) Source: Telefonica del Peru 1995 Annual Report. Translations from 12/31/95
Peruvian Nuevo Sol into US$ at the 12/29/95 exchange rate of 0.4341
US$/Peruvian Nuevo Sol.
(5) Source: Calculations based on Pyramid Research Report estimates of ISP
hosts and of population for Peru.
(*) Includes historical information for the years 1993-1995 and projections for
the years 1996-2000.
10
<PAGE>
OPERATING COMPANY OVERVIEW. The Company conducts its business in Peru
through its wholly-owned subsidiary, Resetel, which was acquired by the Company
in May 1996. Resetel offers to multinational, national and local businesses a
broad array of high quality data, video and voice communications services,
including LAN interconnection, remote terminal access and dedicated channels
for access to the Internet, on a private line basis through a digital fiber
optic network in metropolitan Lima, Peru. The Company has installed and in
operation 90 kilometers of its fiber optic network, and plans to expand its
network to approximately 230 kilometers by the end of 1998. The Company
anticipates that its fiber optic network will travel through the major
commercial and industrial districts of Lima and the adjacent port city of
Callao (combined population of approximately 7.5 million people) upon its
scheduled completion in 1998. The Company is one of only two companies which is
currently permitted to compete in the provision of its services with
Telefonica.
The Company intends to expand its existing service offerings to provide
local public switched telephony service in Lima upon liberalization of Peru's
telecommunications markets and the expiration of Telefonica's exclusive
concession to provide public switched local and long distance telephony
services, which is scheduled to occur in July 1999. Resetel also intends to
seek approval to provide long distance services as regulation permits. By
implementing its private line and value-added services prior to the expiration
of Telefonica's exclusive concession in 1999, the Company believes that it will
be able to develop a strong customer base and network presence that will enable
it to rapidly enter the local telephony and long distance markets upon
deregulation.
COUNTRY STRATEGY. The Company intends to expand its Peruvian operations.
The Company is currently directing its marketing efforts in Lima towards a
number of Peru's leading financial institutions and multinational companies
with a strong presence in Peru.
The Company also intends to expand the focus of its marketing efforts to
include medium- and small-sized businesses which are located in the major
commercial and industrial districts in Lima and in the port city of Callao. The
Company believes, based upon an independent market survey, that a large number
of its targeted business customers are located in commercial buildings which
are not connected to a fiber optic network, but rather are connected to
networks based on older, copper technology with limited capacity. The Company
intends to take advantage of this opportunity by directly offering its services
to businesses identified by management as having a need for the Company's
services. The Company also intends to (i) use an independent marketing firm to
identify commercial multi-tenant buildings in which a critical mass of
occupants are located that have or will have an interest in acquiring the
Company's services, (ii) rapidly connect many of these buildings to the
Company's existing fiber optic network, (iii) offer an extensive selection of
high quality voice and data services on a private line basis and (iv) pursue an
aggressive sales and marketing strategy that includes (A) an advertising and
marketing campaign designed to increase customer awareness of the Company's
services, (B) holding educational seminars which explain the benefits of using
the telecommunications services offered by the Company and (C) employing a
highly qualified sales force with extensive knowledge of the local market. The
Company believes that customers in Peru are seeking to utilize new
communications technologies in order to more effectively compete in the global
market. By helping to educate its customers on the use of the latest
technologies and by providing turn-key corporate networks and
telecommunications solutions, the Company expects to develop strong customer
relationships that will help it to increase customer revenues. The Company
believes that this strategy will enable it to gain
11
<PAGE>
early mover advantages, build its customer base and expand the range of
services provided to its customers to include local and long distance telephony
upon the expiration of Telefonica's exclusive concession in July 1999.
The Company believes that the quality of its private line services
compares favorably to similar services offered by its competitors. Accordingly,
as part of its marketing strategy, the Company is offering its services on a
trial basis to several major financial institutions in Lima. Upon completion of
the trial with Interbank in July 1997, the Company was hired to link ten of
Interbank's Lima branches through the Company's network.
In addition, the Company believes that the rapid growth of Internet use in
Peru will provide it with a significant opportunity to further develop its
customer base through the strategic referral of customers between ISPs and the
Company.
CONCESSIONS. Resetel provides its services pursuant to a renewable local
carrier concession expiring in 2016. Resetel's concession can be renewed for an
additional 20 years upon prior approval by the Peruvian Ministry of Transport
and Communications. After July 1999, when the local telephony services market
opens for competition, Resetel and other carriers will be able to provide local
telephony services as regulations permit. At such time, Resetel intends to seek
approval to also provide long distance services.
NETWORK INFRASTRUCTURE. The Company provides its services in Peru through
its 230 kilometer fiber optic digital switched network, which is expected to
expand to approximately 400 kilometers. When completed the Company's fiber
optic network will extend throughout the major commercial and industrial
districts of Lima and the port city of Callao (combined population of
approximately 7.5 million people). The Company anticipates substantial
completion of its ATM network in Peru, including last mile connections to
approximately 150 buildings before the end of 1998. The Company's Lima network
will be implemented using self-healing rings equipped with fully redundant ATM
technology.
The Company has utility pole rights-of-way contracts with two of the
Peruvian utility companies which allows the Company to use utility poles to
route cable throughout most of its existing and planned network.
In conjunction with its sales initiatives, the Company expects to invest
in the "last mile" network links that connect commercial buildings and customer
offices with the Company's fiber optic network by installing fiber optic cable
in selected commercial buildings in the Lima business district.
CUSTOMERS. Resetel currently services 30 customers in Peru, including
Interbank and Sony Music Entertainment Peru S.A. Resetel will seek to enter
into contracts with new customers for a term of at least two years. Prices
charged to customers will vary in accordance with the customer's requirements
based on the number of locations, type of services, transmission rates and
length of service contracts.
COMPETITION. Peru's telecommunications market is dominated by Telefonica,
a company formed by the merger in 1994 of the former local telephone service
PTT, Compania Peruana de Telefonos and ENTEL, the former long distance
telephone service PTT. Telefonica is 35% owned by Telefonica de Espana S.A.
Telefonica has announced plans to devote a large amount of its resources over
the next few years to install hundreds of thousands of telephone lines to
provide basic telephone service. The Company believes that the focus of
Telefonica on expanding basic telephone services has created an opportunity for
the Company to capture market share by providing value-added, high bandwidth
services to business customers on a private line basis. Currently, Peru's only
other wireline telecommunications carrier is Tele2000, approximately 58.7% of
which is owned by BellSouth Corporation. Tele2000 currently operates cellular,
public pay phone and cable television services in Lima and other Peruvian
cities. Although Tele2000 has to date focused largely on providing cellular and
cable television services, it owns and operates a small fiber optic loop which
may be utilized to compete directly with the Company.
12
<PAGE>
Management believes that following the deregulation of local and domestic
and international long-distance telephony in July 1999, competition in these
services may arise from a variety of new entrants, including telecommunications
carriers providing services in other countries as well as companies currently
providing services in other industries previously liberalized in Peru. Existing
telecommunications service providers may have established customer
relationships as well as other capabilities and resources to expand their
current service offerings and include local carriers, wireless telephone
operators, the providers of data services, cable television network operators
and operators of existing private network infrastructure, such as electric
power companies. The Company believes that other companies have filed
applications for local concessions, including COMSAT whose license was recently
granted.
The identity of new entrants and the scope of increased competition, and
any corresponding adverse effect on the Company's results, will depend on a
variety of factors. Among such factors are the business strategies and
financial and technical capabilities of potential competitors, prevailing
market conditions at the time competition is permitted, applicable Peruvian
regulations with respect to new entrants and the Company, as well as the
effectiveness of the Company's strategy to prepare for increased competition.
See "Risk Factors--Competition."
CHILE
COUNTRY OVERVIEW. Chile is a highly urbanized country, with a population
of approximately 14.7 million in 1996, of which 85.0% are estimated to live in
cities. Santiago, the capital of Chile and a major international economic
center, has a population of approximately 5.1 million people. The Chilean
government has implemented a strategy to encourage foreign investment in Chile
and it has privatized and deregulated many industries, including
transportation, energy and telecommunications. Since 1991, the Chilean economy
has experienced high rates of economic growth. From 1991 through 1996, GDP
increased by an average annual rate of 7.3%. Inflation has been dramatically
curtailed during this period, falling from 18.7% in 1991 to 6.6% in 1996. GDP
is expected to grow at a compounded annual growth rate of 7.0% from 1997
through the year 2002.
MARKET OVERVIEW. As the first telecommunications market to commence
deregulation in Latin America, Chile has experienced substantial growth in
telecommunications revenue and telephone density. Total international long
distance revenues have grown from $99.9 million in 1993 to $178.2 million in
1996, representing a compound annual growth rate of 21.0%. Chile's
telecommunications markets continue to be dominated by the former PTTs,
although new entrants have begun to reduce the former PTTs' market share. In
the long distance market, Entel, the former long distance PTT, faces
competition from eight other carriers, and its market share has been reduced to
approximately 40.4% for domestic long distance and 37.5% for international
long-distance. As a result of its open telecommunications market, Chilean
subscribers enjoy some of the lowest prices in the world for long distance
telephony services. In the local telephony market, CTC, the former local
services PTT, controls approximately 96% of the local telephony market. The
Company believes that the full implementation of its business strategy will
enable it to penetrate this market and further develop its customer base.
13
<PAGE>
The following table provides some general information on the historical
size and estimated growth of Chile's telecommunications market.
<TABLE>
<CAPTION>
TELECOMMUNICATIONS DATA--CHILE
-----------------------------------------------------------------------
1993 1994 1995 1996
---------------- ---------------- ------------------ ------------------
<S> <C> <C> <C> <C>
TELEPHONE MINUTES
Local Service -- -- -- --
Long Distance Domestic (millions) n/a n/a 1,847.2 (1) 2,259.0 (2)
Long Distance International (millions) n/a n/a 136.9 (3) 172.9 (2)
MAIN LINES IN SERVICE
(in thousands) 1,513 (4) 1,626 (4) 1,846 (4) 2,157 (4)
PENETRATION RATE
(main lines per 100 pop) 11.0 (4) 11.6 (4) 13.0 (4) 14.9 (4)
SERVICE REVENUES
(US$ millions)
Local Services (US$ millions) 479.0 (4) 560.6 (4) 627.8 (4) 733.3 (4)
Toll Services (US$ millions) 135.2 (4) 118.9 (4) 235.6 (4) 275.2 (4)
International Services (US$ millions) 99.9 (4) 85.6 (4) 152.6 (4) 178.2 (4)
DATA
X-25/Frame Relay Ports (in thousands) 3.3 (4) 3.6 (4) 4.7 (4) 10.2 (4)
ISP Host Penetration
(main lines per 100 pop) 0.020(5) 0.022(5) 0.063(5) 0.157(5)
<CAPTION>
TELECOMMUNICATIONS DATA--CHILE
-------------------------------------------------------------------------
1997 1998 1999 2000
---------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
TELEPHONE MINUTES
Local Service -- -- -- --
Long Distance Domestic (millions) n/a n/a n/a n/a
Long Distance International (millions) n/a n/a n/a n/a
MAIN LINES IN SERVICE
(in thousands) 2,623 (4) 3,032 (4) 3,474 (4) 3,920 (4)
PENETRATION RATE
(main lines per 100 pop) 17.8 (4) 20.3 (4) 22.9 (4) 25.4 (4)
SERVICE REVENUES
(US$ millions)
Local Services (US$ millions) 891.7 (4) 1,030.9 (4) 1,181.3 (4) 1,332.9 (4)
Toll Services (US$ millions) 334.6 (4) 386.9 (4) 443.3 (4) 500.2 (4)
International Services (US$ millions) 216.8 (4) 250.6 (4) 287.1 (4) 324.0 (4)
DATA
X-25/Frame Relay Ports (in thousands) 17.5 (4) 25.8 (1) 33.9 (4) 39.7 (4)
ISP Host Penetration
(main lines per 100 pop) 0.279(5) 0.413(5) 0.525(5) 0.601(5)
</TABLE>
- ----------------
n/a--Information not publicly available.
(1) Statistical measures were changed in 1994 due to the multicarrier system
implementation.
(2) Source: Calculations based on monthly market share data provided by the
Subsecretaria de Telecomunicaciones ("SUBTEL") as of August 1997.
(3) Source: Calculations based on Pyramid Research Report estimates of lines in
services--includes historical information for the years 1993-1995
and projections for the years 1996-2000.
(4) Source: Pyramid Research Report--includes historical information for the
years 1993-1995 and projections for the years 1996-2000.
(5) Source: Calculations based on Pyramid Research Report estimates of ISP
hosts and population for Chile.
14
<PAGE>
OPERATING COMPANY OVERVIEW. The Company conducts its business in Santiago
through its wholly-owned subsidiaries, FirstCom Networks, formerly Hewster
Chile, S.A., and FirstCom Long Distance. FirstCom Networks currently provides
businesses in Santiago with high quality voice and data communications services
on a private line basis, including local area network interconnections, remote
terminal access, PBX to PBX connections, remote printing capabilities and high
speed access to the Internet through arrangements with a Chilean based ISP and
private line based services. In addition, FirstCom Networks provides its
customers with local and wide area network design, engineering, installation,
systems integration and support services. FirstCom Long Distance provides
domestic and international long distance services in Santiago. FirstCom Long
Distance's long distance traffic is switched and transported, in part, through
its own gateway switch and satellite earth station as well as through
interconnection with other Chilean long distance carriers. The Company's
Chilean customer base currently includes approximately 40 large and
medium-sized businesses such as Xerox de Chile S.A., Autorentas del Pacifico
(Hertz) Ltda., Iberia Airlines, The Aetna Life Insurance Company, Nike de Chile
S.A. and one ISP. The Company believes that its high quality transmission
capabilities, responsive customer service and domestic and international long
distance services have become important elements in many of its customers'
telecommunications network and operational strategies. The Company provides
network services through its 120 kilometer digital fiber optic network which
covers the downtown business district and outlying industrial park and airport
corridor. This network utilizes advantageous rights-of-way through Santiago's
underground subway system (the "Metro") as well as through certain facilities
of ENERSIS, a Chilean power company.
The Company anticipates being granted during the fourth quarter of 1998 a
license for local telephony. However, there can be no assurance that the
Company will secure such license, be able to make the necessary network
enhancements to provide such services or successfully market such services to
potential customers.
15
<PAGE>
COUNTRY STRATEGY. The Company intends to expand its Chilean operations.
The Company is currently directing its marketing efforts in Santiago towards
medium-and small-sized businesses. Large businesses in Santiago are typically
located in single-tenant buildings and are currently the focus of Chile's major
carriers. Therefore, the Company believes that a substantial opportunity exists
to provide services to medium- and small-sized businesses which are currently
underserved. These businesses are typically located in multi-tenant buildings
throughout downtown Santiago and the outlying industrial district. The Company
believes that, based upon an independent market survey, a large number of its
targeted business customers are located in commercial buildings which are not
connected to a fiber optic network, but rather are connected to networks
through older, copper technology with limited capacity. The Company intends to
take advantage of this opportunity by (i) using an independent marketing firm
to identify commercial, multi-tenant buildings in which a critical mass of
occupants are located that have or will have an interest in acquiring the
Company's services, (ii) rapidly connecting many of these buildings to the
Company's existing fiber optic network, (iii) offering high quality voice and
data services on a private line basis as well as long distance telephony and
(iv) pursuing a sales and marketing strategy that includes a combination of
direct sales calls, telemarketing and direct mail campaigns and an increased
advertising budget.
CONCESSIONS. In 1991, Hewster Servicios Intermedios, S.A., FirstCom
Networks' predecessor, was granted a concession with an unlimited duration to
provide intermediate telecommunications services (the "FirstCom Networks
Concession"). The FirstCom Networks Concession authorized the installation and
operation of the Company's fiber optic cable local network in metropolitan
Santiago. Pursuant to the FirstCom Networks Concession, FirstCom Networks is
authorized to provide voice and data transmission services and certain
value-added services on a private line basis. The FirstCom Networks Concession
may not be transferred, assigned or leased, nor may control of FirstCom
Networks be transferred or assigned, without the prior approval of SUBTEL. The
Company, through a wholly-owned subsidiary, Visat, also holds a concession with
an unlimited duration to construct and operate a network of satellite earth
stations throughout Chile that can provide national and international long
distance telecommunications services (the "Visat Concession"). In addition, the
Company is authorized to provide services based on 38 GHz wireless technology
in Santiago. FirstCom Long Distance holds a concession with an unlimited
duration to provide public, switched national and international long distance
services in Chile. FirstCom Long Distance's concession was issued by the
Chilean Ministry of Transport and Communications in 1993.
NETWORK INFRASTRUCTURE. FirstCom Networks provides network services in
Chile through its 120 kilometer fiber optic network which currently covers the
majority of Santiago's downtown business district and the outlying industrial
park and airport corridors. The Company's 120 kilometer digital fiber optic
network travels through the traditional commercial center of Santiago, where
many established businesses are headquartered, and the rapidly growing
expansion areas, including outlying industrial parks, and the airport corridor
where many branch offices and new companies have located. FirstCom Long
Distance provides domestic and international long distance services in Santiago
through its own gateway switch and satellite earth station and through
interconnections with other Chilean long distance carriers.
The Company is in the process of upgrading its fiber optic network in
Chile by replacing the existing PDH and SDH nodes with ATM node equipment (the
"ATM Upgrade"). The planned ATM Upgrade is expected to be completed by the end
of 1998.
The portion of the Company's network that passes through the downtown
business and financial district has been installed in Santiago's Metro subway
tunnels. The Metro subway tunnels protect the network from hazards such as
severe weather and vandalism. Metro access points, such as ventilation shafts
and platform entrances, are available every approximately 250 meters along the
subway route. These facilities serve as the "insert" points for last mile
connections between the Company's network and customer buildings. In addition
to its agreement with the Metro, the Company has a utility pole right-of-way
contract with one of Chile's electric companies which allows the Company to use
utility poles to route cable to outlying areas of Santiago.
16
<PAGE>
The Company plans to invest in the "last mile" network links that connect
commercial buildings and customer offices with the Company's fiber optic
network. Where customers are operating in newly developed areas of Santiago,
the Company intends to install its own last mile network infrastructure to
connect those customers with its fiber optic network. In areas of Santiago
where the telecommunications infrastructure is more developed, the Company
believes that it may grow most efficiently by leasing such last mile
connections from other network operators. The Company anticipates completing
last mile connections to approximately 150 buildings before the end of 1998.
The Company recently installed its first 38 GHz wireless connection
between its fiber optic network and an ISP. The Company intends to utilize this
wireless technology to connect customers more rapidly and efficiently to its
fiber optic network. This wireless connection is deployed by installing
wireless transceivers on rooftops, towers or windows where line-of-sight can be
established between the connected points. This technology will enable the
Company to develop POPs that serve buildings not currently reached by its fiber
optic network without paying interconnection fees to the local telephone
company. 38 GHz technology provides network connections similar to fiber optic
circuits in terms of both bandwidth and service quality.
The Company intends to invest in FirstCom Long Distance to improve the
quality of its service through the continuing upgrade of FirstCom Long
Distance's switching infrastructure and customer service platforms. In
addition, the Company plans to acquire or install, during 1998, an additional
satellite antenna which will enable FirstCom Long Distance to interconnect with
additional international long distance carriers, subject to regulatory
approval. Such additional satellite capability is expected to enable FirstCom
Long Distance to obtain lower prices for international transmission services.
FirstCom Long Distance obtains local access services through
interconnection agreements with the following operators or their subsidiaries:
CTC Mundo, Complejo Manufacturero de Equipos Telefonicos S.A.C.I. ("CMET"),
Entel, BellSouth Chile S.A., Telefonica Manquehue S.A., Lucsic and Compania
Nacional de Telefonos S.A. ("CNT"). In 1997, FirstCom Long Distance installed a
new Excel NS 2000 international long distance gateway switch to handle all
international long distance calls as well as credit card and callback services.
FirstCom Long Distance operates a 9.1 meter satellite earth station located in
Santiago through which it links with Satelitron, a Mexican carrier, which then
links with a number of other carriers through the Mexican Solidaridad I
satellite. FirstCom Long Distance's satellite earth station is linked with its
gateway switch via a 18-19 GHz microwave link. FirstCom Long Distance currently
operates a 24-hour network control and operator service center in Santiago to
monitor its network and handle customer service calls.
CUSTOMERS. FirstCom Networks currently services approximately 43 customers
in Santiago, including Xerox de Chile S.A., Iberia Airlines, Autorentas del
Pacifico (Hertz) Ltda., Nike de Chile S.A. and The Aetna Life Insurance
Company. FirstCom Networks charges a monthly fee for its services based on the
length of the contract and the type and quantity of services provided. FirstCom
Long Distance provides domestic and international long distance services to
approximately eight large corporations, 800 medium and small-size corporations
and 400 residential customers through annual service contract arrangements. In
addition, during the past three months, FirstCom Long Distance provided casual
dialing services to approximately 20,000 non-subscriber users. FirstCom Long
Distance also provides routing services to a number of other long distance
carriers including Entel.
COMPETITION. Chile's local and long distance markets were both opened to
competition in 1994, with the only constraint being a four-year long distance
market share cap imposed on Chile's former local services monopoly, CTC. There
are currently five telecommunications groups that provide both local and long
distance services, three of which also provide data services. There are also
three other licensed providers of local telephony services and four other
licensed providers of domestic and international long distance services. In the
long distance market, Entel, the former long distance PTT, has a market share
of approximately 40.4% for domestic long distance and 37.5% for international
long distance. In the local telephony market, CTC, the former local services
PTT, has a market share of
17
<PAGE>
approximately 96%. Both CTC and Entel operate fiber optic loops in Santiago,
while Teleductos S.A. operates a passive point-to-point network built using a
star topology.
The Company believes it can successfully compete in the Santiago
telecommunications market by providing customers a competitively priced,
bundled service offering consisting of data, long distance and other
value-added services. In addition, the Company intends to begin offering local
services during 1998 after it receives a license, as to which there can be no
assurance. Such services will be delivered over the Company's digital fiber
optic network which will help the Company control operating costs and minimize
the need to rely on other carriers' networks. The Company believes that it is
well-positioned to develop and increase its customer base in Santiago because
(i) it will be able to gain a "first mover" advantage in offering services to
its targeted customer base of medium and small-sized businesses which the
Company believes have significant unmet demand for advanced telecommunications
services and (ii) its services are provided via a digital fiber optic network
that utilizes the ATM protocol and "drop and insert" technology, which enables
the Company to offer an extensive range of advanced telecommunications
services. The Company believes that its size and the entrepreneurial culture of
its management team will allow it to react quickly to changes in the
marketplace and that, coupled with its strong commitment to customer service,
will differentiate FirstCom Networks and FirstCom Long Distance from its
larger, less flexible competitors.
REGULATION
PERU
PERUVIAN TELECOMMUNICATIONS LAWS AND REGULATIONS. The principal features
of Peruvian regulation of telecommunications services include the General
Telecommunications Law (the "Peruvian Telecommunications Law"), State
Contracts, the General Regulation to the Telecommunications Law (the "General
Regulation"), and the Regulation (the "OSIPTEL Regulation") for the
Organization for Supervision of Private Investments in Telecommunications
("OSIPTEL"). These laws and their related governmental authorities constitute
the legal and regulatory framework within which the Company provides services
in Peru.
The Peruvian Telecommunications Law sets out the basic framework for the
provision and regulation of telecommunications services, and has the stated
objective of providing a competitive market in telecommunications. The law
grants the Peruvian government the ability to oversee telecommunications
services through the Ministry of Transportation, Communications, Housing and
Construction (the "Ministry of Transportation" or the "Ministry"). The Ministry
has the authority to grant concessions and impose sanctions for the violation
of telecommunications laws. Pursuant to Supreme Decree No. 007-97-MTC, the
Specialized Telecommunications Concession Unit ("STCU") became the government
agency within the Ministry charged with the following functions previously
performed by OSIPTEL: (i) grant, renew and cancel concessions, authorizations,
permits and licenses; (ii) manage the electric spectrum and approve the
assignment of frequencies; and (iii) discontinue the rendering of value added
services offered by concessionaires when such services cause any damage or harm
to the public telecommunications network.
CONCESSIONS. A private entity may only provide telecommunications services
in Peru pursuant to a concession granted by STCU and in accordance with a state
contract (the "State Contract") to be entered between the STCU and the
concessionaire. Such concessions, including the concession held by the Company
through Resetel, have a maximum period of twenty years and can be renewed for
an equal term without limitation subject to the submission of an application
for renewal two years prior to the expiration of the concession and compliance
with the requirements under the concession. The State Contract outlines, among
other obligations: (i) a minimum expansion plan for the operator; (ii) required
fees and tariffs; (iii) technology standards for all equipment; and (iv)
quality standards of service.
State Contracts are treated under Peruvian law the same as contracts
between private parties. For this reason, such contracts cannot be modified or
terminated by any subsequent regulation or
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legislation. The Ministry may, however, if it is deemed in the public interest,
modify the terms of State Contracts unilaterally if such terms relate to the
international telecommunications policy of the Ministry, or if it is necessary
to modify the contract to comply with international laws, treaties or
conventions. These changes can only take place through an administrative
process that provides for public comment on any proposed changes.
LOCAL AND LONG DISTANCE SERVICES. Dial tone and public switched local and
long distance services in Peru will be provided exclusively by Telefonica until
May 1999, at which time the exclusivity provisions in Telefonica's concession
will expire and the local and long distance markets are scheduled to be opened
to competition by new entrants. The Company operates under a concession which
permits it to provide private line, special access and value-added services
within the local telecommunications markets of Lima and Callao. Beginning in
1999, the Company may seek to obtain authorization to begin providing dial tone
as well as public local and long distance switched services.
TECHNICAL REQUIREMENTS. The Company is required to comply with regulations
and detailed technical plans promulgated by the OSIPTEL that apply to such
matters as the transmission, routing, signaling and assignment of numbers in
the Peruvian telephone network as well as use of the radio frequency spectrum.
Before concessionaires initiate service, their facilities must have been
authorized by the Ministry of Communications and must be in full compliance
with the applicable regulations and technical plans. Failure to comply with the
technical plans can be grounds for terminating a concession if the holder does
not comply within a period of time prescribed by the OSIPTEL.
Both Telefonica and operators of private networks must make their networks
available for interconnection with other carriers' networks in order to promote
competition within Peru's telecommunications marketplace.
FEES, TARIFFS AND OTHER CHARGES. In conformity with the Telecommunications
Law, the General Regulation, and the OSIPTEL Regulation, telephone operators,
including the Company, must pay certain fees, tariffs, and other charges which
are primarily comprised of: (i) a concession fee; (ii) annual tariffs; (iii)
payment to OSIPTEL for supervisory services; and (iv) contribution to the Fund
for Private Investment in Telecommunications ("FITEL"). The Company may set its
own tariff levels for its private line service, subject to certain maximum
tariff levels set by the OSIPTEL.
FOREIGN INVESTMENT AND EXCHANGE CONTROLS. The basic legal framework to
attract foreign investment to Peru is provided by the Foreign Investment
Promotion Law. The Law provides for specific rules that guarantee
nondiscriminatory treatment of foreign investors investing in Peru, and
provides mechanisms to stimulate and secure foreign capital. Specifically,
under the Law, foreign investors may freely remit all profit and repatriate all
capital invested in Peru, and may freely convert such local currency proceeds
into U.S. dollars. No registration with any government authority of such profit
remittance or capital repatriation is required under Peruvian law irrespective
of whether the original investment was made in the form of a capital
contribution or intercompany loans. Notwithstanding the low level of
restrictions on foreign investment, Peruvian law provides that if the foreign
investor's home country imposes foreign investment restrictions on investments
made by Peruvian companies in that country, the Peruvian government is
authorized to impose similar restrictions with respect to investments made by
companies from that country. For this reason, foreign investors are encouraged
to enter into a legal stabilization agreement (the "Legal Stability Agreement")
with the Peruvian government to guarantee certain rights with respect to their
foreign investment in Peruvian companies.
Legal Stability Agreements are entered into for a term of ten years.
Foreign investors who execute such agreements are guaranteed the following
rights, as of the date of the execution of the agreement: (i) maintenance of
the existing tax treatment of the foreign investment; (ii) legal stability as
to the availability of foreign currency for the remittance of profits and
repatriation of capital and (iii) non-discriminatory treatment of the foreign
investor.
Foreign investors may enter into the Legal Stability Agreement by
submitting an application to the National Commission on Foreign Investments,
provided that the capital contribution is made in the
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following manner: (i) a capital contribution in cash of at least $2.0 million
within two years of the date of execution of the agreement; or (ii) a capital
contribution in cash of at least $500,000 and creation of at least 20
employment positions within two years from the date of the execution of the
agreement.
CHILE
TELECOMMUNICATIONS LAWS AND REGULATIONS. The Ley General de
Telecomunicaciones (General Law of Telecommunications), Law No. 18.168 (1982)
(the "Chilean Telecommunications Law") and various decrees issued by the
Ministry of Transportation and Telecommunications and other Chilean
governmental authorities, constitute the legal and regulatory framework within
which the Company provides services in Chile.
In 1994, the Chilean Telecommunications Law was amended to promote greater
competition in the telecommunications sector and to establish a framework for a
multicarrier dialing system. The most significant amendments were: (i) in the
case of local telephone carriers, only their affiliates or other related
companies, rather than the local telephone carriers themselves, can now provide
public long distance services and (ii) the establishment of all carriers'
maximum market shares in the domestic long distance market for a four-year
period and in the international long distance market for three years, each
period measured from the inception of the multicarrier dialing system, as set
forth in the following table. Companies that carry traffic above these units
will be subject to substantial financial penalties and the Undersecretary of
Telecommunications may suspend their service.
<TABLE>
<CAPTION>
MAXIMUM MARKET SHARE CAPS
----------------------------------------
YEAR 1 YEAR 2 YEAR 3 YEAR 4
-------- -------- -------- -------
(IN MINUTES)
<S> <C> <C> <C> <C>
Carriers Affiliated with Local Operators:
Domestic Long Distance 35% 45% 55% 60%
International Long Distance 20 30 40 --
Other Carriers:
Domestic Long Distance 80 70 60 60
International Long Distance 70 65 60 --
</TABLE>
The Chilean Telecommunications Law also requires providers of public
telephone services to conform to a multicarrier system in which end-users,
rather than local telephone carriers, will determine on a call-by-call or
contractual basis the long distance carrier they want to use. In addition, long
distance carriers are authorized to establish direct connections to end users
through their own networks.
The Chilean Telecommunications Law provides for substantial fines, the
suspension of service and other penalties for violations of the multicarrier
dialing system. The routing of calls by a local telephone company to a long
distance carrier other than the carrier selected by the end user or the
obstruction or delay of an interconnection between the local telephone carrier
and any long distance carrier would constitute violations, and the local
telephone carrier may be required to indemnify the provider of long distance
services for any such violations.
CONCESSIONS. The Chilean Telecommunications Law specifies which
telecommunications services require that a provider obtain a concession or
permit from the Ministry of Transportation and Telecommunications. Such
concessions or permits are granted by the Subsecretaria de Telecommunicaciones
(the "Undersecretary of Telecommunications"). Concessions, which may be granted
only to entities constituted and domiciled in Chile, are necessary to provide
the following services, among others: (i) public telecommunications services
which are provided to satisfy the telecommunications needs of the general
public and (ii) intermediate telecommunications services which are transmission
and switching services offered by third parties to other concession holders who
provide public telecommunications services or other services to end-users.
Permits, which are granted following a simplified procedure and may have a
shorter duration than concessions, are required to provide limited services,
which are services necessary to satisfy specialized needs of businesses or
other institutions, but do not entail carrying traffic across public
international and certain telecommunications networks.
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Concessions and permits are granted by the Chilean government for a fixed
term which is presently 30 years. These concessions and permits can be renewed
for the same period if so requested by the concessionaire. However, because the
Company's concession was granted before the establishment of fixed terms, such
concession is deemed to be indefinite in accordance with its terms and with
Transitory Article 3 of such law. Concessions and permits cannot be assigned,
transferred or leased without the prior authorization of the Undersecretary of
Telecommunications, which authorization cannot be denied without reasonable
cause.
Holders of concessions to provide public telecommunications services must
establish and accept interconnection with others, in accordance with technical
requirements established by the Undersecretary of Telecommunications, to ensure
that users have access to all public services. Concession holders may establish
their own systems or use facilities of other entities.
Any telephone service outage must be corrected within 12 hours or users
are entitled to indemnification and the concession holder is subject to fines.
The Undersecretary of Telecommunications may suspend a concession holder's
service for up to thirty days for failure to comply with technical
requirements, which action may be challenged in the courts within a term of
five days as of the notification to the holder of the concession.
The Chilean Telecommunications Law provides that holders of concessions
and permits shall have access, on equal economic and technical basis, to
satellite systems and international cables.
Existing concessions may be terminated if the concession holder does not
fulfill certain of its obligations, including: (i) fulfillment of the technical
framework applicable to the service; (ii) reiterative sanctions because of the
suspension of transmissions; (iii) nonpayment of a fine imposed on the
concession holder for more than 30 days; and (iv) the unauthorized change of
any of the essential elements of the concession. The holder of the concession
can appeal such termination to the Chilean Supreme Court within ten days if it
believes that the termination was illegal.
TARIFF SYSTEM. Currently, providers of domestic and international long
distance services are subject to maximum tariffs fixed by the Chilean
government.
The Company's services are presently subject to maximum tariffs under the
Chilean Telecommunications Law. The Chilean government establishes the maximum
tariffs of regulated services by using a methodology that provides for the
recovery of investments and the costs of operations of such services, as well
as a profit based on the cost of capital. Under the Chilean Telecommunications
Law, the structure, level and mechanism for indexing the affected services are
fixed every five years by a joint decree issued by the Ministry of
Transportation and Telecommunications and the Ministerio de Economia, Fomento y
Reconstruccion (the "Ministry of the Economy") on the basis of the incremental
costs of providing the tariffed service in each geographical service area where
the service is provided, including capital costs taking into account the
expansion plans of the regulated companies over the five year period. In the
absence of expansion plans, the structure and level of rates are set on the
basis of marginal long-term costs. Maximum tariffs are established on the basis
of an economic model that relies on the costs of an ideally efficient
enterprise that offers only the service subject to tariff. The tariff for each
service that is subject to tariff regulation reflects the theoretical cost
components associated with such service.
Tariffs for domestic long distance telephone services must include the
prices of long distance transmission and switching as well as the price of
local telephone service. Tariffs for international long distance services must
include such price components as the price of domestic and international
services, the cost of access to the local network, as well as the settlement
costs with foreign correspondents.
Providers of telecommunications services are prohibited from
discriminating among similarly situated users in the price charged for tariffed
services. Each tariff is subject to its own index, which is
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calculated using the prices of its principal components. A concessionaire must
give two months notice to the Undersecretary of Telecommunications of changes
to the maximum tariff resulting from changes in the applicable index (including
inflation adjustments) and that tariff, upon readjustment, is the maximum price
that users may be charged for the service.
Because the tariff-setting process takes place every five years, providers
of long distance services subject to tariff regulation have to prepare a
special study for each regulated service included in their geographic
concession areas. The purpose of the study is to calculate the total and
marginal long-term costs with respect to each such service and to determine on
the basis of such calculation the structure and level of future tariffs. New
tariff proposals must be presented to the Ministries of Transportation and
Telecommunications and of Economy 180 days prior to the end of each five-year
period. The Company and other intermediate service providers are subject to the
maximum tariffs established by the corresponding authorities for the principal
intermediate service provider.
ENCAJE OR DEPOSIT REQUIREMENT. Thirty percent of amounts borrowed from
abroad must be placed on deposit with the Central Bank for a period equal to
the average term of the loan, with a minimum period of 90 days and a maximum
period of 1 year. These funds do not earn interest. In lieu of making this
deposit, the recipient may comply with the encaje through the purchase of
special Central Bank promissory notes equal to 30% of the principal, which the
Central Bank repurchases on the same date, prior to deduction of an interest
rate equal to LIBOR + 4% for one year. In addition to the 30% deposit
requirement, payments made by a Chilean company on interest in connection with
a loan by a foreign shareholder of such company are treated as dividends for
purposes of the imposition of a 35% withholding tax on the value of the payment
of interest.
FOREIGN INVESTMENT AND EXCHANGE CONTROLS. Complete foreign ownership of
investments in Chilean entities is possible and there is no minimum period
within which the foreign investments must remain in Chile. Foreign investment
capital may be remitted overseas one year after entering Chile.
The Central Bank requires most transactions relating to foreign investment
to be effected in a "formal" currency market. Appropriate approvals and
registrations must be obtained when foreign investment capital enters the
country to ensure the right to acquire foreign currency to pay for imports,
repatriate capital and profits and pay interest and capital due on foreign
currency loans.
Foreign investment capital may be remitted overseas one year after
entering Chile, but only from the proceeds of sale or liquidation of all or
part of the assets, business, shares or rights representing the investment.
Capital comprising reinvested profits are not subject to the one year
restriction.
Annual profits may be remitted overseas at any time. Interim profits and
dividends can be remitted quarterly if supported by audited financial
statements and permitted by the foreign investment contract with the
government.
Normally, foreign currency required to repatriate capital and profits must
be obtained in the local formal currency market. Certificates authorizing the
purchase of the foreign currency are issued by the Foreign Investment
Committee, normally within 48 hours in the case of profits. Investors may be
able to operate offshore foreign currency accounts which may be used to
repatriate capital profits directly.
The Foreign Investment Statute guarantees that restrictions applicable to
the remittance of capital and profits will not be less favorable than those
applying generally to the acquisition of foreign currency to pay for imports.
TAXATION
PERU
The tax structure of Peru is composed of several broad based taxes, a
consumption tax on certain products (e.g. gasoline), a general income tax, an
alternative minimum tax based on a business' assets, a
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<PAGE>
property tax, and a simplified import tariff. In addition, withholding taxes
are imposed on interest and salary income, and Peru has a recently expanded
value-added tax ("VAT") that covers certain products and services.
INCOME TAX. Peruvian corporations or foreign corporations domiciled in
Peru are subject to an income tax at a rate of 30% on the net income realized
by the company during the fiscal year. There is no departmental, regional or
municipal income tax.
PAYMENT OF DIVIDENDS. Under applicable Peruvian law, amounts paid as
dividends or distributed as profits are not deemed to be taxable income and,
consequently, are not subject to any taxation.
EXTRAORDINARY ASSET TAX. Peruvian corporations are subject to an annual
extraordinary asset tax calculated at a rate of 0.5% over the value of the net
assets of the corporation. The amount of the net extraordinary asset tax which
is due may be credited against the corporation's income tax.
VALUE ADDED TAX. Peruvian corporations are subject to a value added tax
calculated at a rate of 18% over the value of services rendered to customers,
goods imported into Peru, sale of personal or real property and assignment of
fixed assets to an affiliate. Companies are entitled to an off-setting credit
against the value added taxes imposed on the sales of goods and services.
CHILE
TAXATION. Generally, foreign investors and local businesses are treated
equally, although foreign investors are given the benefit of certain fixed rate
tax options which allow them to limit the impact of future adverse tax changes.
To promote savings and investment, the income of business entities is
taxed in two stages, initially when income is earned and finally when profits
are distributed to the ultimate business owners. The effective rate payable on
foreign investment profits remitted abroad is normally 35%, 15% being payable
at the time profits are earned with the balance due on payment overseas.
Considerable emphasis is placed on indirect taxation through a 18% value-added
tax which contributes about 60% of fiscal revenue.
First Category Income Tax (the "First Category Income Tax"), often
referred to as the corporate tax, is paid by all entities on accrued income
from business operations at a rate of 15%. Chile has a fully integrated tax
system allowing this corporate tax to be credited against personal income taxes
payable by resident investors when business profits are withdrawn by them or,
in the case of foreign investors, against withholding tax payable when profits
are remitted overseas. Profit distributions received by a resident business
entity as an investor in another business entity are not liable to tax until
distributed to a non-business or overseas entity.
WITHHOLDING TAX. Additional withholding income tax (the "Additional
Withholding Income Tax") of 35% is payable by non-resident individuals and
entities on Chilean-source business income withdrawn or remitted overseas. This
tax is withheld by the paying business entity.
The 15% corporate tax is allowed as a credit against the Additional
Withholding Income Tax payable. As a result, the effective rate payable on
foreign investment profits remitted abroad is normally 35%, 15% being payable
at the time profits are earned with the 20% balance due on payment overseas.
Withholding tax is also imposed on most other payments made abroad. For
example:
1. 30% for royalty payments and patents, license and similar fees;
2. 4% for interest payments to a foreign or international banking
institution or to a foreign or international financial institution
registered with the Central Bank of Chile. A 35% rate applies to interest
payments to all other entities;
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<PAGE>
3. 35% for rental payments, this rate can be reduced to 1.75% for
equipment rental payments; and
4. 20% withholding tax applied to remuneration of foreign individuals not
resident in Chile for "technical assistance" or "engineering services"
rendered in Chile or abroad.
These rates can be increased to 80% for royalties or fees for technical
services considered unproductive or unnecessary for the economic development of
the country. All these payments are tax deductible if necessary to produce
income.
THIN CAPITALIZATION RULES. Although the tax regime does not impose
restrictions on debt/equity ratios, the Foreign Investment Committee currently
limits borrowing levels when approving investments. The current debt to equity
ratio is 70:30.
CAPITAL GAINS. Gain recognized on the sale of shares will be subject to
both the First Category Income Tax and the Additional Withholding Income Tax,
if either (i) the foreign holder has held the shares for less than one year or
(ii) the foreign holder acquired and sold the shares in the ordinary course of
business or as an habitual trader of shares. In all other cases, gain on the
sale of shares will be subject to a sole 15% First Category Income Tax.
For purposes of determining the capital gains on the disposition of the
shares of the Chilean companies, the tax basis will be the acquisition value
adjusted by the variation of the Chilean Consumer Price Index between the last
day of the month prior to the purchase of the shares and the last day of the
month prior to the disposition of the shares. If the investment in the shares
has been made through DL 600, upon total or partial liquidation of the
investment, no taxes will be applied on gains up to the U.S. dollar equivalent
of the foreign investment.
INCOME TAX PAYMENT. Chile has a calendar tax year and returns must be
lodged by April 30 of the following year. Business entities are required to
make monthly provisional payments of corporate tax equal to a percentage of the
previous month's gross revenue. The percentage is determined by the ratio of
gross revenue to First Category Income Tax for the business entity for the
preceding year. Any further tax due must be paid on filing of the relevant tax
return. Excess tax paid is recoverable after filing.
EMPLOYEES
As of August 3, 1998, the Company had 220 full-time employees, of whom
approximately 102 are in Resetel, 46 are in FirstCom Networks, 66 are in
FirstCom Long Distance and six are in the Company's headquarters. The Company's
employees are not represented by any labor union. The Company believes that
relations with its employees are good.
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GLOSSARY OF DEFINED TERMS
ATM (ASYNCHRONOUS TRANSFER MODE): An information transfer standard that is
one of a general class of packet technologies that relay traffic by way of an
address contained within the first five bytes of a standard 53 byte-long packet
or cell. The ATM format can be used by many different information systems,
including LANs, to deliver traffic at varying rates, permitting a mix of data,
voice and video.
ATV: Refers to any system of distributing television programming that
generally results in better video and audio quality than that offered by the
NTSC 525-line standard.
BACKBONE: Refers to the major fiber cable carrying the accumulated
transmissions of many businesses connected to a network system. Similar to a
water main, the backbone is the high volume conduit for transmissions input by
multiple smaller connections (last-mile connections) from business offices.
BANDWIDTH: The range of frequencies that can be passed through a medium,
such as glass fibers, without distortion. The greater the bandwidth, the
greater the information carrying capacity of such medium. For fiber optic
transmission, electronic transmitting devices determine the bandwidth, not the
fibers themselves.
CAP (COMPETITIVE ACCESS PROVIDER): A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access telecommunications services and switched access
services. CAPs are also referred to in the industry as alternative access
vendors, alternative local telecommunications service providers (ALTS) and
metropolitan area network providers (MANs).
CARRIER'S CARRIER: Refers to a telecommunications network that provides
wholesale telecommunications transmission to other major telecommunications
networks such as long distance, local and cellular telephone companies.
CENTREX: Refers to the switching capability provided by a telephone
company's central office to a customer over telephone lines on a subscription
basis. Centrex allows a customer to receive such services as intra-office call
routing and voice mail from a telephone company's switch, thereby avoiding the
purchase of a private switch known as PBX.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER): A company that provides local
exchange services in competition with the incumbent local exchange carrier.
CTC: Compania de Telefonos de Chile, S.A., the PTT of Chile which was
privatized in 1987.
DEDICATED LINES: Telecommunications lines reserved for use by particular
customers along predetermined routes (in contrast to telecommunications lines
within the local telephone PTT's public switched network).
DIGITAL: Describes a method of storing, processing and transmitting
information through the use of distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital transmission and switching
technologies employ a sequence of these pulses to represent information, as
opposed to the continuously variable analog signal. The precise digital numbers
preclude any distortion (such as graininess or snow, in the case of video
transmission, or static or other background distortion, in the case of audio
transmission).
DROP AND INSERT: Refers to a network's capability to share capacity among
users without dedicating any fiber strand to a single end user.
EARTH STATION: A parabolic antenna and associated electronics for
receiving or transmitting satellite signals.
ENHANCED SERVICES: Refers to private line services, and LAN and WAN
connectivity services.
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ENTEL: Empresa Nacional de Telefonos, S.A. Privatized in 1989, Entel has
historically been Chile's national long distance company. Under the
Multicarrier Agreement, Entel is now licensed to provide all types of
telecommunications services within Chile.
ESN (ENHANCED SERVICES NETWORK): The name used to describe the
communication services providing digital connectivity, primarily for data
applications via frame relay, ATV, or digital interexchange private line
facilities.
FIBER OPTICS: Fiber optic technology involves sending laser light pulses
across glass strands in order to transmit digital information. Fiber optic
cable currently is the medium of choice for the telecommunications and cable
industries. Fiber is resistant to electrical interference and many
environmental factors that affect copper wiring and satellite transmission.
FRAME RELAY: A form of data communications packet switching that uses
smaller packets and requires less error checking than traditional technologies
such as X.25 or SNA. Frame Relay is used in wide area networks to interconnect
LANs and computer systems. Frame Relay was designed to operate at higher speeds
on modern fiber optic networks.
GATEWAY SWITCH: A switch which is used to establish connection with other
carriers.
GHZ OR GIGAHERTZ: A unit of frequency equal to one billion cycles or hertz
per second.
ILEC (INCUMBENT LOCAL EXCHANGE CARRIER): The name used to describe a
company which is the principal local exchange carrier.
INTERCONNECTION: Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
ISP (INTERNET SERVICE PROVIDER): The name used for those companies which
provide its subscribers with access to the Internet.
INTERNET: The name used to describe the global open network of computers
that permits a person with access to exchange information with any other
computer connected to the network.
LAN (LOCAL AREA NETWORK): Refers to the interconnection of computers for
the purpose of sharing files, programs and printers. LANs may include dedicated
computers or file servers that provide a centralized source of shared files and
programs.
LAST MILE: A shorthand reference to the last section of a
telecommunications path to the ultimate end-user which may be less than or
greater than one mile.
LEC (LOCAL EXCHANGE CARRIER): A company providing local telephone
services.
LONG DISTANCE CARRIERS (INTEREXCHANGE CARRIERS): Long distance carriers
provide services between local exchanges on an interstate or intrastate basis.
A long distance carrier may offer services over its own or another carrier's
facilities.
LONG EXCHANGE SERVICES: Services provided within a geographic area
determined by the appropriate state regulatory authority which calls are
transmitted without toll charges to the calling or called party.
MINISTRY OF TRANSPORTATION AND TELECOMMUNICATIONS: Chile's government body
which, through the Undersecretariat of Telecommunications, is responsible for
regulating and registering all telecommunications equipment and services. Its
role is equivalent to that of the Federal Communications Commission in the
United States.
MINISTRY OF TRANSPORTATION, COMMUNICATIONS, HOUSING AND CONSTRUCTION: The
Peruvian government entity with the authority to regulate telecommunications
and with the authority to grant concessions and licenses for telecommunications
service providers such as the Company.
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MULTICARRIER AGREEMENT: The legislation passed by Chile's Ministry of
Telecommunications in 1994 which opens Chile's long distance market to
competition while temporarily limiting the market share in that market which
may be held by the CTC.
NODE: Devices on a network that demand or supply services or where
transmission paths are connected.
PBX (PRIVATE BRANCH EXCHANGE): A customer owned and operated switch on
customer premises, typically used by large businesses with multiple telephone
lines.
PDH (PLESIOCHRONOUS DIGITAL HIERARCHY): Refers to a digital transmission
system that operates as a Time Division Multiplexing (TDM) system by combining
multiple signals of 2 Mbit/s through the use of a multiplexor that operates by
adding "dummy" bits (otherwise known as justification bits). The justification
bits are recognized as such when multiplexing occurs, and discarded as original
signals. This process is known as plesiosynchronous operation. The use of
plesiochronous operation has led to the adoption of the term plesiochronous
digital hierarchy, or PDH.
POPS (POINTS OF PRESENCE): Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PTT (PUBLIC TELEPHONE AND TELEGRAPH): A government or privately-owned
monopoly carrier of telecommunications services or having a dominant market
share such as CTC.
PRIVATE LINE: Refers to a private, dedicated telecommunications connection
between different locations (excluding long distance carriers' POPs).
PUBLIC SWITCHED NETWORK: Refers to traditional public (not dedicated) LEC
networks that switch calls between different customers.
REDUNDANT ELECTRONICS: Describes a telecommunications facility using two
separate electronic devices to transmit the telecommunications signal so that
if one device malfunctions, the signal may continue without interruption.
RIGHT-OF-WAY: Rights negotiated with the appropriate entity, such as a
utility company or transportation agency, to secure access to poles, ducts,
conduits or subway tunnels, as the case may be, to install the fiber optic
lines.
SDH (SYNCHRONOUS DIGITAL HIERARCHY): An open standard for signals used in
optical fiber networks. It provides a basic data transport format that can be
used for all types of digital information (voice, video, data, facsimile and
graphics) and is used internationally. The specified base rate is 51.48 MBPS
(called synchronous transport signal level 1, or STS-1), and specifications
exist for data speeds up to 2.4 Gbps.
SNA (SYSTEMS NETWORK ARCHITECTURE): A tree structured computer network
architecture, with a mainframe host acting as the network control center.
SONET (SYNCHRONOUS OPTICAL NETWORK TECHNOLOGY): Refers to a set of
standards for optical communications transmission systems that define the
optical rates and formats, signal characteristics, performance, management and
maintenance information to be embedded within the signals and the multiplexing
techniques to be employed in optical communications transmission systems. SONET
facilitates the interoperability of dissimilar vendors equipment. SONET
benefits business customers by minimizing the equipment necessary for various
telecommunications applications and supports networking diagnostic and
maintenance features. Allows selective adding and dropping of signals.
SWITCH: A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is the process
of interconnecting circuits to form a transmission path between users.
27
<PAGE>
SWITCHED SERVICES: Refers to transportation of switched traffic along
dedicated lines between the local telephone company's central offices and the
long distance carrier's POPs.
TELEPORT: Refers to a facility capable of transmitting and receiving
satellite signals for other users.
WAN (WIDE AREA NETWORK): A data network typically extending a LAN outside
a building, over telephone common carrier lines to link other LAN's in other
buildings.
ITEM 2. DESCRIPTION OF PROPERTY
ICCA's corporate offices are located at 2600 Douglas Road Suite 501, Coral
Gables, Florida. These offices are occupied under a lease that expires on
November 30, 1998 (the "ICCA Lease") at a rent of approximately $3,000 per
month. The ICCA Lease does not specify the conditions for its renewal, but the
Company believes that the current lease may be renewed for an additional one
year term without unreasonable effort or additional expense. The Company's
offices in Santiago, Chile are occupied under a lease which expires in
September 2006, at a rent of approximately $14,000 per month. The Company's
offices in Lima, Peru are occupied under a two year lease terminating on
October 14, 1998 at a rent of approximately $3,500 per month. The Company
believes that its current facilities, together with other contiguous rental
space, are adequate to provide for its current needs and that its current
facilities and planned lease of replacement facilities in Chile will be
adequate for its current and anticipated needs and anticipated growth.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq Small Cap Market ("Nasdaq")
(ticker symbol: ICCA).
The Common Stock was traded over-the-counter and quoted on the OTC
bulletin board between June 1994 and November 1996. The Common Stock has been
listed and traded on Nasdaq since November 1996.
The following table sets forth, for two most recent fiscal years, the
high and low closing prices of the Common Stock:
PERIOD HIGH LOW
First Quarter 1996 $3.38 $0.94
Second Quarter 1996 7.12 3.00
Third Quarter 1996 5.88 4.25
Fourth Quarter 1996 5.13 2.13
First Quarter 1997 $3.50 $1.88
Second Quarter 1997 3.25 1.44
Third Quarter 1997 3.44 2.06
Fourth Quarter 1997 4.00 1.56
28
<PAGE>
DIVIDENDS
The Company has never declared or paid any dividends on the Common Shares and
does not presently intend to pay dividends on the Common Shares in the
foreseeable future. The Company's Board of Directors intends to retain future
earnings, if any, to finance the development and expansion of its business. In
addition, the indenture relating to the Senior Notes limits, and, for the
foreseeable future, effectively prohibits, the ability of the Company to declare
or pay cash dividends.
NUMBER OF SHAREHOLDERS
As of August 6, 1998, there were 400 holders of record of the Company's
Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and the notes thereto appearing
elsewhere in this document.
OVERVIEW
GENERAL
The Company is a next generation provider of intelligent telecommunication
services. The Company's mission statement is to be the leading services
provider of high bandwidth integrated telecommunications services to businesses
and other high volume users operating in key Latin American markets, creating
great opportunities for its customers, employees, investors and other partners.
The Company's strategy is to (i) build facilities based fiber optic and
digital switching intelligent networks; (ii) develop strategic relationships
with technology network vendors and developers of Internet-based software; and
(iii) provide end-to-end network solutions to business customers.
Today, the Company is constructing state-of-the-art fiber optic ATM
networks in Santiago, Chile and Lima, Peru. ATM is an information transfer
standard that is one of a general class of packet technologies. ATM can be used
by many different information systems, including local area networks to deliver
traffic at varying rates, permitting a mix of voice, data, video and
multimedia. As of March 31, 1998, the Company had installed approximately (i)
120 kilometers of fiber optic cable through most of Santiago's downtown
business district and the outlying industrial and airport corridor and (ii) 230
kilometers of fiber optic cable through the major commercial and industrial
districts of Lima, and the port city of Callao. During the second and third
quarter of this year the Company intends to substantially complete the
installation of the ATM backbone equipment in both Peru and Chile.
29
<PAGE>
The Company has historically operated as a Latin American
telecommunications development stage company, which has developed its
operations in Latin America through the acquisition of holding and operating
companies that own licenses, concessions or rights-of-way in what the Company
believes to be attractive markets. The following table sets forth the name,
principal market and date of acquisition of each entity acquired by the
Company.
<TABLE>
<CAPTION>
NAME MARKET DATE OF ACQUISITION ACQUISITION PRICE(1)
- ---- ---------- --------------------- ---------------------
<S> <C> <C> <C>
Hewster Servicios Intermedios, S.A. ("HSI") .......... Santiago July 15, 1994 $ 9.2 million(2)
Visat, S.A. ("Visat") ................................ Santiago September 23, 1994 1.1 million
Resetel .............................................. Lima May 7, 1996 7.5 million
Hewster, S.A. ("HSA ") ............................... Santiago July 31, 1996 1.5 million
Iusatel Chile, S.A. ("Iusatel") ...................... Santiago December 17, 1997 5.9 million
</TABLE>
- ----------------
(1) The acquisition price represents the purchase price as defined in the
respective stock purchase agreement and excludes any other acquisition
related costs.
(2) The acquisition of HSI was accounted for as a reverse acquisition,
resulting in HSI acquiring the Company, for accounting purposes, and the
recapitalization of HSI.
In Chile the Company operates three wholly owned subsidiaries, FirstCom
Networks (formerly operated by the Company under the names of Hewster Servicios
Intermedios, S.A. and Hewster S.A.), FirstCom Long Distance (formerly Iusatel
Chile S.A.) and Visat S.A. ("Visat").
FirstCom Networks currently provides businesses in Santiago with high
quality voice and data communications services on a private line basis,
including local area network interconnections, remote terminal access, PBX to
PBX connections, remote printing capabilities and high speed access to the
Internet through arrangements with a Chilean based ISP. In addition, FirstCom
Networks provides its
30
<PAGE>
customers with local and wide area network design, engineering, installation,
systems' integration and support services. FirstCom Long Distance provides
domestic and international long distance services. FirstCom Long Distance's
long distance traffic is switched and transported, in part, through its own
gateway switch and satellite earth station, as well as through interconnections
with other Chilean long distance carriers. Visat holds a government concession
to provide intermediate telecommunications services, including the installation
and operation of a network of 12 satellite earth stations and a switch
throughout Chile, which allows the Company to transmit satellite
communications.
In Peru, the Company operates as a wholly owned subsidiary, Red de
Servicios Empresariales de Telecommunicaciones, S.A. ("Resetel"). Upon
completion of its fiber optic network, Resetel intends to aggressively provide
multinational, national and local businesses a broad array of high quality
data, video and voice communication services, including LAN interconnection,
frame relay, remote terminal access and dedicated channels for access to the
Internet, on a private line basis. Resetel intends to expand its existing
service offerings to provide local public switched telephone service upon
liberalization of Peru's telecommunications markets and expiration of
Telefonica del Peru's exclusive concession to provide public switched local and
long distance telephony services, which is scheduled to occur in July 1999.
RESTATED FINANCIAL INFORMATION AND AMENDED QUARTERLY FINANCIAL INFORMATION
During August 1998, the Company restated its December 31, 1997 and 1996
financial statements to reflect the effect of revising the price per share of
Company common stock issued in connection with the May 1996 acquisition of
Resetel from $2.25 to $5.99 per share. The revised price per share is based on
the average closing price of the Company's common stock for the period of 14
days before and after the date the terms of the acquisition were announced. The
previously recorded purchase price was based on the Company's March 1996 private
placement. The effect of the change in price per share increased the reported
purchase price from approximately $2,800,000 to $7,500,000. The effect of the
restatement on (1) the Company's annual statements of operations, related to
increased amortization expense, was to increase net loss by $136,000 and
$234,000, resulting in a net loss of $4,762,000 and $15,866,000 for the years
ended December 31, 1996 and 1997, respectively (2) on the Company's
stockholders' equity, related to the increased purchase price, was to increase
additional paid in capital by $4,675,000, resulting in additional paid in
capital of $23,168,000 and $31,562,000 as of December 31, 1996 and 1997,
respectively and (3) on the Company's net basic and diluted loss per share,
related to increased amortization expense of $0.01 per share, resulting in net
basic and diluted loss per share of $0.32 and $0.95 for the years ended December
31, 1996 and 1997.
During October 1997 and August 1998 the Company amended certain financial
information as reported on Forms 10-QSB during 1996 and 1997. A summary of the
original and amended unaudited financial information and a description of the
related impact of the Company's statement of operations follows:
<TABLE>
<CAPTION>
(In Thousands of U.S. Dollars)
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Revenues ................................. $ 58 $ 113 $ 477
Loss from Operations ..................... (591) (1,646) (2,911)
Net loss, as amended ..................... $ (621) $(1,711) $(2,981)
====== ======= =======
Net basic and diluted loss per
share,as amended ........................ $(0.05) $ (0.12) $(0.20)
====== ======= =======
General and administrative
expenses ................................ 247 (a) 247 (a)
Depreciation expense ..................... 110 (a) 240 (a) 240 (a)
Interest expense ......................... 36 (a) 36 (a)
------- -------
Amortization expenses .................... 64 (c) 122 (c)
------- -------
Net loss, as originally reported ......... $ (511) $(1,124) $(2,336)
====== ======= =======
Net basic and diluted loss per
share,as originally reported ............ $(0.04) $ (0.08) $(0.16)
====== ======= =======
31
<PAGE>
<CAPTION>
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997
-------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues ................................. $ 324 $ 585 $ 853
Loss from Operations ..................... (1,085) (2,384) (8,574)
Net loss, as amended ..................... $(1,283) $ (2,881) $ (10,069)
======= ======== =========
Net basic and diluted loss per
share,as amended ........................ $ (0.08) $ (0.37) $ (0.61)
======= ======== =========
General and administrative
expenses ................................
Depreciation expense .....................
Interest expense ......................... 178 (b)
-------
Amortization expenses .................... 58 (c) 116 (c) 176 (c)
------- -------- ---------
Net loss, as originally reported ......... $(1,047) $ (2,765) $ (9,893)
======= ======== =========
Net basic and diluted loss per
share,as originally reported ............ $ (0.06) $ (0.37) $ (0.61)
======= ======== =========
</TABLE>
- ----------------
(a) Reflects (i) adjustment identified in the fourth quarter of 1996 to provide
depreciaiton on assets placed in use during the first quarter of 1996,
for which depreciation initially had not commenced until the second
quarter of 1996 and (ii) adjustments for various expenses and costs
identified by the Company in the fourth quarter of 1996 as relating to
earlier 1996 quarters.
(b) Reflects additional interest identified in the fourth quarter of 1997
related to the beneficial conversion feature inherent in the 7%
Convertible Debentures issued in February 1997 (see Note 4). Of the total
adjustment of $310, the amount of $132 was capitalized as part of the
Company's fiber optic network.
(c) Reflects the quarterly effect of the Resetel purchase price described in
the introductory language to the table above.
the Company during the fourth quarter of 1996.
32
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
SALES. The Company's sales were $1,130,000 for the year ended December 31,
1997 as compared to $652,000 for the year ended December 31, 1996. This
increase of approximately $478,000, was attributable to the inclusion of a full
year of FirstCom Networks' operations, as compared to five months in 1996.
COST OF REVENUES. The Company's cost of revenues, relating principally to
the Company's operations in Chile, was $1,203,000 for the year ended December
31, 1997 as compared to $958,000 for the year ended December 31, 1996. This
increase of approximately $245,000, was attributable to services provided by
FirstCom Networks.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling,
general and administrative expenses were $4,678,000 for the year ended December
31, 1997 as compared to $3,272,000 for the year ended December 31, 1996. This
increase of approximately $1,406,000, was primarily attributable to an increase
in corporate expenses related to salaries, professional fees and travel
attributable to the ongoing support of the Company's subsidiary operations, as
well as corporate development opportunities, and expenses attributable to the
Company's Resetel and FirstCom Networks subsidiaries which were acquired by the
Company in May and July 1996, respectively.
The significant components of selling, general and administrative expenses
were as follows:
<TABLE>
<CAPTION>
1996 1997
----------- ----------
<S> <C> <C>
Compensation ............... 1,202,000 2,775,000
Professional fees .......... 956,000 728,000
Travel ..................... 292,000 254,000
Other ...................... 822,000 921,000
</TABLE>
COMMON STOCK AND STOCK OPTION COMPENSATION. This expense is directly
attributable to the intrinsic value of shares of Common Stock and stock options
issued to certain officers and former directors of the Company during 1997.
Common Stock and stock options were issued to officers to reflect the value
attributable to their services. Common Stock and stock options issued to former
directors were issued to compensate them for services rendered to the Company
pursuant to an agreement signed in October 1997.
DEPRECIATION AND AMORTIZATION. The Company's depreciation and amortization
expenses were $1,201,000 for the year ended December 31, 1997 as compared to
$842,000 for the year ended December 31, 1996. This increase of $359,000 was
primarily attributable to an increase in amortization expense related to the
intangible assets purchased in the acquisitions of Resetel and FirstCom
Networks.
INTEREST EXPENSE. The Company's interest expense was $6,521,000 for the
year ended December 31, 1997 as compared to $246,000 for the year ended
December 31, 1996. This increase of approximately $6,275,000 was due to
additional financing costs related to the Senior Notes, the issuance of
convertible debentures in February and May 1997 and the non-cash charge of
$852,000 related to the value of 300,000 shares of common stock issued to an
individual for certain past financial assistance provided to the Company. Of
the total interest costs incurred by the Company for the year ended December
31, 1997, $712,000 of such costs were capitalized in connection with the
Company's construction of its fiber optic network in Lima, Peru.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SALES. The Company's sales were $652,000 for the year ended December 31,
1996 as compared to $224,000 for the year ended December 31, 1995. This
increase of approximately $428,000, was attributable to additional services
provided by the Company through its HSA subsidiary, which was acquired in July
1996.
COST OF SALES. The Company's cost of sales was $958,000 for the year ended
December 31, 1996 as compared to $408,000 for the year ended December 31, 1995.
This increase of approximately $550,000, was attributable to added costs
associated with the increase in sales discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling,
general and administrative expenses were $3,272,000 for the year ended December
31, 1996 as compared to $1,906,000 for the year
33
<PAGE>
ended December 31, 1995. This increase of approximately $1,366,000, was
primarily attributable to an increase in corporate expenses related to
salaries, professional fees, consulting fees and travel attributable to the
ongoing support of the Company's subsidiary operations as well as corporate
development opportunities, and expenses attributable to the Company's Resetel
and HSA subsidiaries which were acquired by the Company in May 1996 and July
1996, respectively.
The significant components of selling, general and administrative expenses
were as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Compensation ............... 934,000 1,202,000
Professional fees .......... 562,000 956,000
Travel ..................... 111,000 292,000
Other ...................... 299,000 822,000
</TABLE>
DEPRECIATION AND AMORTIZATION. The Company's depreciation and amortization
expenses were $842,000 for the year ended December 31, 1996 as compared to
$396,000 for the year ended December 31, 1995. This increase of $446,000 was
attributable to an increase in amortization expense related to the intangible
assets purchased in the acquisitions of Resetel and HSA, as well as additional
depreciation expense related to the commencement of operations of the Company's
fiber optic network in Chile.
INTEREST EXPENSE. The Company's interest expense was $246,000 for the year
ended December 31, 1996 as compared to $319,000 for the year ended December 31,
1995. This decrease of approximately $73,000, was due to a reduction in the
Company's outstanding indebtedness during 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has been primarily engaged in start-up
activities requiring substantial expenditures. Consequently, the Company has
reported losses from operations, before interest, of approximately $2.5 million,
$4.5 million and $10.6 million for the years ended December 31, 1995, 1996 and
1997, respectively. In addition, the Company has reported cash used in investing
activities of approximately $1.2 million, $3.0 million and $127.5 million for
the years ended December 31, 1995, 1996 and 1997, respectively. Cash used in
investing activities related primarily to the purchase of property and equipment
and the acquisitions of Visat, FirstCom Networks and FirstCom Long Distance and
the purchase and use of restricted cash and investments. Further development of
the Company's business and the expansion of its fiber optic networks, service
offerings and customer base will require significant additional expenditures,
and the Company expects that it will have significant operating losses and net
cash outflows from operating and investing activities through at least 1999.
Since inception, the Company has funded its cash needs through a
combination of private equity and debt placements.
On October 27, 1997, the Company consummated the Senior Note Offering of
150,000 Units consisting of an aggregate of $150.0 million aggregate principal
amount of 14% Senior Notes due October 27, 2007 and 5,250,000 Unit Warrants to
purchase 5,250,000 shares of Common Stock of the Company at an exercise price
of $4.40 per share. The Unit Warrants entitle the holders thereof to acquire an
aggregate of 5,250,000 shares of Common Stock, representing approximately 15.2%
of the Common Stock of the Company on a fully diluted basis as of the date of
the consummation of the Senior Note Offering (assuming full vesting and
exercise of all options and warrants outstanding at March 31, 1998), at an
exercise price of $4.40 per share. In addition, the Initial Purchaser of the
Units in the Senior Note Offering, was granted 2,250,000 warrants to acquire
2,250,000 shares of Common Stock of the Company at an exercise price of $4.40
per share.
The net proceeds to the Company from the Senior Note Offering were
approximately $142.5 million, after deducting the underwriting discount and
offering expenses. Approximately $57.3 million
34
<PAGE>
of the proceeds were used to purchase a portfolio of securities that was
deposited in escrow for payment of interest on the Senior Notes through October
27, 2000 and, under certain circumstances, as security for repayment of
principal of the Senior Notes.
In addition to the deposit of a portion of the proceeds from the Senior
Note Offering to fund interest payments on the Senior Notes through October
2000, the Company deposited $62 million of the proceeds from the Senior Note
Offering in a separate account under a trustee's control pending application of
such funds by the Company for the payment of: (a) Permitted Expenditures; (b)
in the event of a Change of Control of the Company, the Change of Control
Payment and (c) in the event of a Special Offer to Purchase, or a Special
Mandatory Redemption, the purchase or redemption price in connection therewith.
The Company expects to use these proceeds to expand and operate the
Company's telecommunications businesses in Peru and Chile. Under the terms of
the Indenture at least 60% of these funds used by the Company for Permitted
Expenditures must be related to the Company's telecommunications business in
Peru.
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will not permit any of its Subsidiaries to issue any shares of preferred stock;
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) and the Company may issue shares of Disqualified Stock if the Company's
Debt to Cash Flow Ratio would have been no greater than 5.5 to 1, in the case
of any such incurrence or issuance on or before December 31, 2000, or no
greater than 5.0 to 1, in the case of any such incurrence or issuance at any
time thereafter, in each case, determined on a pro forma basis (including a pro
forma application of the net proceeds thereof), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of the applicable four full fiscal quarter
period.
The Indenture also provides that the Company will not incur any
Indebtedness that is contractually subordinated to any other Indebtedness of
the Company unless such Indebtedness is also contractually subordinated to the
Senior Notes on substantially identical terms; provided, however, that no
Indebtedness of the Company shall be deemed to be contractually subordinated to
any other Indebtedness of the Company solely by virtue of being unsecured.The
provisions of this paragraph will not apply to the incurrence of any Permitted
Debt. See "Description of Senior Notes--Incurrence of Indebtedness and Issuance
of Preferred Stock."
35
<PAGE>
A summary of the Company's value of Common Stock issued (see (2) below) and
Common Stock and Common Stock equivalents outstanding as of March 31, 1998 and
the pro forma effect on the Company's equity capitalization upon the exercise of
all Common Stock equivalents outstanding at December 31, 1997 follows:
<TABLE>
<CAPTION>
STOCK OPTIONS AND WARRANTS OUTSTANDING
AT DECEMBER 31, 1997
----------------------------------------------------
ACTUAL AT MANAGEMENT OTHER OPTIONS
DECEMBER 31, AND SENIOR NOTE AND INCREMENTAL
1997 DIRECTORS(4) WARRANTS(5) WARRANTS(6) AS ADJUSTED(7)
---------------- ---------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Shares of Common Stock ......... 19,084,300 4,995,000 7,500,000 3,195,171 15,690,171
Value of Common Stock
issued(1)(2)
Par Value .................... $ 19,000 $ 4,995 $ 7,500 $ 3,195 $ 15,690
Additional paid in capital.... 31,562,000 15,206,519 32,992,500 6,927,362 55,126,381
------------ ------------ ------------ ----------- ------------
$ 31,581,000 $ 15,211,514 $ 33,000,000 $ 6,930,557 $ 55,142,071
============ ============ ============ =========== ============
Per share(3) ................... $ 1.65 $ 3.05 $ 4.40 $ 2.17 $ 3.51
</TABLE>
- ----------------
(1) The closing price of the Common Stock on December 31, 1997 was $1.94. The
exercise of stock options and warrants as shown above assumes (i) that the
fair value of the Common Stock is equal to or above the exercise price of
the respective stock options and warrants and (ii) full vesting of all
stock options and warrants.
(2) Value of Common Stock represents the proceeds from the Company's issuance
of Common Stock and Common Stock equivalents, and is comprised of par
value and additional paid in capital, as stated in the Company's
consolidated historical financial statements included elsewhere in this
Prospectus.
(3) Represents the amount in (2) per share of Common Stock.
(4) Represents the increase to the Company's value of Common Stock issued upon
the exercise of all stock options (vested and not vested) held by the
Company's management and directors and the Company's receipt of the
exercise price as of December 31, 1997.
(5) Represents the increase to the Company's value of Common Stock issued upon
the exercise of all warrants (vested and not vested) that were issued in
connection with the Senior Notes and are outstanding and the Company's
receipt of the exercise price as of December 31, 1997.
(6) Represents the increase to the Company's value of Common Stock issued upon
the exercise of all other stock options and warrants (vested and not
vested) outstanding and the Company's receipt of the exercise price as of
December 31, 1997 (includes 1,865,000 stock options issued to former
officers and directors).
(7) Represents the combined increase to the Company's value of Common Stock
issued of (4), (5) and (6) above.
As part of its business strategy, the Company intends to continue to
evaluate potential acquisitions, joint ventures and strategic alliances in
companies that own existing networks or companies that provide services that
complement the Company's existing businesses. The Company continues to consider
potential acquisitions from time to time. New sources of capital such as credit
facilities and other borrowings, and additional debt and equity issuances, may
be used to fund such acquisitions and similar strategic investments.
36
<PAGE>
As a result of the Senior Note Offering, the Company has become highly
leveraged and has substantial debt service requirements. In addition, in each
year since its inception the Company had net losses from operations and
therefore had insufficient earnings to cover its fixed charges. The Company's
annual interest obligations under the Senior Notes substantially exceeds the
Company's net income.
The ability of the Company to make scheduled payments with respect to its
indebtedness, including interest on the Senior Notes after October 27, 2000,
will depend upon (i) its ability to implement its business plan, and to expand
its operations and to successfully develop its customer base in its target
markets, (ii) the ability of the Company's subsidiaries to remit cash to the
Company in a timely manner and (iii) the future operating performance of the
Company and its subsidiaries. Each of these factors is, to a large extent,
subject to economic, financial, competitive, regulatory and other factors, many
of which are beyond the Company's control. The Company expects that it will
continue to generate cash losses for the foreseeable future. The Company has
deposited in escrow funds representing interest
37
<PAGE>
payments with respect to the Senior Notes through October 2000. However, no
assurance can be given that the Company will be successful in developing and
maintaining a level of cash flow from operations sufficient to permit it to pay
the principal of, and the interest on the Senior Notes after such time, or with
respect to its other indebtedness. If the Company is unable to generate
sufficient cash flow from operations to service its indebtedness, including the
Senior Notes, it may have to modify its growth plans, restructure or refinance
its indebtedness or seek additional capital. There can be no assurance that (i)
any of these strategies can be effected on satisfactory terms, if at all, in
light of the Company's high leverage or (ii) any such strategy would yield
sufficient proceeds to service the Company's indebtedness, including the Senior
Notes. Any failure by the Company to satisfy its obligations with respect to
the Senior Notes at maturity or prior thereto would constitute a default under
the Indenture and could cause a default under other agreements governing
current or future indebtedness of the Company.
Substantially all of the Company's assets are held by its subsidiaries and
substantially all of the Company's sales are derived from operations of such
subsidiaries. Future acquisitions may be made through present or future
subsidiaries of the Company. Accordingly, the Company's ability to pay the
principal of, and interest and liquidated damages, if any, when due, on the
Senior Notes is dependent upon the earnings of its subsidiaries and the
distribution of sufficient funds from its subsidiaries. the Company's
subsidiaries will have no obligation, contingent or otherwise, to make funds
available to the Company for payment of the principal of, and interest and
liquidated damages on, if any, the Senior Notes. In addition, the ability of
the Company's subsidiaries to make such funds available to the Company may be
restricted by the terms of such subsidiaries' current and future indebtedness,
the availability of such funds and the applicable laws of the jurisdictions
under which such subsidiaries are organized. Furthermore, the Company's
subsidiaries will be permitted under the terms of the Indenture to incur
indebtedness that may severely restrict or prohibit the making of
distributions, the payment of dividends or the making of loans by such
subsidiaries to the Company. The failure of the Company's subsidiaries to pay
dividends or otherwise make funds available to the Company could have a
material adverse effect upon the Company's ability to satisfy its debt service
requirements including its ability to make payments on the Senior Notes.
At March 31, 1998 the Company had $124.6 million of cash and cash
equivalents, restricted cash and restricted investments. The Company believes
its current cash balances should be sufficient to satisfy the Company's
liquidity needs through the end of 1999; however, there can be no assurance
that the Company will have sufficient resources to meet its subsequent
liquidity requirements.
To accelerate its growth rate and to finance the launch or build-out of
additional markets, the Company will consider obtaining financing from various
sources, including vendor financing provided by equipment suppliers, project
financing from commercial banks and international agencies, bank lines of
credit and the sale of equity and debt securities. To the extent that the
Company or any of its subsidiaries issues debt, its leverage and debt service
obligations will increase. There can be no assurance that the Company will be
able to raise such capital on satisfactory terms, if at all. In addition, the
Indenture related to the Senior Notes will limit the ability of the Company and
its subsidiaries to incur additional indebtedness.
INFLATION AND EXCHANGE RATES
Inflation and exchange rate variations may have substantial effects on the
Company's results of operations and financial condition. Generally, the effects
of inflation in many Latin American countries, including Chile and Peru, have
been offset in part by a devaluation of the local countries' currencies
relative to the U.S. dollar. Nevertheless, the devaluation of each country's
currency may have an adverse effect on the Company.
A substantial portion of the Company's purchases of capital equipment and
interest on the Senior Notes is payable in U.S. dollars. To date, the Company
has not had significant foreign currency exposure with third parties and
generally intends to be paid for its services in U.S. dollars or in local
38
<PAGE>
currencies with a pricing adjustment that is structured to protect the Company
against the risk of fluctuations in exchange rates. As a result, the Company
has not entered into foreign currency hedging transactions. In the future, if
third party foreign currency exposure increases, the Company may enter into
hedging transactions in order to mitigate any related financial exposure.
However, a portion of sales to customers of the Company will be denominated in
local currencies, and substantial or continued devaluations in such currencies
relative to the U.S. dollar could have a negative effect on the ability of
customers of the Company to absorb the costs of devaluation. This could result
in the Company's customers seeking to renegotiate their contracts with the
Company or, failing satisfactory renegotiation, defaulting on such contracts.
In addition, from time to time, Latin American countries have experienced
shortages in foreign currency reserves and restrictions on the ability to
expatriate local earnings and convert local currencies into U.S. dollars. Also,
currency devaluations in one country may have adverse effects in another
country, as in late 1994 and 1995, when several Latin American countries were
adversely impacted by the devaluation of the Mexican peso. Any devaluation of
local currencies in the country where the Company operates, or restrictions on
the expatriation of earnings or capital from such countries, could have a
material adverse effect on the business, results of operations and financial
condition of the Company. See "Risk Factors - Country Risks."
NET OPERATING LOSS CARRYFORWARDS
At December 31, 1997, the Company had net operating loss carry forwards
("NOLs") of approximately $16.1 million for U.S. income tax purposes and
approximately $21.3 million for foreign income tax purposes. These
carryforwards are available to offset future taxable income, if any, and expire
for U.S. income tax purposes in the years 2007 through 2012. The foreign net
operating loss carryforwards related to (1) Peru, $665,000, expire in the years
2000 through 2001 and (2) to Chile, $20.6 million, do not expire.
EFFECTS OF NEW ACCOUNTING STANDARDS
During June 1997, the Financial Accounting Standards Board ( the "FASB")
issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information" effective
for fiscal years beginning after December 1997. Management does not expect
Statements No. 130 and 131 to have a significant impact on the Company's
reporting and disclosure requirements in 1998.
Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. Statement No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders.
39
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
PAGE
----
INTERAMERICAS COMMUNICATIONS CORPORATION
Report of Independent Certified Public Accountants ...................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 ....................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997........................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997... .................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Registrant are as follows:
<TABLE>
<CAPTION>
POSITION WITH
NAME AGE THE COMPANY DIRECTOR SINCE
- ---- --- ------------- --------------
<S> <C> <C> <C>
Patricio E. Northland 42 Chairman of the Board of Directors, President November 1996
and Chief Executive Officer
Douglas G. Geib II 41 Director and Chief Financial Officer May 1997
David Kleinman 62 Director May 1997
George Cargill 56 Director July 1994
Andrew Hulsh 37 Director December 1997
</TABLE>
- -----------------
PATRICIO E. NORTHLAND has over sixteen years of experience as an
international telecommunications executive and entrepreneur. Mr. Northland has
been President, Chairman of the Board of Directors and Chief Executive Officer
of the Company since November 1996. Born in Chile, Mr. Northland is a U.S.
citizen who brings to the Company many relationships with telecommunications
carriers and potential customers throughout Latin America. In 1991, Mr.
Northland founded AmericaTel Corporation ("AmericaT "), a Miami-based
international telecommunications carrier focused on traffic originating and
terminating in Latin America, and in 1993, Mr. Northland successfully completed
a joint venture agreement between AmericaTel and Entel, Chile's major long
distance carrier. Under Mr. Northland's leadership, AmericaTel grew to provide
satellite-based voice, data and fax telecommunications services to corporate
customers in several Latin American nations. Prior to his involvement with
AmericaTel, Mr. Northland held key management positions with PanamSat and
IntelSat. In 1996, Mr. Northland sold his interest in AmericaTel to Entel. Mr.
Northland holds engineering degrees from the University of Chile, a master's
degree in communications from George Washington University, and an M.B.A. from
The University of Chicago.
40
<PAGE>
DOUGLAS G. GEIB II has been the Chief Financial Officer and a Director
of the Company since May 1997. For almost 20 years prior thereto, Mr. Geib
worked with Ernst & Young LLP and had been a Partner since 1989. While at Ernst
& Young, Mr. Geib provided corporate finance and audit services, as well as
coordinated and managed various consulting services to clients involved in
telecommunications, healthcare, manufacturing, real estate and consumer
products. Mr. Geib holds an undergraduate business degree from The Ohio State
University and an M.B.A. from The University of Chicago. Mr. Geib is a Certified
Public Accountant.
DAVID C. KLEINMAN has been a Director of the Company since May 1997.
Mr. Kleinman is currently Senior Lecturer in Business Policy at the Graduate
School of Business of The University of Chicago where he has taught since 1971.
Mr. Kleinman serves as a member of the Board of Directors of Irex Corporation
which trades its stock in the over-the-counter market. Mr. Kleinman is also a
member of the Board of Directors of the Acorn Fund, the Acorn International Fund
and the Acorn USA Fund which are registered under the Investment Company Act of
1940.
GEORGE A. CARGILL has been a Director of the Company since July 1994.
Mr. Cargill has been the President and owner of Telectronic S.A., a major
Chilean systems integrator and the Northern Telecom equipment distributor in
Chile since 1976. Prior thereto, Mr. Cargill spent seven years with CTC as a
network engineer and manager of quality control.
ANDREW HULSH has been a Director of the Company since December 1997.
Mr. Hulsh has been a partner with the law firm of Baker & McKenzie since January
1997. For more than five years prior thereto, Mr. Hulsh was an attorney with the
law firm of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., most
recently as a shareholder.
There are no family relationships among any of the Company's directors and
officers.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10 percent of the Company's Common Stock, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten percent shareholders are
required by regulations promulgated by the SEC to furnish the Company with
copies of all Section 16(a) forms that they file with the SEC.
With reference to transactions during fiscal 1997, to the Company's
knowledge, based solely on review of the copies of such reports furnished to the
Company, the Company believes that the following persons failed to file on a
timely basis the following reports required by Section 16(a) of the Exchange
Act. Mr. Kleinman was elected a director in May 1997 and received options to
purchase 200,000 shares of Common Stock. Mr. Kleinman did not file the Form 3 to
report such matters within 10 days of his election. Mr. Kleinman reported such
matters on the Form 5 for fiscal 1997. Mr. Northland was issued 600,000 shares
of Common Stock and granted options to purchase 900,000 shares of Common Stock
in September 1997, and options to purchase 714,000 shares of Common Stock in
October 1997. Mr. Northland did not file the Form 4 to report such transactions.
Mr. Northland reported such transactions on the Form 5 for fiscal 1997. Mr. Geib
was issued 250,000 shares of Common Stock and granted options to purchase
250,000 shares of Common Stock in September 1997 and options to purchase 286,000
shares of Common Stock in October 1997. Mr. Geib did not file the Form 4 to
report such transactions. Mr. Geib reported such transactions on the Form 5 for
fiscal 1997. Mr. Cargill was granted options to purchase 50,000 shares of Common
Stock in December 1997. Mr. Cargill filed the Form 5 for fiscal 1997 to report
such transactions two days after the date such report was due to be filed.
41
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual
compensation earned by the Chief Executive Officer of ICCA, and the other most
highly compensated executive officer of ICCA during 1997 (such persons are
hereinafter referred to as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ------------------------------- ---------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITION(S) YEAR ($) ($) ($)(1) ($) (#) ($) ($)(1)
- --------------------- ------ --------- --------- -------------- ------------ ------------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Patricio E. Northland 1997 300,000 630,000 -- -- 1,614,000(2) -- --
Chairman of the Board, 1996 50,000 -- -- -- 1,000,000 -- --
President and CEO(2) 1995 -- -- -- -- -- -- --
Douglas G. Geib II(3) 1997 166,667 170,000 -- -- 1,036,000 -- --
Chief Financial Officer 1996 -- -- -- -- -- -- --
1995 -- -- -- -- -- -- --
</TABLE>
- ----------------
(1) Perquisites to each officer did not exceed the lesser of $50,000 or 10% of
the total salary and bonus for any officer.
(2) Effective as of November 23, 1996.
(3) Mr. Geib commenced employment with the Company on May 1, 1997. See "--
Employment and Consultants Agreements."
The following table sets forth certain information concerning options
granted in 1997 to ICCA's Named Executive Officers. The Company has no
outstanding stock appreciation rights. None of the Named Executive Officers
exercised options during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------
POTENTIAL REALIZED
VALUE AT ASSUMED
NUMBER OF % OF ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION --------------------------
NAME GRANTED(#) IN FISCAL YEAR PER SHARE($/SH) DATE 5%($) 10%($)
- ---- ------------ ---------------- ----------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Patricio E. Northland ......... 1,614,000 57% $ 3.85 Oct. 2007 3,907,000 9,903.000
Douglas G. Geib II ............ 1,036,000 36% $ 2.90 Oct. 2007 1,889,000 4,788,000
</TABLE>
The following table sets forth information with respect to ICCA's Named
Executive Officers concerning the exercise of options during 1997 and
unexercised options held as of the end of 1997.
42
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT FY-END(#) FY-END($)
----------------------- --------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- ----------------- ------------- ----------------------- --------------
<S> <C> <C> <C> <C>
Patricio E. Northland ......... -- -- 1,538,000 / 1,076,000 -- / --
Douglas G. Geib II ............ -- -- 345,000 / 691,000 -- / --
</TABLE>
EMPLOYMENT AND CONSULTANTS AGREEMENTS
In September 1997, the Company entered into an employment and severance
agreement (the "Northland Agreement") with Patricio E. Northland, President,
Chief Executive Officer and Chairman of the Board of Directors of the Company,
which replaced his former employment agreement with the Company. The Northland
Agreement has a term of three years unless terminated earlier for cause, death
or disability, and provides for an initial annual base salary of $350,000,
subject to an increase of $50,000 in each of the second and third year of the
agreement. In addition, Mr. Northland was granted non-qualified stock options
to purchase 300,000 shares of ICCA's Common Stock in the following manner:
100,000 shares which vest on the date of employment at an exercise price of
$4.00 per share; 100,000 shares which vest one year thereafter at an exercise
price of $6.00 per share; and 100,000 shares which vest two years after the
date of employment at an exercise price of $8.00 per share. In consideration of
Mr. Northland's agreement to terminate his former employment agreement with the
Company, which would have provided for a $750,000 bonus to Mr. Northland upon
consummation of the Senior Note Offering, the Company agreed to pay Mr.
Northland a performance bonus of $250,000 and vest all of his existing options
to acquire 1,000,000 shares of Common Stock granted under his prior employment
agreement.
During May 1997, the Company entered into an employment and severance
agreement (the "Geib Agreement") with Douglas G. Geib II, Chief Financial
Officer of ICCA. The Geib Agreement has a term of three years unless terminated
earlier for cause, death or disability, and provides for an annual salary of
$250,000. In addition to the base salary, the Geib Agreement provides for a
primary performance award based upon business criteria which is designed to
enhance shareholder value during each year up to a maximum of 100 percent of
the base salary payable thereunder. Mr. Geib was also granted non-qualified
stock options to purchase 500,000 shares of ICCA's Common Stock at an exercise
price of $2.42 per share. One-third of such options became exercisable on date
of employment, and the remainder vest in equal annual installments over the
first two years of Mr. Geib's three-year employment period.
During October 1997, the Company entered into an agreement with Mr. Ivan
Van de Wyngard (the "Van de Wyngard Agreement") for the performance of certain
management, consulting and advisory services to the Company. Under the Van de
Wyngard Agreement, Mr. Van de Wyngard will receive a monthly fee of $7,500 as
compensation for his services. The Van de Wyngard Agreement has a term of one
year and may be extended upon mutual agreement between the parties.
STOCK OPTIONS
As of August 3, 1998 ICCA has outstanding options to purchase 7,490,000
shares of Common Stock.
During 1996, 2,060,000 stock options were granted by ICCA to its executive
officers and directors. On May 29, 1997, the Board of Directors of ICCA granted
stock options in an aggregate amount of 200,000 shares of Common Stock to Mr.
Kleinman of which 50,000 shares vested on May 29, 1997 and the remainder vest
in equal annual installments over a three year period. During September 1997,
ICCA agreed to grant the following stock options to the following officers of
ICCA at an exercise price of $2.13 per share, the then market value of the
Common Stock: (i) Patricio E. Northland, President, Chief Executive Officer and
Chairman, was granted options to acquire 600,000 shares; and (ii) Douglas G.
Geib II, Chief Financial Officer and a director of ICCA, was granted options to
acquire 250,000 shares. In addition, in October 1997, ICCA agreed upon
consummation of the Senior Note Offering to grant options to acquire an
additional 714,000 and 286,000 shares to Mr. Northland and Mr. Geib,
respectively, at an exercise price of $4.40 per share. See "Certain
Relationships and Related Party Transactions."
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION
ICCA's Articles of Incorporation and By-laws contain certain provisions
that eliminate the liability of its directors and officers to the fullest
extent permitted by the Texas Business Corporation Act,
43
<PAGE>
except that they do not eliminate liability for: (i) any breach of the duty of
loyalty to the Company or its shareholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) an act or omission for which the liability of a director is expressly
provided by an applicable statute; or (iv) any transaction from which the
director derived an improper personal benefit. The Texas Business Corporation
Act provides that Texas corporations may indemnify any director, officer or
employee made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity of such person, if such person (i)
conducted himself in good faith and (ii) reasonably believed that his conduct
was in the corporation's best interests or, in the case of any criminal
proceeding, that his conduct was not unlawful and opposed to the corporation's
best interests. The indemnification provision does not permit indemnification
of officers, directors and employees (i) when such persons are found liable to
the corporation or (ii) for any transaction from which such persons derive
improper personal benefits. The foregoing provisions may reduce the likelihood
of derivative litigation against directors, officers and employees of the
Company and may discourage or deter shareholders or management from bringing a
lawsuit against directors and officers for breaches of their fiduciary duties,
even though such an action, if successful, might otherwise have benefited the
Company and its shareholders.
The Company has entered into an indemnification agreement with each
director (an "Indemnitee"). Pursuant to the indemnification agreement, the
Company will indemnify an Indemnitee to the fullest extent permitted by law,
notwithstanding that such indemnification is not specifically authorized by the
agreement, ICCA's Articles of Incorporation and By-laws, or statute. In
addition, the Company will indemnify each Indemnitee against any and all
expenses incurred in connection with claims relating to the fact that such
Indemnitee is or was a director, officer, employee, agent or fiduciary of the
Company or any subsidiary of the Company, and the Company will advance all such
expenses. The Company maintains directors' and officers' liability insurance.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling ICCA
pursuant to the foregoing provisions, ICCA has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and therefore unenforceable.
44
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP
The following table sets forth, as of August 6, 1998, information with
respect to the beneficial ownership of the Company's Common Stock by (i) each
director of the Company, (ii) the Named Executive Officers, (iii) the beneficial
owners of more than 5% of the outstanding Common Stock and (iv) all directors
and executive officers of the Company, as a group.
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE
NATURE OF OF
BENEFICIAL OUTSTANDING
NAME AND ADDRESS OWNERSHIP(1) SHARES(2)
- ---------------------------------------------------------------------- -------------------- ------------------
<S> <C>
Patricio E. Northland(3) 2,438,000 7.4%
Douglas G. Geib II(3) 845,332 2.6%
George Cargill(4) 2,000,000 6.1%
David Kleinman(5) 100,000 *
Andrew Hulsh(6) 50,000 *
UBS Securities LLC(7) 2,250,000 6.8%
Hernan Streeter Rios(3) 2,313,750 7.0%
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (5 persons) 5,433,332 16.5%
</TABLE>
- ------------
* Less than 1%.
(1) Includes shares of Common Stock which may be acquired pursuant to
options and warrants exercisable within 60 days of August 6, 1998.
(2) Based on 32,953,554 shares of Common Stock issued and outstanding on
August 6, 1998, plus shares of Common Stock which may be acquired
pursuant to options and warrants exercisable within 60 days of
August 6, 1998.
(3) The address of this person is 2600 Douglas Road, Suite 501, Coral
Gables, Florida 33134.
(4) The address of this person is Eliodoro Yanez, 2238 Santiago, Chile.
(5) The address of this person is 1101 E. 58th Street, Chicago, Illinois
60637.
(6) The address of this person is 1200 Brickell Avenue, Suite 1900, Miami,
Florida 33131.
(7) The address of this company is 299 Park Avenue, New York, New York
10171.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
TELECTRONIC S.A. AND MR. HERNAN STREETER
During the three years ended December 31, 1997, the Company entered into
certain transactions with Telectronic S.A. and its founders, Mr. George A.
Cargill and Mr. Eleazar Donoso. Mr. Cargill and Mr. Donoso are both Company
shareholders. Mr. Cargill is also a current director of the Company.
During the three years ended December 31, 1997 the Company entered into
several transactions with Mr. Hernan Streeter. Mr. Streeter formerly served the
Company as its Chief Executive Officer and its Chairman of the Board. In
addition, he is a principal shareholder of the Company. The Company paid
salaries to Mr. Streeter of $120,000 and $110,000 during 1995 and 1996,
respectively.
From 1994 to 1996 the Company granted Mr. Cargill 290,000 stock options
with a weighted average exercise price of $2.09.
The Company purchased approximately $205,000, $172,000 and $77,000 of
certain telecommunication equipment in 1995, 1996 and 1997, respectively, from
Teletronic, S.A. During 1997 the Company issued and redeemed $200,000 of bridge
notes from Mr. Cargill. In connection with such bridge notes Mr. Cargill
received 20,000 warrants to purchase the Company's common stock at an exercise
price of $2.56 per warrant.
From 1994 to 1996 the Company granted Mr. Streeter 510,000 stock options
with a weighted average exercise price of $1.91, respectively.
45
<PAGE>
On July 24, 1995, Mr. Donoso received 1,425,000 shares of Common Stock
(the "Donoso Shares") from the Company in exchange for his ownership interest
in HSI, a company which was acquired by the Company, in a transaction which was
exempt from the registration requirements of the Securities Act pursuant to
Regulation S and Section 4(2) thereof. On September 14, 1995, Mr. Donoso loaned
the Donoso Shares to Laura Investments, Ltd., a company owned and controlled by
Mr. Streeter.
From September 14, 1995 to March 1996, Laura Investments, Ltd. loaned the
Company an aggregate amount of $1,631,550. During March 1996, the Company
converted the original principal amount of $1,631,550, plus accrued interest of
$7,000 into 839,235 shares of Common Stock which were registered in the name of
Laura Investments, Ltd. and issued in a transaction which was exempt from the
registration requirements of the Securities Act pursuant to Regulation S and
Section 4(2) thereof.
During September 1997, Laura Investments Ltd. agreed to transfer 839,235
shares of the Company's Common Stock to Mr. Donoso in an attempt to satisfy its
obligatons to Mr. Donoso in connection with the transfer of the Donoso Shares
to Laura Investments, Ltd. which occurred on September 14, 1995. However, Mr.
Donoso claimed that the Company owed him additional shares of Common Stock in
consideration of the initial transaction between Mr. Donoso and Laura
Investments Ltd. on September 14, 1995 (or the equivalent monetary
consideration). The Company issued 300,000 shares of Common Stock to Mr. Donoso
in October 1997 in settlement of all outstanding claims by Mr. Donoso against
the Company. The Company recognized interest expense of $852,000 related to the
aggregate fair value of such shares of Common Stock issued to Mr. Donoso. This
transaction was exempt from the registration requirements of the Securities Act
pursuant to Sections 4(2) and 4(6) thereof.
Mr. Streeter was the founder and Chief Executive Officer of Hewster, which
was acquired by the Company during 1996. Prior to its acquisition, Hewster
provided approximately $237,000 of telecommunications services to the Company.
Mr. Streeter also was the primary shareholder and General Manager of FirstCom
Long Distance, which was acquired by the Company during 1997. Prior to this
acquisition, the Company made sales of $162,000 to FirstCom Long Distance.
Pursuant to provisions of the FirstCom Long Distance purchase agreement, the
Company agreed to pay Mr. Streeter a consulting fee of $120,000 during 1998.
46
<PAGE>
MAROON BELLS CAPITAL PARTNERS ("MBCP")
During the three years ended December 31, 1997 the Company entered into
certain transactions with MBCP. Two former directors of the Company, Paul Moore
and Phillip Magiera, are principals in MBCP. MBCP has provided certain
consulting and financial advisory services to the Company during the past three
years.
From 1994 to 1996, the Company granted MBCP and its principals 1,015,000
stock options with a weighted average exercise price of $2.12.
During 1995, the Company recognized $100,000 as a financial advisory fee
to MBCP. During 1996, the Company purchased $493,000 in equipment whereby MBCP
acted as a broker.
During 1996 and 1997, the Company converted $316,000 plus accrued interest
of $30,000 and $240,000, respectively, of outstanding liabilities to MBCP into
172,506 and 80,000 shares, respectively, of the Company's Common Stock. The
value assigned to the Common Stock during (i) 1996 was determined by the
Company's Board of Directors based on similar transactions (E.G., private
placements) and (ii) 1997 was based on the NASDAQ trading price.
During October 1997, the Company entered into an agreement with MBCP and
its principals, Theodore Swindells, Paul Moore and Phillip Magiera, to
compensate them for services rendered to the Company. Pursuant to such
agreement, the Company made a cash payment to MBCP of $500,000 at the closing
of the Senior Note offering and issued to each of Messrs. Moore and Magiera
250,000 shares of Common Stock and options to acquire 250,000 shares of Common
Stock at an exercise price of $2.13 per share. The Company recognized non-cash
consulting expense related to (i) the grant date fair value of the Common Stock
of approximately $1,420,000 and (ii) the intrinsic value of the stock options
of approximately $355,000. The fair value of such common stock and the
intrinsic value of such stock options was based on the Common Stock's grant
date NASDAQ trading price. Messrs. Moore and Magiera resigned from the
Company's board of Directors effective as of the date of the agreement.
OTHER RELATED PARTY TRANSACTIONS
The Company paid approximately $865,000 in legal fees in 1997 to Baker &
McKenzie. Andrew Hulsh is a Senior Partner of Baker & McKenzie and a director
of the Company.
In connection with the FirstCom Long Distance Acquisition, the Company
issued to Mr. Silva, a former director of the Company, a fee in the aggregate
amount of 100,000 shares of Common Stock for his services in facilitating the
transaction. A value of $200,000 was assigned to such Common Stock equivalent
to the grant date market price.
During September 1997, ICCA's Board of Directors ratified the issuance of
the following shares of Common Stock to the following officers of ICCA: (i)
600,000 shares of Common Stock to Patricio E. Northland, President, Chief
Executive Officer and Chairman of the Board and (ii) 250,000 shares of Common
Stock to Douglas G. Geib II, Chief Financial Officer of ICCA. No cash
consideration was paid by either officer for such shares. The Company
recognized non-cash compensation expense of approximately $1,650,000 and
$688,000 representing the grant date fair value of the aforementioned 600,000
and 250,000 shares of Common Stock, respectively. In addition, on the same
date, the Company granted the following stock options to the following officers
of ICCA at an exercise price of $2.13 per share: (i) Patricio E. Northland,
President, Chief Executive Officer and Chairman of the Board, was granted
options to acquire 600,000 shares of Common Stock, one-third of which vested
immediately and the remainder in equal annual installments over the next two
years; and (ii) Douglas G. Geib II, Chief Financial Officer and a director of
ICCA, was granted options to acquire 250,000 shares of Common Stock, one third
of which vested immediately and the remainder vest in equal annual installments
over the next two years. The Company recognized non-cash compensation expense
of approximately $372,000 and $155,000, representing the grant date intrinsic
value of the aforementioned 600,000 and
47
<PAGE>
250,000 stock options, respectively. In addition, in October 1997, ICCA agreed
upon consummation of the Offering to grant options to acquire an additional
714,000 and 286,000 shares to Mr. Northland and Mr. Geib, respectively, at an
exercise price of $4.40 per share--One third of such options vested immediately
and the remainder vest in equal annual installments over the next two years.
The strike price of such options exceeded the grant date fair value of the
underlying common stock. As such the options had no intrinsic value and no
related compensation expense was recorded.
48
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- ----------------------------------------------------------------------------------------------
<S> <C>
2.1 Stock Purchase Agreement, dated as of September 9, 1997, as amended, between
InterAmericas Communications Corporation and Inversiones Druma S.A. for the
Acquisition of 99.9% of the Outstanding shares of capital of Iusatel Chile S.A., previously
filed as an exhibit to Registrant's Current Report on Form 8-K, filed with the Commission on
September 24, 1997 and incorporated herein by reference.
3.1 Articles of Incorporation of InterAmericas Communications Corporation previously filed as
an exhibit to the Registrant's Form 8-A Registration Statement, filed with the Commission
on November 29, 1994 and incorporated herein by reference.
3.2 By-laws of InterAmericas Communications Corporation previously filed as an exhibit to
Amendment No. 4 to the Form S-4 Registration Statement of the Registrant, filed with the
Commission on August 12, 1998 and incorporated herein by reference.
4.1 Purchase Agreement, dated as of October 21, 1997 by and among InterAmericas
Communications Corporation, Hewster Chile S.A. Red de Servicios Empresariales de
Telecomunicaciones S.A. and UBS Securities LLC previously filed as an exhibit to
Registrant's Registration Statement on Form S-4, filed with the Commission on
December 10, 1997 and incorporated herein by reference.
4.2 Form of Existing Note previously filed as an exhibit to Registrant's Registration Statement
on Form S-4, filed with the Commission on December 10, 1997 and incorporated herein by
reference.
4.3 Indenture, dated as of October 27, 1997 between InterAmericas Communications
Corporation and State Street Bank & Trust Company, N.A. previously filed as an exhibit to
Registrant's Registration Statement on Form S-4, filed with the Commission on
December 10, 1997 and incorporated herein by reference.
4.4 A/B Exchange Registration Rights Agreement, dated as of October 27, 1997, between
InterAmericas Communications Corporation and UBS Securities LLC previously filed as an
exhibit to Registrant's Registration Statement on Form S-4, filed with the Commission on
December 10, 1997 and incorporated herein by reference.
4.5 Warrant Agreement, dated as of October 27, 1997, between the Registrant and State Street
Bank & Trust Company, N.A. previously filed as an exhibit to Registrant's Registration
Statement on Form S-4, filed with the Commission on December 10, 1997 and incorporated
herein by reference.
4.6 Warrant Registration Rights Agreement, dated as of October 27, 1997 between
InterAmericas Communications Corporation and UBS Securities LLC previously filed as an
exhibit to Registrant's Registration Statement on Form S-4, filed with the Commission on
December 10, 1997 and incorporated herein by reference.
4.7 Specimen of InterAmericas Communications Corporation 14% Senior Note due October 27,
2007 previously filed as an exhibit to Registrant's Registration Statement on Form S-4, filed
with the Commission on December 10, 1997 and Incorporated herein by reference.
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------------------------------------------------------
<S> <C>
4.8 Proceeds Pledge and Escrow Agreement, dated as of October 27, 1997 between
InterAmericas Communications Corporation and State Street Bank and Trust Company,
N.A., previously filed as an exhibit to Registrant's Registration Statement on Form S-4, filed
with the Commission on December 10, 1997 and incorporated herein by reference.
5.1 Opinion of Baker & McKenzie.
10.1 Employment Agreement, dated as of October 7, 1997, between InterAmericas
Communications Corporation and Patricio E. Northland, previously filed as an exhibit to
Amendment No. 4 to the Form S-4 Registration Statement of the Registrant filed with the
Commission on August 12, 1998 and incorporated herein by reference.
10.2 Employment and Severance Agreement, dated as of April 14, 1997, between InterAmericas
Communications Corporation and Douglas G. Geib previous filed as an exhibit to
Amendment No. 4 to the Form S-4 Registration Statement of the Registrant filed with the
Commission on August 12, 1998 and incorporated herein by reference.
21.1 Subsidiaries of the Registrant previously filed as an exhibit to Registrant's Form 10-KSB,
filed with the Commission on March 10, 1998 and incorporated herein by reference.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Baker & McKenzie (included in Exhibit 5.1).
25.1 Statement of Eligibility of State Street Bank and Trust Company, N.A. previously filed as an
exhibit to Registrant's Registration Statement on Form S-4, filed with the Commission on
December 10, 1997 and incorporated herein by reference.
99.1 Form of Letter of Transmittal previously filed as an exhibit to Registrant's Registration
Statement on Form S-4, filed with the Commission on December 10, 1997 and incorporated
herein by reference.
99.2 Form of Notice of Guaranteed Delivery previously filed as an exhibit to Registrant's
Registration Statement on Form S-4, filed with the Commission on December 10, 1997 and
incorporated herein by reference.
99.3 Form of Exchange Agent Agreement previously filed as an exhibit to Registrant's
Registration Statement on Form S-4, filed with the Commission on December 10, 1997 and
incorporated herein by reference.
99.4 Form of Information Agent Agreement previously filed as an exhibit to Registrant's
Registration Statement on Form S-4, filed with the Commission on December 10, 1997 and
incorporated herein by reference.
</TABLE>
(b) Financial Statements Schedules:
SCHEDULE
NUMBER SCHEDULE
- -------- --------
Schedule II -- Valuation and Qualifying Accounts for the Years
Ended December 31, 1996 and 1997
(c) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K on November
3, 1997 for the Senior Note Offering and FirstCom Long
Distance Acquisition. The Current Report on Form 8-K contains
the unaudited pro forma condensed combined financial
statements of the Registrant giving effect to the Senior Note
Offering, the use of proceeds therefrom and the FirstCom Long
Distance Acquisition.
50
<PAGE>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT BALANCE AT
DECEMBER DECEMBER
DESCRIPTION 31, 1996 ADDITIONS DEDUCTIONS 31, 1997
- ----------- ----------- --------- ---------- -----------
Deferred tax asset
valuation allowance $1,900,000 7,800,000 -- $9,700,000
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, as amended (the "Exchange Act"), the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Coral Gables, Florida on the 12th day of August,
1998.
INTERAMERICAS COMMUNICATIONS CORPORATION
By:/S/ PATRICIO E. NORTHLAND
-------------------------------------
Patricio E. Northland
PRESIDENT AND CHIEF EXECUTIVE OFFICER
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/S/ PATRICIO E. NORTHLAND Chairman of the Board, Director August 12, 1998
- -------------------------------------- President and Chief Executive Officer
Patricio E. Northland (PRINCIPAL EXECUTIVE OFFICER)
/S/ DOUGLAS G. GEIB* Chief Financial Officer and August 12, 1998
- --------------------------------------- Director (PRINCIPAL FINANCIAL
Douglas G. Geib II AND ACCOUNTING OFFICER)
/S/ DAVID C. KLEINMAN* Director August 12, 1998
- ---------------------------------------
David C. Kleinman
/S/ GEORGE A. CARGILL* Director August 12, 1998
- ---------------------------------------
George A. Cargill
/S/ ANDREW HULSH* Director August 12, 1998
- ---------------------------------------
Andrew Hulsh
*By: /S/ PATRICIO E. NORTHLAND
----------------------------------
Patricio E. Northland
Attorney-in-fact
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of InterAmericas Communications Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations and stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
InterAmericas Communications Corporation and its subsidiaries at December 31,
1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these consolidated 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 misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As described in Note 5, during 1996 and 1995, the Company had significant
transactions and relationships with related parties. Because of these
relationships, it is possible that the terms of these transactions may not be
the same as those that would result from transactions among wholly unrelated
parties.
As described in Note 2, the Company has restated its financial statements
for the years ended December 31, 1997 and 1996.
PricewaterhouseCoopers LLP
Miami, Florida
March 2, 1998, except as to Note 2
which is as of August 6, 1998
F-2
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1997
------------ -----------
(AS RESTATED, NOTE 2)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 723 $ 14,936
Restricted cash ................................................... -- 61,028
Restricted investments ............................................ -- 20,404
Accounts receivable, net .......................................... 113 2,367
Prepaid expenses and other current assets ......................... 491 1,208
--------- ---------
Total current assets ............................................. 1,327 99,943
Restricted investments ............................................. -- 37,488
Telecommunications networks, net ................................... 3,956 9,348
Intangible assets, net ............................................. 9,568 15,186
Deferred financing costs ........................................... 42 14,971
--------- ---------
Total assets ..................................................... $ 14,893 $ 176,936
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 299 $ 4,023
Convertible debentures ............................................ -- 1,550
Accrued interest .................................................. 83 3,925
Other accrued expenses ............................................ 591 2,631
Due to related parties ............................................ 416 263
Lease obligations, current ........................................ 114 313
Other current liabilities ......................................... 323 322
--------- ---------
Total current liabilities ........................................ 1,826 13,027
Senior notes, net .................................................. -- 131,626
Lease obligations, less current portion ............................ 248 356
--------- ---------
Total liabilities ................................................ 2,074 145,009
--------- ---------
Commitments and contingencies ...................................... -- --
--------- ---------
Stockholders' equity
Preferred stock, $.001 par value, authorized 10,000,000 shares,
none issued .....................................................
Common stock, $.001 par value, authorized 50,000,000 shares,
issued and outstanding as of December 31, 1996 and 1997
16,152,518 and 19,084,300 shares, respectively .................. 16 19
Additional paid in capital ........................................ 23,168 31,562
Warrants .......................................................... -- 26,737
Accumulated deficit ............................................... (10,287) (26,153)
Cumulative translation adjustments ................................ (78) (238)
--------- ---------
Total stockholders' equity ....................................... 12,819 31,927
--------- ---------
Total liabilities and stockholders' equity ....................... $ 14,893 $ 176,936
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- -------------- --------------
(AS RESTATED, NOTE 2)
<S> <C> <C> <C>
Revenues ..................... $ 224 $ 652 $ 1,130
Operating expenses:
Cost of revenues ............ 408 958 1,203
Selling, general and
administrative ............. 1,906 3,272 4,678
Non-cash compensation and
consulting ................. 12 73 4,640
Depreciation and
amortization ............... 396 842 1,201
---------- ----------- -----------
2,722 5,145 11,722
---------- ----------- -----------
Loss from operations ......... (2,498) (4,493) (10,592)
Interest expense ............. (319) (246) (6,521)
Interest income .............. 10 80 1,315
Other expense, net ........... (66) (103) (68)
---------- ----------- -----------
Net loss ..................... (2,873) (4,762) (15,866)
========== =========== ===========
Net basic and diluted loss
per share ................... $ (.31) $ (.32) $ (.95)
========== =========== ===========
Weighted average common
shares outstanding .......... 9,407,000 14,795,660 16,667,719
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- ADDITIONAL
PAID-IN
SHARES AMOUNTS CAPITAL
------------ --------- ------------
<S> <C> <C> <C>
Balances at December 31, 1994 .............. 6,316,024 $ 6 $ 2,637
Common stock issued in private
placements ................................ 635,761 1 1,962
Conversion of debt ......................... 4,888,900 5 1,126
Stock issued for acquisitions .............. 111,000 -- 400
Imputed interest on
related party notes ....................... -- -- 16
Stock option grants ........................ -- -- 12
Currency translation adjustment ............ -- -- --
Net loss ................................... -- -- --
--------- --- -------
Balances at December 31, 1995 .............. 11,951,685 12 6,153
Common stock issued in private
placements ................................ 1,939,042 2 7,430
Conversion of debt ......................... 1,011,791 1 1,985
Stock issued for acquisitions .............. 1,250,000 1 7,487
Imputed interest on related
party notes ............................... -- -- 40
Stock option grants ........................ -- -- 73
Currency translation adjustment ............ -- -- --
Net loss ................................... -- -- --
---------- --- -------
Balances at December 31, 1996
(As Restated, Note 2) ..................... 16,152,518 16 23,168
Conversion of debt ......................... 1,101,782 1 1,993
Beneficial conversion feature .............. -- -- 810
Reversal of beneficial conversion
feature upon redemption of debt ........... -- -- (344)
Stock issued to a former director in
connection with the FirstCom Long
Distance Acquisition ...................... 100,000 -- 205
Stock issued as compensation to officers
and former directors ...................... 1,350,000 2 3,756
Stock option grants to officers and
former directors .......................... -- -- 882
Conversion of liabilities .................. 80,000 -- 240
Stock issued for past financial
assistance ................................ 300,000 -- 852
Warrants to purchase common stock .......... -- -- --
Currency translation adjustment ............ -- -- --
Net loss ................................... -- -- --
---------- --- -------
Balances at December 31, 1997
(As Restated, Note 2) ..................... 19,084,300 19 31,562
</TABLE>
<TABLE>
<CAPTION>
ACCRUED CUMULATIVE
DISTRIBUTIONS ACCUMULATED TRANSLATION
AND WARRANT DEFICIT ADJUSTMENT TOTAL
--------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 .............. $ (6,088) $ (2,652) $ (14) $ (6,111)
Common stock issued in private
placements ................................ -- -- -- 1,963
Conversion of debt ......................... 6,088 -- -- 7,219
Stock issued for acquisitions .............. -- -- -- 400
Imputed interest on
related party notes ....................... -- -- -- 16
Stock option grants ........................ -- -- -- 12
Currency translation adjustment ............ -- -- 44 44
Net loss ................................... -- (2,873) -- (2,873)
--------- --------- ------ ---------
Balances at December 31, 1995 .............. -- (5,525) 30 670
Common stock issued in private
placements ................................ -- -- -- 7,432
Conversion of debt ......................... -- -- -- 1,986
Stock issued for acquisitions .............. -- -- -- 7,488
Imputed interest on related
party notes ............................... -- -- -- 40
Stock option grants ........................ -- -- -- 73
Currency translation adjustment ............ -- -- (108) (108)
Net loss ................................... -- (4,762) -- (4,762)
--------- --------- ------ ---------
Balances at December 31, 1996
(As Restated, Note 2) ..................... -- (10,287) (78) 12,819
Conversion of debt ......................... -- -- -- 1,993
Beneficial conversion feature .............. -- -- -- 810
Reversal of beneficial conversion
feature upon redemption of debt ........... -- -- -- (344)
Stock issued to a former director in
connection with the FirstCom Long
Distance Acquisition ...................... -- -- -- 205
Stock issued as compensation to officers
and former directors ...................... -- -- -- 3,758
Stock option grants to officers and
former directors .......................... -- -- -- 882
Conversion of liabilities .................. -- -- -- 240
Stock issued for past financial
assistance ................................ -- -- -- 852
Warrants to purchase common stock .......... 26,737 -- -- 26,737
Currency translation adjustment ............ -- -- (160) (160)
Net loss ................................... -- (15,866) -- (15,866)
--------- --------- ------ ---------
Balances at December 31, 1997
(As Restated, Note 2) ..................... 26,737 (26,153) (238) 31,927
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
-------------- -------------- -------------
(AS RESTATED, NOTE 2)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................... $(2,873) $(4,762) $ (15,866)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense ........................................ 396 842 1,201
Amortization of deferred financing costs and original issue discounts ........ -- -- 518
Beneficial conversion features on convertible debentures, net ................ -- -- 466
Capitalized interest related to network construction ......................... -- -- (712)
Services exchanged for common stock .......................................... 12 73 852
Non-cash compensation and consulting expense ................................. -- -- 4,640
Interest converted to equity ................................................. 183 49 45
Changes in assets and liabilities:
Accounts receivable ......................................................... (70) (105) (29)
Prepaid expenses and other current assets ................................... 202 (197) (258)
Other assets ................................................................ 76 (53) (64)
Accounts payable and accrued expenses ....................................... (4) 299 4,602
Due to related parties ...................................................... (66) (251) (179)
Other current liabilities ................................................... -- 171 (105)
Deferred taxes .............................................................. (6) -- --
---------- ------- ----------
Cash used in operating activities .......................................... (2,150) (3,934) (4,889)
--------- ------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of telecommunications network ........................................ (720) (1,453) (2,763)
Restricted cash and investments ............................................... -- -- (118,920)
Acquisition of FirstCom Long Distance ......................................... -- -- (5,799)
Acquisition of Visat .......................................................... (450) -- --
Acquisition of FirstCom Networks .............................................. -- (1,515) --
--------- ------- ----------
Cash used in investing activities .......................................... (1,170) (2,968) (127,482)
--------- ------- ----------
Cash flows from financing activities:
Issuance of Senior Notes ...................................................... -- -- 150,000
Deferred financing costs ...................................................... -- -- (7,000)
Proceeds from credit agreements ............................................... -- -- --
Proceeds from convertible debentures .......................................... -- -- 3,500
Repayment of convertible debentures ........................................... -- -- --
Issuance of common stock ...................................................... 1,963 7,430 --
Net proceeds from issuance of (repayments to)
notes payable and Bridge Notes ............................................... 893 (1,061) --
Additions to notes payable to related party ................................... 407 1,232 --
(Payments under) proceeds from leasing obligations ............................ -- (31) 84
--------- ------- ----------
Cash provided by financing activities, net ................................. 3,263 7,570 146,584
--------- ------- ----------
Net increase (decrease) in cash and cash equivalents ........................... (57) 668 14,213
Effect of exchange rate changes on cash ........................................ -- (2) --
Cash and cash equivalents at beginning of year ................................. 114 57 723
--------- --------- ----------
Cash and cash equivalents at end of year ....................................... $ 57 $ 723 $ 14,936
========= ========= ==========
Cash paid for interest ........................................................ $ 2 $ 153 $ 545
========= ========= ==========
</TABLE>
Capital lease obligations of $221 and $172 were incurred in 1995 and 1996
respectively.
During 1997, the Company capitalized $712 of interest costs related to the
construction of a fiber optic network.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
1. ORGANIZATION AND BUSINESS FORMATION
InterAmericas Communications Corporation ("the Company") is a provider of
telecommunications services in Chile and Peru. The Company has historically
operated as a Latin American telecommunications development stage company which
has developed its operations in Latin America through the acquisition of
holding and operating companies that own licenses, concessions or rights-of-way
in what the Company believes to be attractive markets. The Company operates in
Chile as Visat, S.A. ("Visat"), FirstCom Networks, S.A. ("FirstCom Networks"),
formerly Hewster Chile, S.A., and FirstCom Long Distance, S.A. ("FirstCom Long
Distance"), formerly Iusatel Chile, S.A., and in Peru as Red de Servicios de
Telecomunicaciones, S.A. ("Resetel").
Visat holds a government concession to provide intermediate
telecommunications services, including the installation and operation of a
network of 12 satellite earth stations and a switch throughout Chile, which
allows the Company to transmit either "C" or "KU" bands for satellite
communications and broad band distribution. FirstCom Networks is engaged in the
development of a fiber optic network and provides various network installation
and systems integration services in Santiago, Chile. FirstCom Long Distance
provides domestic and international long distance services in Chile. FirstCom
Long Distance's long distance traffic switched and transported, in part,
through its own gateway switch and satellite earth station, as well as through
interconnections with other long distance carriers. Resetel is building a fiber
optic telecommunications network in Lima and Callao, Peru.
During the three years ended December 31, 1997, the Company made the
following acquisitions, each of which was accounted for as a purchase. The
consolidated financial statements include the operating results from the
effective date of acquisition.
ACQUISITION OF RESETEL
On May 7, 1996, the Company acquired 100% of Resetel's outstanding stock
in exchange for 1,250,000 shares of Common Stock of the Company. The purchase
price of approximately $7,490 has been substantially allocated to a local
carrier concession. A fair value of $5.99 was assigned to each share issued to
the shareholders of Resetel (See Note 2).
ACQUISITION OF FIRSTCOM NETWORKS
On July 31 and September 2, 1996 the Company acquired 99% and 1%,
respectively, of FirstCom Networks' outstanding stock for $1,500 in cash.
Goodwill of approximately $1,300 was recorded representing the excess cost over
the fair value of net assets acquired in the transaction.
ACQUISITION OF FIRSTCOM LONG DISTANCE
On December 17, 1997, the Company acquired 100% of FirstCom Long
Distance's outstanding stock for $5,900 million in cash. In addition, the
Company incurred other direct acquisition costs totaling approximately $300,
which includes the fair market value of 100,000 shares of Company Common Stock
paid to a former director for his services in facilitating the transaction. The
purchase agreement provides for an additional payment of up to $850 if FirstCom
Long Distance achieves certain operating results for the year ending December
31, 1998.
The excess purchase price, of approximately $6,200, over the fair value of
the net assets acquired has been allocated to FirstCom Long Distance's
telephone carrier concession. The Company has
F-7
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
1. ORGANIZATION AND BUSINESS FORMATION--(CONTINUED)
accounted for the acquisition of FirstCom Long Distance as if it occurred on
December 31, 1997, since FirstCom Long Distance's estimated operating results
for the period from December 17, 1997 to December 31, 1997 were not material.
OTHER RELATED ACQUISITION DISCLOSURES
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisition of FirstCom Networks, Resetel and
FirstCom Long Distance had occurred at the beginning of the periods presented,
and do not purport to be indicative of the results that actually would have
occurred if the acquisition had been consummated as of those dates or of
results which may occur in the future:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Revenue .................... $ 8,614 $ 11,145
Net loss ................... (33,011) (36,702)
Net loss per share ......... $ (2.22) $ (2.20)
</TABLE>
The Company assesses the carrying amount of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Measurement of any impairment would
include a comparison of estimated future cash flows to be generated during the
remaining life of each intangible asset to its net carrying value. Following is
a summary of the intangible assets resulting from the Company's acquisitions:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
----------------------- USEFUL
1996 1997 LIFE
--------- ----------- ----------
<S> <C> <C> <C>
Satellite transmission rights .......... $1,166 $ 1,166 10 years
Concessions ............................ 7,494 13,770 20 years
Goodwill ............................... 1,289 1,289 10 years
------ --------
9,949 16,225
Less: accumulated amortization ......... (381) (1,039)
------ --------
$9,568 $ 15,186
====== ========
</TABLE>
F-8
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
2. RESTATED FINANCIAL INFORMATION AND AMENDED QUARTERLY FINANCIAL INFORMATION
During August 1998, the Company restated its December 31, 1997 and 1996
financial statements to reflect the effect of revising the price per share of
Company common stock issued in connection with the May 1996 acquisition of
Resetel (see Note 1) from $2.25 to $5.99 per share. The revised price per share
is based on the average closing price of the Company's common stock for the
period of 14 days before and after the date the terms of the acquisition were
announced. The previously recorded purchase price was based on the Company's
March 1996 private placement. The effect of the change in price per share
increased the reported purchase price from approximately $2,800 to $7,500. The
effect of the restatement on (1) the Company's annual statements of operations,
related to increased amortization expense, was to increase net loss by $136 and
$234, resulting in a net loss of $4,762 and $15,866 for the years ended
December 31, 1996 and 1997, respectively (2) on the Company's stockholders'
equity, related to the increased purchase price, was to increase additional
paid in capital by $4,675, resulting in additional paid in capital of $23,168
and $31,562 as of December 31, 1996 and 1997, respectively and (3) on the
Company's net basic and diluted loss per share, related to increased
amortization expense of $0.01 per share, resulting in net basic and diluted loss
per share of $0.32 and $0.95 for the years ended December 31, 1996 and 1997.
During October 1997 and August 1998 the Company amended certain financial
information as reported on Forms 10-QSB during 1996 and 1997. A summary of the
original and amended unaudited financial information and a description of the
related impact of the Company's statement of operations follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996
-------------- --------------- ---------------
<S> <C> <C> <C>
Revenues ................................. $ 58 $ 113 $ 477
Loss from Operations ..................... (591) (1,646) (2,911)
Net loss, as amended ..................... $ (621) $(1,711) $(2,981)
====== ======= =======
Net basic and diluted loss per
share,as amended ........................ $(0.05) $(0.12) $(0.20)
====== ======= =======
General and administrative
expenses ................................ 247 (a) 247 (a)
Depreciation expense ..................... 110 (a) 240 (a) 240 (a)
Interest expense ......................... 36 (a) 36 (a)
Amortization expenses .................... 64 (c) 122 (c)
------ ------- -------
Net loss, as originally reported ......... $ (511) $(1,124) $(2,336)
====== ======= =======
Net basic and diluted loss per
share,as originally reported ............ $(0.04) $(0.08) $(0.16)
====== ======= =======
<CAPTION>
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1997
-------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues ................................. $ 324 $ 585 $ 853
Loss from Operations ..................... (1,085) (2,384) (8,574)
Net loss, as amended ..................... $(1,283) $ (2,881) $ (10,069)
======== ======== =========
Net basic and diluted loss per
share,as amended ........................ $(0.08) $ (0.37) $ (0.61)
======== ======== =========
General and administrative
expenses ................................
Depreciation expense .....................
Interest expense ......................... 178 (b)
Amortization expenses .................... 58 (c) 116 (c) 176 (c)
-------- -------- ---------
Net loss, as originally reported ......... $(1,047) $ (2,765) $ (9,893)
======== ======== =========
Net basic and diluted loss per
share,as originally reported ............ $(0.06) $ (0.37) $ (0.61)
======== ======== =========
</TABLE>
- ----------------
(a) Reflects (i) adjustment identified in the fourth quarter of 1996 to provide
depreciation on assets placed in use during the first quarter of 1996,
for which depreciation initially had not commenced until the second
quarter of 1996 and (ii) adjustments for various expenses and costs
identified by the Company in the fourth quarter of 1996 as relating to
earlier 1996 quarters.
(b) Reflects additional interest identified in the fourth quarter of 1997
related to the beneficial conversion feature inherent in the 7%
Convertible Debentures issued in February 1997 (see Note 4). Of the total
adjustment of $310, the amount of $132 was capitalized as part of the
Company's fiber optic network.
(c) Reflects the quarterly effect of the Resetel purchase price described in
the introductory language to the table above.
F-9
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED ITEMS
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
Through December 31, 1997, the Company's subsidiaries used the following
functional currency: Resetel-Peruvian sole, FirstCom Networks and VISAT-Chilean
peso. As such, assets and liabilities are translated at end-of-period exchange
rates. Income, expense and cash flows are translated at weighted average
exchange rates for the period. The resulting currency translation adjustments
are accumulated and reported as a component of stockholders' equity.
As a result of (1) the Company's U.S. dollar denominated senior note
financing during October 1997, (2) the acquisition of FirstCom Long Distance on
December 17, 1997 and (3) the fact that FirstCom Long Distance and FirstCom
Networks operate as one functional entity of which FirstCom Long Distance
represents the majority of the operations, effective January 1, 1998 the
Company's Chilean subsidiaries will use the U.S. dollar as their functional
currency. Management does not expect this change to have a significant impact
on the Company's results of operations.
Effective January 1, 1998 the Company's Peruvian subsidiary, Resetel, will
use the U.S. dollar as its functional currency. Although, through December 31,
1997 Resetel incorrectly used the local currency as its functional currency,
the impact of using the U.S. Dollar as Resetel's functional currency on prior
periods is not significant. Management does not expect this change to have a
significant impact on the Company's results of operations.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1996 consolidated financial statements
were reclassified to conform with the 1997 presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, restricted cash,
accounts receivable and accounts payable approximated fair value based on the
short maturity of these financial instruments. The carrying amount of debt and
capital leases approximated fair value based on the prevailing market rates
currently available to the Company for similar financial instruments.
CASH AND CASH EQUIVALENTS
The Company considers all certificates of deposit and highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
RESTRICTED CASH AND INVESTMENTS
Restricted cash represents proceeds from the senior note offering (see
Note 4) to be used, in accordance with the terms of the related indenture
agreement, primarily for the purchase of the telecommunications equipment in
Peru and Chile. Restricted investments are U.S. Treasury Notes that
F-10
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED ITEMS--(CONTINUED)
are restricted for the repayment of interest on the senior notes, and are
stated at amortized cost, which approximated fair value at December 31, 1997.
These investments mature at various dates through October 2000. Management
designated these investments as held-to-maturity.
TELECOMMUNICATIONS NETWORKS
Telecommunications networks are recorded at cost and are depreciated on a
straight-line method over the estimated useful lives of the related assets.
Construction, engineering, interest and labor costs directly related to the
development of the Company's networks are capitalized. The Company begins
depreciating these costs when the networks become commercially operational.
Telecommunications networks consists of:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
----------------------- USEFUL
1996 1997 LIFE
--------- ----------- ----------
<S> <C> <C> <C>
Telecommunications equipment ........................ $2,868 $ 6,547 10 to 20
Telecommunications equipment pending installation and
construction in progress ........................... 1,021 2,627 --
Office equipment and furniture ...................... 1,007 1,663 3 to 7
------ --------
4,896 10,837
Less: accumulated depreciation ...................... (940) (1,489)
------ --------
$3,956 $ 9,348
====== ========
</TABLE>
ACCOUNTING ESTIMATES
The preparation of financial statements require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
ACCRUED EXPENSES
Accrued expenses consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------ ---------
<S> <C> <C>
Purchases of telecommunication equipment ......... $376 $ --
Professional fees ................................ 63 622
Payroll .......................................... 14 447
Other ............................................ 138 640
---- ------
$591 $1,709
==== ======
</TABLE>
F-11
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED ITEMS--(CONTINUED)
COMMON STOCK EXCHANGED FOR OTHER THAN CASH
Common stock exchanged for services and as inducements to make loans have
been recorded as consulting, compensation or interest expense and additional
paid in capital at the grant date fair value of the common stock. Through
November 1996, the grant date fair value of the common stock was estimated by
the Company's Board of Directors. After November 1996, the grant date fair
value of the common stock was based on the NASDAQ trading price.
REVENUE RECOGNITION
Revenue is recognized as services are provided.
NET LOSS PER SHARE
The computation of net loss per share of common stock is computed by
dividing net loss for the year by the weighted average number of shares
outstanding during the year. The weighted average number of shares outstanding
for the years ended December 31, 1995, 1996 and 1997 excludes approximately 2.2
million, 4.3 million and 15.6 million, respectively of antidilutive stock
options and warrants.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method which requires the recognition of related expense on the grant
date when the exercise price of the stock option granted is less then the fair
value of the underlying common stock. Additionally, the Company provides pro
forma disclosure of net loss and loss per share as if the fair value based
method had been applied in measuring compensation expense for stock options
granted in 1997 and 1996.
The policy of the Company has been to grant options at an exercise price
equal to the estimated market value of the Company's common stock at the date
of the grant, except for certain grants made in 1995 and 1997 for which $12 and
$882, respectively was charged to expense. Had compensation costs for the
Company's stock option grants been determined based on the fair value at the
grant dates of options granted consistent with the fair value based method, the
Company's loss and loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
------------ -------------
<S> <C> <C> <C>
Net loss .................... As Reported $ (4,762) $ (15,866)
Pro forma (7,646) (21,471)
Net loss per share .......... As Reported (.32) ( .95)
Pro forma (.52) (1.29)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions; volatility of 90%, risk-free interest rate of
6.72%, zero dividend yield and expected lives ranging from 4 to 8 years. The
weighted
F-12
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED ITEMS--(CONTINUED)
average fair value of options granted in 1996 was $2.38. The weighted average
fair value of stock options granted during 1997 (i) with a strike price
equivalent to the grant date fair value of the underlying common stock was
$2.60, and (ii) with a strike price less than the grant date fair value of the
underlying common stock was $2.26.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse.
The Company is subject to federal, state and foreign income taxes but has
not incurred a liability for such taxes due to losses incurred. At December 31,
1997 the Company has net tax operating loss carryforwards of approximately
$16,100 for U.S. income tax purposes and approximately $21,300 for foreign
income tax purposes. These carryforwards are available to offset future taxable
income, if any, and expire for U.S. income tax purposes in the years 2007
through 2012. The foreign net operating loss carryforwards related (1) to Peru,
$665 expire in the years 2000 through 2001 and (2) to Chile, $20,600, do not
expire.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset are presented below:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards .......... $ 1,900 $ 8,953
Accounts receivable ....................... -- 438
Non-cash compensation ..................... -- 309
-------- --------
1,900 9,700
Less: valuation allowance ................. (1,900) (9,700)
-------- --------
Net deferred tax asset .................... $ -- $ --
======== ========
</TABLE>
Income tax expense for the years ended December 31, 1997, 1996 and 1995
differred from the amounts computed by applying the statutory income tax rate
applicable to the countries in which the Company and its subsidiaries operate
as a result of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax benefit .......... $ (773) $ (1,020) $ (4,929)
Increase in valuation allowance .......... 773 1,020 4,929
------ -------- --------
$ -- $ -- $ --
====== ======== ========
</TABLE>
The domestic and foreign components of net loss are as follows:
F-13
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED ITEMS--(CONTINUED)
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Domestic .......... $ (1,710) $ (2,021) $ (12,402)
Foreign ........... (1,163) (2,605) (3,230)
-------- -------- ---------
$ (2,873) $ (4,626) $ (15,632)
======== ======== =========
</TABLE>
The deferred tax assets have been fully offset by a valuation allowance
resulting from the uncertainty surrounding the future realization of the net
operating loss carryforwards.
RECENT ACCOUNTING PRONOUNCEMENTS
During June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and
Related Information" effective for fiscal years beginning after December 1997.
Management does not expect Statements No. 130 and 131 to have a significant
impact on the Company's reporting and disclosure requirements in 1998.
Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purposes financial statement. Statement No. 131
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders
4. CAPITALIZATION
The Company has had material transactions impacting its capitalization
during the past three years. The following information, in addition to the
disclosures in Note 5--Related Party Transactions and Note 6--Stock Options and
Warrants, describes the most significant of these transactions.
SENIOR NOTE OFFERING
On October 27, 1997, the Company completed a private offering (the "Senior
Note Offering") pursuant to Rule 144A and Regulation S promulgated under the
U.S. Securities Act of 1933 of 150,000 Units, consisting of an aggregate of
$150,000 aggregate principal amount of 14% Senior Notes due October 27, 2007
("Senior Notes") and 5,250,000 warrants (the "Unit Warrants") to purchase
5,250,000 shares of Common Stock of the Company at an exercise price of $4.40
per share. In addition, UBS Securities LLC, the initial purchaser of the Units
in the Senior Note Offering, was granted 2,250,000 warrants (the "Initial
Warrants") to acquire 2,250,000 shares of Common Stock of the Company at an
exercise price of $4.40 per share. The Unit Warrants are exercisable on the
earlier of April 27, 1998 or the registration with the SEC of the Senior Notes
and the Initial Warrants are immediately exercisable and both expire on October
27, 2007. Interest is payable semi-annually beginning on April 1, 1998.
The fair value of the Unit Warrants which is approximately $18,500 is
reflected as an original issue discount on the Senior Notes in the accompanying
consolidated balance sheet. Additionally, the Company incurred direct financing
costs of approximately $14,900, including the fair value of $7,900 of
F-14
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
4. CAPITALIZATION--(CONTINUED)
the Initial Warrants, as determined by an investment bank. The original issue
discount and direct financing costs are being amortized to interest expense
over ten years using the level yield method with an effective interest rate of
18.9 percent. The fair value of the Unit Warrants and Initial Warrants was
determined by an investment banking firm using the Black-Scholes option pricing
model with the following assumptions: volatility of 90%, risk-free interest
rate of 6.24%, zero dividend yield and an expected life of 10 years.
The Senior Notes are redeemable on or after October 27, 2002 at the option
of the Company, in whole or in part from time to time, at specified redemption
prices declining annually to 100% of the principal amount on or after October
27, 2005, plus accrued and unpaid interest. Upon a change in control, the
Company is required to make an offer to purchase the Senior Notes at a purchase
price equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any. The Senior Notes contain certain restrictive covenants
that, among other things, limit the ability of the Company to incur additional
debt or issue preferred stock, pay dividends, enter into related party
transactions or make certain other restricted payments.
The net proceeds to the Company from the Senior Note Offering were
approximately $142,500, after deducting the underwriting discount and offering
expenses. Approximately $57,300 of the proceeds were used to purchase a
portfolio of securities that was deposited in escrow for payment of interest on
the Senior Notes through October 27, 2000 and, under certain circumstances, as
security for repayment of principal of the Senior Notes. During November and
December of 1997, the Company used the net proceeds of the Senior Note Offering
as follows: (i) $5,900 for the acquisition of FirstCom Long Distance, (ii)
$4,300 for the purchase of telecommunications equipment and the repayment of
its subsidiaries liabilities, (iii) $2,600 to settle all of the Company's
outstanding obligations related to convertible debentures and (iv) $975 to
repay certain bridge notes. The Company expects to use the remaining proceeds
primarily to expand and operate the Company's telecommunications businesses in
Peru and Chile.
In addition to the deposit of a portion of the proceeds from the Senior
Note Offering to fund interest payments on the Senior Notes through October
2000, the Company deposited $62 million of the proceeds from the Senior Note
Offering in a separate account under a trustee's control pending application of
such funds by the Company for the payment of: (a) Permitted Expenditures; (b)
in the event of a Change in Control of the Company, the Change in Control
Payment and (c) in the event of a Special Offer to Purchase, or a Special
Mandatory Redemption, the purchase or redemption price in connection therewith.
CONVERTIBLE DEBENTURES
On June 30, 1995, the Company converted $6,088 of convertible debt into
4.5 milion shares of the Company's common stock.
On July 31, 1995, the Company converted $781 of an outstanding bridge loan
into 388,900 shares of the Company's common stock.
On February 3, 1997, the Company issued $1,500 aggregate principal amount
of 7% Convertible Debentures due February 3, 2000 and warrants to purchase an
aggregate 100,000 shares of the
F-15
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
4. CAPITALIZATION--(CONTINUED)
Company's Common Stock. Pursuant to the terms of the 7% Convertible Debentures
(i) the conversion price was equivalent to the lesser of the fair value of the
Company's common stock on the date the debt was issued or 83% of the fair value
of the Company's common stock at the date of conversion, (ii) the Company was
obligated to register with the SEC all shares of common stock underlying the
warrants and debentures, and (iii) the failure to register such shares of
common stock by June 30, 1997 would result in an additional weekly interest
charge of 0.1 percent on the outstanding principal balance. On May 6, 1997 the
Company issued $2,000 aggregate principal amount of 8% Convertible Debentures
due April 30, 1998 and warrants to purchase an aggregate 20,000 shares of the
Company's Common Stock (collectively the "Convertible Debentures"). Pursuant to
the terms of the 8% Convertible Debentures (i) the conversion price was
equivalent to the lesser of the fair value of the Company's common stock on the
date the debt was issued or 80% of the fair value of the Company's common stock
on the date of conversion, (ii) the Company was obligated to register with the
SEC all shares of common stock underlying the warrants and debentures, and
(iii) the failure to register such shares of common stock by August 6, 1997
would result in an additional cash payment every 30 days thereafter of 3% of
the original principal amount.
The Convertible Debentures were issued with beneficial conversion features
due to the fact that the holders may convert the debt at any time prior to the
maturity at a conversion price less than the conversion date fair value of the
Company's common stock. As a result, the Company recorded $810 as interest cost
and additional paid in capital related to the value of the beneficial
conversion feature.
During 1997, the Company issued 1,101,782 shares of Common Stock in
connection with the conversion of $1,950 aggregate principal amount of the
Convertible Debentures, plus related accrued interest. Effective December 31,
1997 the Company entered into an agreement for early extinguishment of the
Company's remaining financial obligations related to the Convertible Debentures
for $2,600 in cash. The cash payment was made on January 5 and 8, 1998.
Such settlement, including the related loss on extinguishment of $255
classified as interest expense, has been accrued for as of December 31, 1997
and related to the following items:
<TABLE>
<S> <C>
Outstanding principal ......... $1,550
Accrued interest .............. 128
Redemption premiums ........... 335
Penalties ..................... 587
------
$2,600
======
</TABLE>
The above redemption premiums and penalties have been included in interest
expense in the accompanying statement of operations. As a result of such
settlement and redemption of outstanding principal, $344 of paid-in capital
related to the beneficial conversion feature was reversed.
PRIVATE ISSUANCES OF COMMON STOCK
In October 1994, the Company commenced a private offering of its common
stock. The Company issued 315,714 shares of common stock and raised $1,100
prior to December 31, 1994. In early 1995, the Company closed the private
placement, having issued a total of 951,476 shares of common stock and raised a
total of $3,000, net of expenses of $260.
F-16
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
4. CAPITALIZATION--(CONTINUED)
In February 1996, the Company commenced a private offering of its common
stock. The Company issued 500,000 shares of common stock and raised $1,120
through March 31, 1996, net of expenses of $80. In June 1996, the Company
commenced a private offering of its common stock. The Company issued 1,439,000
shares of common stock and raised $6,400 through August 1996, net of expenses
of $520.
During September 1997, the Company's Board of Directors authorized the
issuance of 850,000 shares of common stock to two officers and the Company
recognized related non-cash compensation expense of $2,338.
5. RELATED PARTY TRANSACTIONS
TELECTRONIC S.A. AND MR. HERNAN STREETER
During the three years ended December 31, 1997, the Company entered into
certain transactions with Telectronic S.A. and its founders, Mr. George A.
Cargill and Mr. Eleazar Donoso. Mr. Cargill and Mr. Donoso are both Company
shareholders. Mr. Cargill has been a director of the Company since 1994.
During the three years ended December 31, 1997, the Company entered into
several transactions with Mr. Hernan Streeter. Mr. Streeter formerly served the
Company as its Chief Executive Officer and its Chairman of the Board. In
addition, he is a principal shareholder of the Company. The Company paid
salaries to Mr. Streeter of $120 and $110 during 1995 and 1996, respectively.
As compensation for his service as a director of the Company, from 1994 to
1997, the Company granted Mr. Cargill 290,000 stock options with a weighted
average exercise price of $2.09. The exercise price of such grants was equal to
the grant date fair value of the underlying Common Stock.
The Company purchased approximately $205, $172 and $77 of certain
telecommunication equipment in 1995, 1996 and 1997, respectively, from
Telectronic, S.A.
On July 24, 1995, Mr. Donoso received 1,425,000 shares of Common Stock
(the "Donoso Shares") from the Company in exchange for his ownership interest
in HSI, a company which was acquired by the Company, in a transaction which was
exempt from the registration requirements of the Securities Act pursuant to
Regulation S and Section 4(2) thereof. On September 14, 1995, Mr. Donoso loaned
the Donoso Shares to Laura Investments, Ltd., a company owned and controlled by
Mr. Streeter.
From September 14, 1995 to March 1996, Laura Investments, Ltd. loaned the
Company an aggregate amount of $1,631,550. During March 1996, the Company
converted the original principal amount of $1,631,550, plus accrued interest of
$7,000 into 839,235 shares of Common Stock which were registered in the name of
Laura Investments, Ltd. and issued in a transaction which was exempt from the
registration requirements of the Securities Act pursuant to Regulation S and
Section 4(2) thereof.
During September 1997, Laura Investments Ltd. agreed to transfer 839,235
shares of the Company's Common Stock to Mr. Donoso in an attempt to satisfy its
obligatons to Mr. Donoso in
F-17
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
5. RELATED PARTY TRANSACTIONS--(CONTINUED)
connection with the transfer of the Donoso Shares to Laura Investments, Ltd.
which occurred on September 14, 1995. However, Mr. Donoso claimed that the
Company owed him additional shares of Common Stock in consideration of the
initial transaction between Mr. Donoso and Laura Investments Ltd. on September
14, 1995 (or the equivalent monetary consideration). The Company issued 300,000
shares of Common Stock to Mr. Donoso in October 1997 in settlement of all
outstanding claims by Mr. Donoso against the Company. The Company recognized
interest expense of $852,000 related to the aggregate fair value of such shares
of Common Stock issued to Mr. Donoso. This transaction was exempt from the
registration requirements of the Securities Act pursuant to Sections 4(2) and
4(6) thereof.
During 1997, the Company issued and redeemed $200 of bridge notes from Mr.
Cargill. In connection with such bridge notes Mr. Cargill received 20,000
warrants to purchase the Company's common stock at an exercise price of $2.56
per warrant. The fair value, $21, of such warrants (determined using the
Black-Scholes option pricing model with the following assumptions: volatility of
90% risk free interest rate of 6.7%, zero dividend yield and expected life of
two years) was recorded as original issue discount and subsequently expensed
upon repayment of the bridge notes.
As compensation for his services as a director and Chief Executive Officer
of the Company, from 1994 to 1996, the Company granted Mr. Streeter 510,000
stock options with a weighted average exercise price of $1.91. The exercise
price of such grants was equal to the grant date fair value of the underlying
Common Stock.
Mr. Streeter was the founder and Chief Executive Officer of FirstCom
Networks, which was acquired by the Company during 1996. Prior to its
acquisition, FirstCom Networks provided approximately $237 of telecommunication
services to the Company. Mr. Streeter also was the primary shareholder and
General Manager of FirstCom Long Distance, which was acquired by the Company
during 1997. Prior to this acquisition, the Company made sales of $162 to
FirstCom Long Distance. Pursuant to provisions of the FirstCom Long Distance
purchase agreement, the Company agreed to pay Mr. Streeter a consulting fee of
$120 during 1998.
MAROON BELLS CAPITAL PARTNERS ("MBCP")
During the three years ended December 31, 1997, the Company entered into
certain transactions with MBCP. Two former directors of the Company, Paul Moore
and Phillip Magiera, are principals in MBCP. MBCP has provided certain
consulting and financial advisory services to the Company during the past three
years.
As compensation for their services as directors of the Company, from 1994
to 1996, the Company granted MBCP and its principals 1,015,000 stock options
with a weighted average exercise price of $2.12. The exercise price of such
grants was equal to the grant date fair value of the underlying Common Stock.
During 1995, the Company recognized $100 as a financial advisory fee to
MBCP. During 1996, the Company purchased $493 in equipment whereby MBCP acted
as a broker. Additionally, during 1996 and 1997, the Company made expense
reimbursements of $219 and $132, respectively, to MBCP and its principals.
F-18
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
5. RELATED PARTY TRANSACTIONS--(CONTINUED)
During 1996 and 1997, the Company converted $316, plus accrued interest of
$30, and $240, respectively, of outstanding liabilities to MBCP into 172,506
and 80,000 shares, respectively, of the Company's Common Stock.
During October 1997, the Company entered into an agreement with MBCP and
its principals, Theodore Swindells, Paul Moore and Phillip Magiera, to
compensate them for services rendered to the Company. The services provided by
Messrs. Moore and Magiera related to their functions as directors of the
Company. Pursuant to such agreement, the Company made a cash payment to MBCP of
$500 at the closing of the Senior Note offering and issued to each of Messrs.
Moore and Magiera 250,000 shares of Common Stock and options to acquire 250,000
shares of Common Stock at an exercise price of $2.13 per share. The Company
recognized non-cash consulting expense related to (i) the grant date fair value
of the Common Stock of $1,420 and (ii) the intrinsic value of the stock options
of $355. Messrs. Moore and Magiera resigned from the Company's Board of
Directors effective as of the date of the agreement.
OTHER RELATED PARTY TRANSACTIONS
The Company paid approximately $865 in legal fees in 1997 to a law firm
having a senior partner who is also a current director of the Company.
F-19
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
6. STOCK OPTIONS AND WARRANTS
Under the terms of the Company's stock option agreements, options have a
maximum term of ten years from the date of the grant. The options vesting
period varies from full vesting upon issuance of options to one forty eighth
per month to the end of the option term. A summary of the Company's stock
option activity is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------- ------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ---------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year ............... 605,000 $ 2.13 1,565,000 $ 2.03 3,625,000 $ 2.31
Granted ................ 960,000 1.96 2,060,000 2.52 3,670,000 3.15
Exercised .............. -- -- -- -- -- --
Cancelled .............. -- -- -- -- -- --
------- ------- --------- ------- --------- -------
Outstanding at
end of year ........... 1,565,000 $ 2.03 3,625,000 $ 2.31 7,295,000 $ 2.73
========= ======= ========= ======= ========= =======
Options exercisable
at year-end ........... 1,250,350 $ 2.57 2,754,734 $ 2.54 4,970,365 $ 2.50
========= ======= ========= ======= ========= =======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE EXERCISE
PRICE OUTSTANDING PRICE LIFE EXERCISABLE PRICE PRICE
- ---------------- ------------- --------- ------------ ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$ .35 100,000 $ .35 7 100,000 $ .35 $ .35
1.83 to 1.96 1,110,000 1.96 8 1,063,194 1.96 1.83 to 1.96
2.00 to 2.42 3,130,000 2.23 9 1,801,736 2.24 2.00 to 2.42
2.50 to 2.81 1,655,000 2.70 8 1,511,917 2.71 2.50 to 2.81
4.00 to 4.40 1,100,000 4.36 10 493,518 4.32 4.00 to 4.40
6.00 to 8.00 200,000 7.00 10 -- -- 6.00 to 8.00
--------- ---------
7,295,000 4,970,365
========= =========
</TABLE>
Included in the preceding table are 1,350,000 stock options, of which
783,333 are exercisable at December 31, 1997, with an exercise price of $2.13
and a weighted average remaining contractual life of 10 years. The exercise
price of such stock options was less than the grant date fair value of the
underlying Common Stock.
During 1997 the Company granted two officers 2,650,000 stock options that
vest over a two year period. The exercise price of such grants was equal to the
grant date fair market value of the underlying Common Stock, except for 850,000
options with an exercise price of $2.13. The Company recognized non-cash
compensation expense of $527 related to the 850,000 options. The terms of
1,000,000 stock options granted during 1996 were modified during 1997 to
provide for immediate vesting.
F-20
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
6. STOCK OPTIONS AND WARRANTS--(CONTINUED)
Including the Initial and Note Warrants described in Capitalization above,
the following is a summary of warrants granted by the Company:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ---------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ---------- --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year ........................... 75,000 $ 1.25 680,171 $ 2.97 680,171 $ 2.97
Granted ............................ 605,171 3.18 -- -- 7,715,000 4.35
Exercised .......................... -- -- -- -- -- --
Cancelled .......................... -- -- -- -- -- --
------- ------- ------- ------ --------- -------
Outstanding at end of year ......... 680,171 $ 2.97 680,171 $ 2.97 8,395,171 $ 4.24
======= ======= ======= ====== ========= =======
Options exercisable at
year-end .......................... 680,171 $ 2.97 680,171 $ 2.97 895,171 $ 2.80
======= ======= ======= ====== ========= =======
</TABLE>
These warrants resulted from the Company's financing activities from 1994
to 1997. The weighted average grant date fair value of warrants granted during
1997 was $3.52.
7. COMMITMENTS AND CONTINGENCIES
The Company entered into an operating agreement in 1993 with Metro S.A. to
install and operate the Company's optical fiber telecommunication network in
the tunnels, conduits and stations of lines 1 and 2 of the Santiago subway
system. The Company has given Metro S.A. a $50 performance bond relating to
these leases. The monthly lease rental is equivalent to 15% of the net monthly
invoicing of the company for services rendered in the metropolitan region of
Chile, subject to minimum amounts. The lease expires in the year 2003. Under
the agreement, the Company is obligated to provide certain telecommunications
services to Metro, S.A.
The following summarizes future minimum payments under non-cancelable
operating lease agreements at December 31, 1997:
<TABLE>
<S> <C>
1998 .............. $1,001
1999 .............. 920
2000 .............. 1,007
2001 .............. 1,101
2002-2003 ......... 2,154
------
$6,183
======
</TABLE>
Rental expense under operating leases was $255, $508 and $961 for the
years ended December 31, 1995, 1996 and 1997, respectively.
In September 1997, the Company entered into an employment and severance
agreement (the "Northland Agreement") with Patricio E. Northland, President,
Chief Executive Officer and Chairman
F-21
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
7. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
of the Board of Directors of the Company, which replaced his former employment
agreement with the Company. The Northland Agreement has a term of three years
unless terminated earlier for cause, death or disability, and provides for an
initial annual base salary of $350,000, subject to an increase of $50,000 in
each of the second and third year of the agreement. In addition, Mr. Northland
was granted non-qualified stock options to purchase 300,000 shares of ICCA's
Common Stock in the following manner: 100,000 shares which vest on the date of
employment at an exercise price of $4.00 per share; 100,000 shares which vest
one year thereafter at an exercise price of $6.00 per share; and 100,000 shares
which vest two years after the date of employment at an exercise price of $8.00
per share. In consideration of Mr. Northland's agreement to terminate his
former employment agreement with the Company, which would have provided for a
substantial bonus to Mr. Northland upon consummation of the Offering, the
Company agreed to pay Mr. Northland a performance bonus of $250,000 and vest
all of his existing options to acquire 1,000,000 shares of Common Stock granted
under his prior employment agreement. As a result of this transaction, the
Company recognized compensation expense of $250 related to the performance
bonus. The strike price of the vested options was equivalent to the fair value
of the underlying Common Stock on the date of the Northland Agreement.
During May 1997, the Company entered into an employment and severance
agreement (the "Geib Agreement") with Douglas G. Geib II, Chief Financial
Officer of ICCA. The Geib Agreement has a term of three years unless terminated
earlier for cause, death or disability, and provides for an annual salary of
$250,000. In addition to the base salary, the Geib Agreement provides for a
primary performance award based upon business criteria which is designed to
enhance shareholder value during each year up to a maximum of 100 percent of
the base salary payable thereunder. Mr. Geib was also granted non-qualified
stock options to purchase 500,000 shares of ICCA's Common Stock at an exercise
price of $2.42 per share. One-third of such options became exercisable on date
of employment, and the remainder vest in equal annual installments over the
first two years of Mr. Geib's three-year employment period.
During October 1997, the Company entered into an agreement with Mr. Ivan
Van de Wyngard (the "Van de Wyngard Agreement") for the performance of certain
management, consulting and advisory services to the Company. Under the Van de
Wyngard Agreement, Mr. Van de Wyngard will receive a monthly fee of $7,500 as
compensation for his services. The Van de Wyngard Agreement has a term of one
year and may be extended upon mutual agreement between the parties.
F-22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- ----------------------------------------------------------------------------------------------
<S> <C>
2.1 Stock Purchase Agreement, dated as of September 9, 1997, as amended, between
InterAmericas Communications Corporation and Inversiones Druma S.A. for the
Acquisition of 99.9% of the Outstanding shares of capital of Iusatel Chile S.A., previously
filed as an exhibit to Registrant's Current Report on Form 8-K, filed with the Commission on
September 24, 1997 and incorporated herein by reference.
3.1 Articles of Incorporation of InterAmericas Communications Corporation previously filed as
an exhibit to the Registrant's Form 8-A Registration Statement, filed with the Commission
on November 29, 1994 and incorporated herein by reference.
3.2 By-laws of InterAmericas Communications Corporation previously filed as an exhibit to
Amendment No. 4 to the Form S-4 Registration Statement of the Registrant, filed with the
Commission on August 12, 1998 and incorporated herein by reference.
4.1 Purchase Agreement, dated as of October 21, 1997 by and among InterAmericas
Communications Corporation, Hewster Chile S.A. Red de Servicios Empresariales de
Telecomunicaciones S.A. and UBS Securities LLC previously filed as an exhibit to
Registrant's Registration Statement on Form S-4, filed with the Commission on
December 10, 1997 and incorporated herein by reference.
4.2 Form of Existing Note previously filed as an exhibit to Registrant's Registration Statement
on Form S-4, filed with the Commission on December 10, 1997 and incorporated herein by
reference.
4.3 Indenture, dated as of October 27, 1997 between InterAmericas Communications
Corporation and State Street Bank & Trust Company, N.A. previously filed as an exhibit to
Registrant's Registration Statement on Form S-4, filed with the Commission on
December 10, 1997 and incorporated herein by reference.
4.4 A/B Exchange Registration Rights Agreement, dated as of October 27, 1997, between
InterAmericas Communications Corporation and UBS Securities LLC previously filed as an
exhibit to Registrant's Registration Statement on Form S-4, filed with the Commission on
December 10, 1997 and incorporated herein by reference.
4.5 Warrant Agreement, dated as of October 27, 1997, between the Registrant and State Street
Bank & Trust Company, N.A. previously filed as an exhibit to Registrant's Registration
Statement on Form S-4, filed with the Commission on December 10, 1997 and incorporated
herein by reference.
4.6 Warrant Registration Rights Agreement, dated as of October 27, 1997 between
InterAmericas Communications Corporation and UBS Securities LLC previously filed as an
exhibit to Registrant's Registration Statement on Form S-4, filed with the Commission on
December 10, 1997 and incorporated herein by reference.
4.7 Specimen of InterAmericas Communications Corporation 14% Senior Note due October 27,
2007 previously filed as an exhibit to Registrant's Registration Statement on Form S-4, filed
with the Commission on December 10, 1997 and Incorporated herein by reference.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------------------------------------------------------
<S> <C>
4.8 Proceeds Pledge and Escrow Agreement, dated as of October 27, 1997 between
InterAmericas Communications Corporation and State Street Bank and Trust Company,
N.A., previously filed as an exhibit to Registrant's Registration Statement on Form S-4, filed
with the Commission on December 10, 1997 and incorporated herein by reference.
5.1 Opinion of Baker & McKenzie.
10.1 Employment Agreement, dated as of October 7, 1997, between InterAmericas
Communications Corporation and Patricio E. Northland, previously filed as an exhibit to
Amendment No. 4 to the Form S-4 Registration Statement of the Registrant filed with the
Commission on August 12, 1998 and incorporated herein by reference.
10.2 Employment and Severance Agreement, dated as of April 14, 1997, between InterAmericas
Communications Corporation and Douglas G. Geib previous filed as an exhibit to
Amendment No. 4 to the Form S-4 Registration Statement of the Registrant filed with the
Commission on August 12, 1998 and incorporated herein by reference.
21.1 Subsidiaries of the Registrant previously filed as an exhibit to Registrant's Form 10-KSB,
filed with the Commission on March 10, 1998 and incorporated herein by reference.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Baker & McKenzie (included in Exhibit 5.1).
25.1 Statement of Eligibility of State Street Bank and Trust Company, N.A. previously filed as an
exhibit to Registrant's Registration Statement on Form S-4, filed with the Commission on
December 10, 1997 and incorporated herein by reference.
99.1 Form of Letter of Transmittal previously filed as an exhibit to Registrant's Registration
Statement on Form S-4, filed with the Commission on December 10, 1997 and incorporated
herein by reference.
99.2 Form of Notice of Guaranteed Delivery previously filed as an exhibit to Registrant's
Registration Statement on Form S-4, filed with the Commission on December 10, 1997 and
incorporated herein by reference.
99.3 Form of Exchange Agent Agreement previously filed as an exhibit to Registrant's
Registration Statement on Form S-4, filed with the Commission on December 10, 1997 and
incorporated herein by reference.
99.4 Form of Information Agent Agreement previously filed as an exhibit to Registrant's
Registration Statement on Form S-4, filed with the Commission on December 10, 1997 and
incorporated herein by reference.
</TABLE>
