SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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 #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
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.001
(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 February 25, 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 $42,121,233. 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 February 25, 1998, there were outstanding 19,084,300
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive proxy
statement for the Annual Meeting of Stockholders scheduled to be held in May
1998 are incorporated by reference in Items 9 through 13 of Part III of this
Annual Report on Form 10-KSB. Certain exhibits listed in Part III of this
Annual Report on Form 10-KSB are incorporated by reference from prior filings
made by the Registrant under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
<PAGE>
<TABLE>
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TABLE OF CONTENTS
PAGE
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PART I
Item 1 Description of Business . . . . . . . . . . . . . . . . . . . . 1
Item 2 Description of Property . . . . . . . . . . . . . . . . . . . . 23
Item 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 24
Item 4 Submission of Matters to a Vote of Security Holders . . . . . . 24
PART II
Item 5 Market for Common Equity and Related Stockholder Matters. . . . 24
Item 6 Management's Discussion and Analysis
Of Financial Condition and Results of Operations. . . . . . . . 25
Item 7 Financial Statements. . . . . . . . . . . . . . . . . . . . . . 32
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . 47
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act . . . . . . . *
Item 10 Executive Compensation. . . . . . . . . . . . . . . . . . . . . *
Item 11 Security Ownership of Certain Beneficial Owners and Management. *
Item 12 Certain Relationships and Related Party Transactions. . . . . . *
Item 13 Exhibits, Financial Statement Schedules and Reports on Form 8-K *
<FN>
* The information required by this item is incorporated by reference from
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held in May 1998.
</TABLE>
<PAGE>
PART I
This Annual Report on Form 10-KSB of InterAmericas Communications
Corporation (the "Company") contains certain forward-looking statements within
the meaning of the securities laws that are subject to many risks and
uncertainties. All statements regarding the Company's and its subsidiaries'
expected financial position, business and financing plans are forward-looking
statements. 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 report, including, without limitation, the
information under "Management 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. See
"Glossary of Defined Terms," for definitions of certain technical and industry
terms used herein.
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 del Peru
S.A. ("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 90 kilometer digital fiber optic
network in Lima, Peru, which the Company intends to expand to approximately 230
kilometers by the end of 1998. 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
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.
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 plans to apply for 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 its existing network 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 FirstCom Long Distance, S.A.
("FirstCom Long Distance"), formerly Iusatel Chile, S.A., an operating company
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 Research, Inc.
("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, 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 del Peru S.A. ("Interbank") and
one ISP in Peru. Upon completion of its networks, 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.
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. See "-- Business and Services -- Peru
- - Country Strategy" and "-- Chile - Country Strategy."
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 to leverage its existing customer base by expanding the
geographic reach and density of its existing networks as well as by entering
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 scheduled liberalization of Peru's telecommunications
markets in July 1999, at which time the exclusivity provisions of Telefonica's
concession will expire and the local and long distance markets are scheduled to
be opened to competition by new entrants. 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.
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 leveraging its customer base 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.
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 a senior note offering (the
"Senior Note Offering") of 150,000 units (the "Units") pursuant to Rule 144A and
Regulation S under the Securities Act of 1933, as amended (the "Securities
Act"), consisting of (i) $150.0 million aggregate principal amount of 14% Senior
Notes ("Senior Notes") due October 27, 2007 and (ii) 5,250,000 warrants
("Warrants or "Unit Warrants") to purchase an aggregate of 5,250,000 shares of
Common Stock, par value $.001 per share (the "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 Form S-4 and Form S-3
Registration Statements with the Securities and Exchange Commission ("SEC") to
register under the Securities Act (i) new notes (the "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 Senior 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.
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>
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PERU
1993 1994 1995 1996 1997 1998 1999 2000
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ECONOMIC DATA*
Population (millions) . . . . . 22.5 22.9 23.4 23.8 24.3 24.8 25.3 25.8
Real GDP (in constant 1990 US$
billions) . . . . . . . . . . 36.5 41.2 44.1 45.3 47.6 50.2 53.1 56.5
Inflation (%) . . . . . . . . . 39.5 15.4 10.2 11.8 10.0 9.1 8.3 7.5
TELECOMMUNICATIONS DATA**
Main Lines in Service (in
thousands). . . . . . . . . . 673.0 772.4 1,109.2 1,435.1 1,595.5 1,850.8 2,093.6 2,437.7
Penetration Rate (main lines
per 100 pop). . . . . . . . . 2.9 3.4 4.7 5.9 6.6 7.5 8.3 9.4
Service Revenues (US$
millions) . . . . . . . . . . 655.8 590.7 825.9 880.4 1,216.2 1,410.8 1,595.9 1,858.2
Local Services (US$
millions) . . . . . . . . . 190.7 251.4 459.1 506.9 676.0 784.2 887.1 1,032.9
Toll Services (US$
millions) . . . . . . . . . . 235.2 123.2 130.9 143.1 192.8 223.6 253.0 294.5
International Services (US$
millions) . . . . . . . . . . 229.9 216.1 235.9 230.5 347.4 403.0 455.8 530.8
CHILE
1993 1994 1995 1996 1997 1998 1999 2000
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ECONOMIC DATA*
Population (in millions). . . . 13.8 14.0 14.3 14.5 14.7 15.0 15.2 15.4
Real GDP (constant 1990 US$
billions) . . . . . . . . . . 38.2 39.8 43.1 46.1 48.8 52.3 55.9 59.8
Inflation (%) . . . . . . . . . 12.2 8.9 8.2 6.6 5.7 5.0 5.1 4.7
TELECOMMUNICATIONS DATA**
Main Lines in Service (in
millions) . . . . . . . . . . 1.5 1.6 1.8 2.2 2.6 3.0 3.5 3.9
Penetration Rate (main lines
per 100 pop). . . . . . . . . 11.0 11.6 13.0 14.9 17.8 20.3 22.9 25.4
Service Revenues (US$
millions) . . . . . . . . . . 714.10 765.10 1,016.0 1,186.7 1,443.1 1,668.4 1,911.7 2,157.1
Local Services (US$
millions) . . . . . . . . . 479.0 560.6 627.8 733.3 891.7 1,030.9 1,181.3 1,332.9
Toll Services (US$
millions) . . . . . . . . . 135.2 118.9 235.6 275.2 334.6 386.9 443.3 500.2
International Services (US$
millions) . . . . . . . . . 99.9 85.6 152.6 178.2 216.8 250.6 287.1 324.0
<FN>
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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.
</TABLE>
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.
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 $373.6 million are domestic and international long distance
revenues. The Company believes that Peru's telecommunications market offers an
excellent environment for telecommunications business growth. The Company
believes that the Peruvian economy is also a source of growing demand for
telecommunication services with growing domestic and multinational businesses
attracting significant foreign investment. The following chart presents certain
historical and projected information with respect to the telecommunications
market in Peru for the periods indicated:
<TABLE>
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TELECOMMUNICATIONS DATA -- PERU*
1993 1994 1995 1996 1997 1998 1999
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TELEPHONE
Minutes (in millions)
Local Services . . . . . . . . . . . 3,600.0(1) 4,240.0(1) 4,954.0(1) 7,806.2(2) 4,193.4(3) n/a n/a
Long Distance Domestic . . . . . . . 388.0(1) 394.0(1) 461.0(1) 577.0(2) 326.4(3) n/a n/a
Long Distance International. . . . . 179.2(1) 232.4(1) 262.1(1) 294.5(2) 164.6(3) n/a n/a
MAIN LINES IN SERVICE (IN THOUSANDS) . 673.0(2) 772.4(2) 1,109.2(2) 1,435.1(2) 1,595.5(1) 1,850.8(1) 2,093.6(1)
PENETRATION RATE
(main lines per 100 pop) . . . . . . 2.9(4) 3.4(4) 4.7(4) 5.9(2) 6.6(1) 7.5(1) 8.3(1)
SERVICE REVENUES
Local Services (US$millions) . . . . 190.7(1) 251.4(4) 459.1(4) 506.9(3) 676.0(1) 784.2(1) 887.1(1)
Toll Services (US$millions). . . . . 235.2(1) 123.2(4) 130.9(4) 143.15(3) 192.8(1) 223.6(1) 253.0(1)
International Services (US$millions) 229.9(1) 216.1(4) 235.9(4) 230.5(3) 347.4(1) 403.0(1) 455.8(1)
DATA
X-25/Frame Relay Ports (in thousands). 0.5(1) 0.7(1) 0.9(1) 1.2(1) 1.5(1) 14.0(1) 29.9(1)
ISP Host Penetration
(main lines per 100 pop) . . . . . . 0.000(5) 0.001(5) 0.003(5) 0.021(5) 0.084(5) 0.208(5) 0.361(5)
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$millions) . . . . 1,032.9(1)
Toll Services (US$millions). . . . . 294.5(1)
International Services (US$millions) 530.8(1)
DATA
X-25/Frame Relay Ports (in thousands). 46.6(1)
ISP Host Penetration
(main lines per 100 pop) . . . . . . 0.515(5)
<FN>
- ---------------
(1) Source: Pyramid Research Report.
(2) Source: Telefonica del Peru, S.A. 1996 Annual Report.
(3) Source: Telefonica del Peru S.A., 2nd Quarter Report: July 31, 1997. Translations from 6/30/97 Peruvian Nuevo Sol
into US$ 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.
</TABLE>
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 leverage Resetel's existing
customer base, its cost efficient, state-of-the-art infrastructure and its
market knowledge 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 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 90 kilometer fiber optic digital switched network, which is expected to
expand to approximately 230 kilometers by the end of 1998. The Company
anticipates that its 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) upon its scheduled
completion in 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.
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.
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 $178.2 million in
1996, representing a compound annual growth rate of 21.0%. Chile's
telecommunications markets continue to be dominated by the former PTTs, although
new entrants have begun to reduce the former PTTs' market share. In the long
distance market, Entel, the former long distance PTT, faces competition from
eight other carriers, and its market share has been reduced to approximately
40.4% for domestic long distance and 37.5% for international long-distance. As a
result of its open telecommunications market, Chilean subscribers enjoy some of
the lowest prices in the world for long distance telephony services. In the
local telephony market, CTC, the former local services PTT, controls
approximately 96% of the local telephony market. The Company believes that the
full implementation of its business strategy will enable it to penetrate this
market and further develop its customer base.
The following table provides some general information on the historical
size and estimated growth of Chile's telecommunications market.
<TABLE>
<CAPTION>
TELECOMMUNICATIONS DATA -- CHILE
1993 1994 1995 1996 1997 1998 1999 2000
-------- -------- ---------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TELEPHONE MINUTES
Local Service . . . . . . . . . . . . -- -- -- -- -- -- -- --
Long Distance Domestic (millions) . . n/a n/a 1,847.2(1) 2,259.0(2) n/a n/a n/a n/a
Long Distance International
(millions). . . . . . . . . . . . . . n/a n/a 136.9(3) 172.9(2) n/a n/a n/a n/a
MAIN LINES IN SERVICE
(in thousands). . . . . . . . . . . . 1,513(4) 1,626(4) 1,846(4) 2,157(4) 2,623(4) 3,032(4) 3,474(4) 3,920(4)
PENETRATION RATE
(main lines per 100 pop). . . . . . . 11.0(4) 11.6(4) 13.0(4) 14.9(4) 17.8(4) 20.3(4) 22.9(4) 25.4(4)
SERVICE REVENUES
(US$millions)
Local Services (US$millions). . . . . 479.0(4) 560.6(4) 627.8(4) 733.3(4) 891.7(4) 1,030.9(4) 1,181.3(4) 1,332.9(4)
Toll Services (US$millions) . . . . . 135.2(4) 118.9(4) 235.6(4) 275.2(4) 334.6(4) 386.9(4) 443.3(4) 500.2(4)
International Services (US$millions). 99.9(4) 85.6(4) 152.6(4) 178.2(4) 216.8(4) 250.6(4) 287.1(4) 324.0(4)
DATA
X-25/Frame Relay Ports (in thousands) 3.3(4) 3.6(4) 4.7(4) 10.2(4) 17.5(4) 25.8(1) 33.9(4) 39.7(4)
ISP Host Penetration
(main lines per 100 pop). . . . . . . 0.020(5) 0.022(5) 0.063(5) 0.157(5) 0.279(5) 0.413(5) 0.525(5) 0.601(5)
<FN>
- ---------------
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.
</TABLE>
Operating Company Overview. The Company conducts its business in Santiago
through its wholly-owned subsidiaries, FirstCom Networks, S.A. ("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 is in the process of filing an application to obtain 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.
Country Strategy. The Company's new management team intends to leverage
FirstCom Networks' and FirstCom Long Distance's existing customer base, its cost
efficient state-of-the-art infrastructure and its market knowledge 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 December 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.
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 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 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 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 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 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.
<PAGE>
<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 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.
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 calculated using the prices of its
principal components. A concessionaire must give two months notice to the
Subsecretaria de Telecomunicaciones (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.
<PAGE>
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 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, 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 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;
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 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 February 25, 1998, the Company had 128 full-time employees, of whom
approximately 32 are in Resetel, 34 are in FirstCom Networks, 57 are in FirstCom
Long Distance and five 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.
<PAGE>
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.
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.
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.
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
plesiosynchronous operation has led to the adoption of the term
plesiosynchronous 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.
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.
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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company'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 leases which expire
through September 2006, at a total 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:
<TABLE>
<CAPTION>
PERIOD HIGH LOW
<S> <C> <C>
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
</TABLE>
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 February 25, 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 new provider of high bandwidth integrated telecommunication
services to high volume users through state of the art fiber optic networks
located in Santiago, Chile and Lima, Peru. The Company began development of its
networks in Chile and Peru in 1994 and 1996, respectively. As of December 31,
1997, the Company had (i) constructed a 120 kilometer fiber optic network which
extends through most of Santiago's downtown business district and the outlying
industrial and airport corridor and (ii) completed construction of 90 kilometers
of its fiber optic network in Lima. The Lima network, when completed, is
expected to be approximately 230 kilometers in length and will extend throughout
the major commercial and industrial districts of Lima, and the port city of
Callao.
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
<S> <C> <C>
Hewster Servicios Intermedios, S.A. ("HSI") . . . . . . . . Santiago July 15, 1994
Visat, S.A. ("Visat") . . . . . . . . . . . . . . . . . . . Santiago September 23, 1994
Red de Servicios Empresariales de Telecomunicaciones, S.A.
("Resetel") . . . . . . . . . . . . . . . . . . . . . . . Lima May 7, 1996
Hewster, S.A. ("HSA "). . . . . . . . . . . . . . . . . . . Santiago July 31, 1996
Iusatel Chile, S.A. ("Iusatel"). . . . . . . . . . . . . . Santiago December 17, 1997
</TABLE>
FirstCom Networks (HSI and HSA were combined to operate under the name of
Hewster Chile, S.A. and subsequently FirstCom Networks, S.A.) 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. Visat is a Chilean corporation that
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. Resetel is a Peruvian corporation that holds a concession to build
and operate a fiber-optic telecommunications network in Lima and Callao, Peru.
FirstCom Long Distance (formerly Iusatel) is a Chilean corporation 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. FirstCom Networks,
Visat, Resetel and FirstCom Long Distance are wholly-owned subsidiaries of the
Company.
To date, the majority of the Company's revenues have been generated through
systems integration and consulting fees provided by the Company's FirstCom
Networks operations. With the proceeds of the Company's Senior Note Offering
completed in October 1997, the Company anticipates that it will have the capital
necessary to complete and leverage its networks to provide significant,
sustainable network-based telecommunications revenues. Due to the changing scope
of its operations, the Company believes that its historical operating results
and statistics may not be indicative nor representative of future results and
statistics.
Sales
Today, the Company derives its sales primarily from long distance services
provided by FirstCom Long Distance and services provided by FirstCom Networks
including voice and data communications services on a private line basis, and
local and wide-area network design, engineering, systems integration and support
services. The Company expects sales to increase significantly over the next few
years due to the recent acquisition of FirstCom Long Distance and the continued
expansion of its operations.
Costs of Sales
Cost of sales include both the cost of services provided and the cost of
equipment sold. Today, cost of sales relate principally to the Company's
operations in Chile. Such costs of services include payments under lease
agreements to install and operate the Company's fiber optic network in the
Santiago subway system. The lease agreement requires payments based on monthly
invoicing of the Company, subject to minimum amounts. The Company anticipates
that the cost of sales will increase with the expansion of its operations.
However, as a percentage of sales, the Company anticipates that the cost of
sales will decrease over time as a result of economies of scale in its
operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of
compensation expense, professional fees, consulting services, travel costs,
office rent and other general corporate expenses. As the Company's subsidiaries
expand their operations, complete construction of their fiber optic networks and
add new customers, the Company expects a larger portion of selling, general and
administrative expenses to be incurred at the subsidiary level. The Company
expects selling, general and administrative expenses to increase over time as it
continues to expand its operations. However, selling, general, and
administrative expenses as a percentage of sales is expected to decrease over
time with the expansion of the Company's operations, although during the next
several years such costs could represent a higher percentage of sales compared
to historical amounts, as the Company funds the infrastructure necessary to
enhance sales in the future.
Depreciation and Amortization
The Company depreciates its property and equipment over their estimated
useful lives, which approximate twenty years for its fiber optic networks.
Intangible assets acquired in the acquisition of FirstCom Long Distance,
FirstCom Networks and Visat are being amortized over ten years. The concessions
purchased in the acquisitions of Resetel and FirstCom Long Distance are being
amortized over their estimated useful lives of twenty years. The Company
believes that depreciation and amortization will continue to increase with the
expansion of its operations.
Interest Expense
The Company currently incurs interest expense on the outstanding Senior
Notes, capital leases and also incurred interest and related expenses
attributable to convertible debentures and bridge notes that were issued during
the year ended December 31, 1997. Interest expense has been reduced for amounts
capitalized related to the Company's construction of its fiber optic networks.
Interest costs reported with respect to the company's convertible
debentures include interest expense related to the stated coupon rate of
interest, the value attributable to the ability of the holders to convert the
debentures at a share price less than the closing bid price (as reported by the
Nasdaq SmallCap Market) at time of conversion ("beneficial conversion features")
and amortization of (i) deferred financing costs and (ii) original issue
discounts related to detachable warrants. The value attributable to the
beneficial conversion features has been expensed at date of issuance because the
agreements could allow holders of the Convertible Debentures to convert at that
date. As a result, for the year ended December 31, 1997 the Company incurred
noncash interest cost of $466,000 related to the fair value of the beneficial
conversion features.
Interest expense for the year ended December 31, 1997 also includes
non-cash costs of $852,000 related to the value of 300,000 shares of Common
Stock issued to an individual for certain financial assistance provided to the
Company.
The Company expects interest expense to increase significantly in the
future due to the interest payable on the Senior Notes.
Income Taxes
The Company is subject to federal, state and foreign income taxes but has
incurred no liability for such taxes due to net operating losses incurred. These
net operating losses could be used to offset future taxable income. The
Company's net deferred tax assets, which result primarily from the future
benefit of these net operating losses, are fully offset by a valuation allowance
for the same amount because of the uncertainty surrounding the future
realization of these net operating loss carryforwards. However, as the Company
expands its fiber optic networks in Chile and Peru, the Company expects to
generate taxable income. Certain tax benefits could expire prior to the time the
Company generates taxable income.
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 $5,265,000 for the year ended December
31, 1997 as compared to $3,272,000 for the year ended December 31, 1996. This
increase of approximately $1,993,000, 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.
Common Stock and Stock Option Compensation. This expense is directly
attributable to the value of shares of Common Stock and stock options issued to
certain officers and former directors of the Company during 1997.
Depreciation and Amortization. The Company's depreciation and amortization
expenses were $967,000 for the year ended December 31, 1997 as compared to
$706,000 for the year ended December 31, 1996. This increase of $261,000 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 $5,934,000 for the
year ended December 31, 1997 as compared to $246,000 for the year ended December
31, 1996. This increase of approximately $5,688,000 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 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.
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,
$4.4 million and $10.9 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 $8.6
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. 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 in the foreseeable future.
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 November 14, 1997), 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 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 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
Offering as follows: (i) $5.9 million for the acquisition of FirstCom Long
Distance; (ii) $4.3 million for the purchase of telecommunications equipment and
the repayment of its subsidiaries liabilities; (iii) $2.6 million to settle all
of the Company's outstanding obligations related to convertible debentures and
(iv) $975,000 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.
A summary of the Company's value of Common Stock issued and Common Stock
and Common Stock equivalents outstanding as of December 31, 1997 and the pro
forma effect of the exercise of such Common Stock equivalents and the
concurrent inflows of capital follows:
<TABLE>
<CAPTION>
ACTUAL AT STOCK OPTIONS AND WARRANTS OUTSTANDING INCREMENTAL
DECEMBER 31, MANAGEMENT SENIOR NOTE OTHER OPTIONS PRO-
1997 AND DIRECTORS(3) WARRANTS (4) AND WARRANTS (5) FORMA (6)
------------- ----------------- ------------- ----------------- ------------
<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 . $ 26,906,000 $ 15,211,514 $ 33,000,000 $ 6,927,362 $ 55,142,071
ISSUED (1)
PER SHARE(2). . . . . . $ 1.41 $ 3.05 $ 4.40 $ 2.17 $ 3.51
<FN>
(1) 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.
(2) Represents the amount in (1) per share of Common Stock.
(3) Represents the incremental impact on 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 as of
December 31, 1997.
(4) Represents the incremental impact on 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 as of December 31, 1997.
(5) Represents the incremental impact on the Company's value of Common Stock issued upon the exercise
of all other stock options and warrants (vested and not vested) outstanding as of December 31,
1997 (includes 1,865,000 stock options issued to former officers and directors).
(6) Represents the combined incremental impact of (3), (4) and (5) above.
</TABLE>
<PAGE>
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.
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, among other things, (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 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.
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, as such terms are defined in the
Indenture: (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.
The Company believes the net proceeds from the Senior Note Offering will 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
currencies with a pricing adjustment that is structured to protect the Company
against the risk of fluctuations in exchange rates. 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.
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 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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
<S> <C>
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
</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 4, 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.
/s/ Price Waterhouse LLP
- ----------------------
Price Waterhouse LLP
Miami, Florida
March 2, 1998
<PAGE>
<TABLE>
<CAPTION>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . $ 723 $ 13,705
Restricted cash . . . . . . . . . . . . . . . . . . . . - 59,659
Restricted investments. . . . . . . . . . . . . . . . . - 20,404
Accounts receivable, net of allowance of $168 in 1997 . 113 2,367
Prepaid expenses and other current assets . . . . . . . 491 1,208
--------- ---------
Total current assets. . . . . . . . . . . . . . 1,327 97,343
Restricted investments. . . . . . . . . . . . . . . . . . - 37,488
Telecommunications networks, net. . . . . . . . . . . . . 3,956 9,348
Intangible assets, net. . . . . . . . . . . . . . . . . . 5,029 10,881
Deferred financing costs. . . . . . . . . . . . . . . . . 42 14,971
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . $ 10,354 $170,031
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . $ 299 $ 4,023
Accrued interest. . . . . . . . . . . . . . . . . . . . 83 3,797
Other accrued expenses. . . . . . . . . . . . . . . . . 591 1,709
Due to related parties. . . . . . . . . . . . . . . . . 416 263
Lease obligations, current. . . . . . . . . . . . . . . 114 313
Other current liabilities . . . . . . . . . . . . . . . 323 322
--------- ---------
Total current liabilities . . . . . . . . . . . 1,826 10,427
Senior notes, net . . . . . . . . . . . . . . . . . . . . - 131,626
Lease obligations, less current portion . . . . . . . . . 248 356
--------- ---------
Total liabilities . . . . . . . . . . . . . . . 2,074 142,409
--------- ---------
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. . . . . . . . . . . . . . . 18,493 26,887
Warrants. . . . . . . . . . . . . . . . . . . . . . . . - 26,737
Accumulated deficit . . . . . . . . . . . . . . . . . . (10,151) (25,783)
Cumulative translation adjustments . . . . . . . . . . . (78) (238)
--------- ---------
Total stockholders' equity. . . . . . . . . . . 8,280 27,622
--------- ---------
Total liabilities and stockholders' equity. . . $ 10,354 $170,031
========= =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------------- --------------- ----------------
<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 5,265
Non-cash compensation and consulting . . . . . . . . 12 73 4,640
Depreciation and amortization. . . . . . . . . . . . 396 706 967
------------- --------------- ----------------
2,722 5,009 12,075
------------- --------------- ----------------
Loss from operations . . . . . . . . . . . . . . . . . (2,498) (4,357) (10,945)
Interest expense . . . . . . . . . . . . . . . . . . . (319) (246) (5,934)
Interest income. . . . . . . . . . . . . . . . . . . . 10 80 1,315
Other expense, net . . . . . . . . . . . . . . . . . . (66) (103) (68)
------------- --------------- ----------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (2,873) $ (4,626) $ (15,632)
============= =============== ================
Net loss per share . . . . . . . . . . . . . . . . . . $ (.31) $ (.31) $ (.94)
============= =============== ================
Weighted average common shares outstanding . 9,407,000 14,795,660 16,667,719
============= =============== ================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
ADDITIONAL ACCRUED CUMULATIVE
COMMON STOCK PAID-IN DISTRIBUTIONS ACCUMULATED TRANSLATION
--------------------
SHARES AMOUNTS CAPITAL AND WARRANT DEFICIT ADJUSTMENT TOTAL
---------- -------- -------- ------------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 . . . . . . 6,316,024 6 2,637 (6,088) (2,652) (14) (6,111)
Common stock issued in private
placements. . . . . . . . . . . . . . . 635,761 1 1,962 - - - 1,963
Conversion of debt. . . . . . . . . . . . 4,888,900 5 1,126 6,088 - - 7,219
Stock issued for acquisitions . . . . . . 111,000 - 400 - - - 400
Imputed interest on related party
notes . . . . . . . . . . . . . . . . . - - 16 - - - 16
Stock option grants . . . . . . . . . . . - - 12 - - - 12
Currency translation adjustment . . . . . - - - - - 44 44
Net loss. . . . . . . . . . . . . . . . . - - - - (2,873) - (2,873)
---------- -------- -------- ------------- --------- ------------ ---------
Balances at December 31, 1995 . . . . . . 11,951,685 12 6,153 - (5,525) 30 670
Common stock issued in private
placements. . . . . . . . . . . . . . . 1,939,042 2 7,430 - - - 7,432
Conversion of debt. . . . . . . . . . . . 1,011,791 1 1,985 - - - 1,986
Stock issued for acquisitions . . . . . . 1,250,000 1 2,812 - - - 2,813
Imputed interest on related party
notes . . . . . . . . . . . . . . . . . - - 40 - - - 40
Stock option grants . . . . . . . . . . . - - 73 - - - 73
Currency translation adjustment . . . . . - - - - - (108) (108)
Net loss. . . . . . . . . . . . . . . . . - - - - (4,626) - (4,626)
---------- -------- -------- ------------- --------- ------------ ---------
Balances at December 31, 1996 . . . . . . 16,152,518 16 18,493 - (10,151) (78) 8,280
Conversion of debt. . . . . . . . . . . . 1,101,782 1 2,459 - - - 2,459
Stock issued to certain officers, related
parties and former directors . . . . . . 1,830,000 2 5,935 - - - 5,937
Warrants to purchase common stock .. . . - - - 26,737 - - 26,737
Currency translation adjustment . . . . . - - - - - (160) (160)
Net loss. . . . . . . . . . . . . . . . . - - - - (15,632) - (15,632)
---------- -------- -------- ------------- --------- ------------ ---------
Balances at December 31, 1997. . . . . . 19,084,300 $ 19 $ 26,887 $ 26,737 $(25,783) $ (238) $ 27,622
========== ======== ======== ============= ========= ============ =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
--------- -------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . $ (2,873) $(4,626) (15,632)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization expense. . . . . . 396 706 967
Amortization of deferred financing costs and
original issue discounts . . . . . . . . . . . - - 518
Beneficial conversion features on convertible
debentures . . . . . . . . . . . . . . . . . . - - 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 3,552
Due to related parties . . . . . . . . . . . . (66) (251) (179)
Other current liabilities. . . . . . . . . . . - 171 (105)
Deferred taxes . . . . . . . . . . . . . . . . (6) - -
--------- -------- ----------
Cash used in operating activities . . . . . (2,150) (3,934) (5,939)
--------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of telecommunications network . . . . . . (720) (1,453) (2,763)
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) (8,562)
--------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Senior Notes . . . . . . . . . . . . . - - 150,000
Deferred financing costs . . . . . . . . . . . . . - - (7,000)
Restricted cash and investments. . . . . . . . . . - - (117,551)
Net proceeds from convertible debentures . . . . . - - 1,950
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 27,483
--------- -------- ----------
Net increase (decrease) in cash and cash
equivalents. . . . . . . . . . . . . . . . . . . . (57) 668 12,982
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 $ 13,705
========= ======== ==========
Supplemental cash flow information
Cash paid for interest. . . . . . . . . . . . . . . $ 2 $ 153 $ 545
========= ======== ==========
<FN>
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.
</TABLE>
<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 $2,800 has been substantially allocated to a local carrier
concession. A fair value of $2.25 was assigned to each share issued to the
shareholders of Resetel based on the net proceeds per share of the Company's
March 1996 private placement.
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 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 results of operations of Resetel and FirstCom Networks for the period
from January 1, 1996 to the respective date of acquisition were not significant.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisition of 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>
(UNAUDITED)
DECEMBER 31,
--------- ---------
1996 1997
--------- ---------
<S> <C> <C>
Revenue. . . . . . $ 8,474 $ 10,927
Net loss . . . . . (31,630) (39,895)
Net loss per share $ (2.14) $ (2.40)
</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>
ESTIMATED
DECEMBER 31, USEFUL
-----------------
1996 1997 LIFE
------- -------- --------
<S> <C> <C> <C>
Satellite transmission rights . $1,166 $ 1,166 10 years
Concessions . . . . . . . . . . 2,819 9,095 20 years
Goodwill. . . . . . . . . . . . 1,289 1,289 10 years
------- --------
5,274 11,550
Less: accumulated amortization (245) (669)
------- --------
$5,029 $10,881
======= ========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED ITEMS
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
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.
Primarily as a result of the Company's U.S. dollar denominated senior note
financing during October 1997, effective January 1, 1998 the Company's
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.
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
3) 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 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>
ESTIMATED
DECEMBER 31, 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>
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 fair value of the common stock.
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 $(4,626) $(15,632)
Pro forma (7,510) (21,237)
Net loss per share As Reported (.31) (.94)
Pro forma (.51) (1.27)
</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 average fair
value of options granted in 1996 and 1997 were $2.38 and $2.47, respectively.
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 Company has deferred tax assets of approximately, $1,900 and $9,700 at
December 31, 1996 and 1997, respectively, consisting primarily of net operating
loss carryforwards. 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.
3. 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 4 - Related Party Transactions and Note 5 - 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, 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 the Initial
Warrants. The original issue discount and direct financing costs are being
amortized to interest expense over ten 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, as such terms are defined in the
Indenture: (a) Permitted Expenditures; (b) in the event of a Change in Control
of the Company, the Change in Control Payment and (c) in the event of a Special
Offer to Purchase, or a Special Mandatory Redemption, the purchase or redemption
price in connection therewith.
CONVERTIBLE DEBENTURES
On February 3, 1997, the Company issued $1,500 aggregate principal amount
of 7% Convertible Debentures due February 3, 2000 and warrants to purchase an
aggregate 100,000 shares of the Company's Common Stock. 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").
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 settled all of the Company's remaining financial obligations
related to the Convertible Debentures for $2,600 in cash.
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.
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 1997, the Company issued 850,000 shares of common stock to two
officers and recognized related non-cash compensation expense of approximately
$2,300.
4. RELATED PARTY TRANSACTIONS
TELECTRONIC S.A.
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.
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.
In October 1997, the Company issued 300,000 shares of Common Stock to Mr.
Donoso for certain financial assistance provided to the Company during its
development stage. The Company recognized interest expense of $852 related to
the aggregate fair value of such shares of Common Stock.
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.
MR. HERNAN STREETER
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.
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.
During 1995 and 1996, approximately $1,600 was loaned to the Company by
Laura Investments, Ltd., a company owned by Mr. Streeter. During 1996, the
Company paid $86 of interest to Laura Investments, Ltd. On March 31, 1996 the
loans, plus accrued interest, were converted into 839,235 shares of Company
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.
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.
During 1996 and 1997, the Company converted $316 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. 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 the Common Stock and stock options of approximately $1,800.
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.
5. 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
------------------------
WEIGHTED
AVERAGE
REMAINING OPTIONS EXERCISABLE
-----------------------------------
EXERCISE NUMBER CONTRACTUAL NUMBER EXERCISE
PRICE OUTSTANDING LIFE EXERCISABLE PRICE
- ------------- ----------- ----------- ------------------- --------------
<S> <C> <C> <C> <C>
.35. . . . . 100,000 7 100,000 $ .35
1.83 to 1.96. 1,110,000 8 1,063,194 1.83 to 1.96
2.00 to 2.42. 3,130,000 9 1,465,786 2.00 to 2.42
2.50 to 2.81. 1,655,000 8 1,511,917 2.50 to 2.81
4.00 to 4.40. 1,100,000 10 493,518 4.00 to 4.40
6.00 to 8.00. 200,000 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
452,952 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.
<PAGE>
During 1997 the Company granted two officers 2,650,000 stock options that
vest over a two year period. The Company recognized non-cash compensation
expense of $527 related to certain of these stock option grants. The terms of
1,000,000 stock options granted during 1996 were modified during 1997 to provide
for immediate vesting.
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.
6. 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>
<CAPTION>
<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.
The Company has entered into employment agreements with key members of
management that expire in 2000. These agreements provide for annual compensation
and payments upon death, disability and certain changes in control.
<PAGE>
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
The information required by this item is incorporated by reference from the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held in May 1998.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held in May 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held in May 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
The information required by this item is incorporated by reference from the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held in May 1998.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------- ----------------------------------------------------------------------
<C> <S>
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 the Registrant's Form 8-A
Registration Statement, filed with the Commission on
November 29, 1994 and incorporated herein by reference.
4.1 -- Purchase Agreement, dated as of October 21, 1997 by and
among InterAmericas Communications Corporation, FirstCom Networks
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
Company 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.
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.
10.1 -- Stock Purchase Agreement, dated as of September 9, 1997,
between InterAmericas Communications Corporation and
Inversiones Druma S.A. for the acquisition of 99.9% of the
outstanding shares of capital of FirstCom Long Distance, S.A.,
previously filed as an exhibit to Registrant's Current
Report on Form 8-K, filed with the Commission on January 5,
1998 and incorporated herein by reference.
10.2 -- Employment and Severance Agreement, dated as of October 7,
1997, between InterAmericas Communications Corporation and
Patricio E. Northland, previously filed as an exhibit to
Registrant's Current Report on Form 8-K filed with the
Commission on October 16, 1997 and incorporated herein by reference.
10.3 -- Employment and Severance Agreement, dated as of April 14,
1997, between InterAmericas Communications Corporation and
Douglas G. Geib II, previously filed as an exhibit to
Registrant's Quarterly Report on Form 10-QSB filed with the
Commission on May 15, 1997 and incorporated herein by reference.
10.4 -- Settlement Agreement, dated as of October 4, 1997, between
InterAmericas Communications Corporation and each of Maroon
Bells Capital Partners, Inc., Theodore Swindells, Paul A.
Moore and Philip Magiera, previously filed as an exhibit to
Registrant's Current Report on Form 8-K filed with the
Commission on October 16, 1997 and incorporated herein by
reference.
10.5 -- Settlement Agreement, dated as of October 3, 1997, between
InterAmericas Communications Corporation and Eleazar Donoso,
previously filed as an exhibit to Registrant's Current
Report on Form 8-K filed with the Commission on October 16,
1997 and incorporated herein by reference.
11.1 -- Statement re: Computation of per share earnings
21.1 -- Subsidiaries of the Registrant
24.1 -- Power of Attorney (as set forth on the signature page of the report)
27.1 -- Financial Data Schedule
</TABLE>
<PAGE>
(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.
<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 10th day of March,
1998.
INTERAMERICAS COMMUNICATIONS CORPORATION
By: /s/ Patricio E. Northland
-----------------------------------------
Patricio E. Northland
President and Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed by the following persons in the capacities and on the dates indicated.
Each person whose signature appears below hereby authorizes Patricio E.
Northland and Douglas G. Geib II, and each of them acting individually with full
power of substitution, to file one or more amendments to this report, which
amendments may make such changes as Patricio E. Northland and Douglas G. Geib II
deem appropriate, and each person whose signature appears below, individually
and in each capacity stated below, hereby appoints Patricio E. Northland and
Douglas G. Geib II, and each of them acting individually with full power of
substitution, as Attorney-in-Fact to execute his name and on his behalf, to file
any such amendments to this report.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------- ------------------------------------- -------------
<S> <C> <C>
/s/ Patricio E. Northland Chairman of the Board, Director March 10, 1998
- ---------------------------------------
Patricio E. Northland President and Chief Executive Officer
(Principal Executive Officer)
/s/ Douglas G. Geib Chief Financial Officer and March 10, 1998
- ---------------------------------------
Douglas G. Geib II Director (Principal Financial
and Accounting Officer)
/s/ David C. Kleinman Director March 10, 1998
- ---------------------------------------
David C. Kleinman
Director March 10, 1998
- ---------------------------------------
George A. Cargill
/s/ Andrew Hulsh Director March 10, 1998
- ---------------------------------------
Andrew Hulsh
</TABLE>
<PAGE>
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
DECEMBER 31, DECEMBER 31,
DESCRIPTION 1996 ADDITIONS DEDUCTIONS 1997
<S> <C> <C> <C> <C>
Deferred tax asset valuation allowance
$ 1,900,000 7,800,000 -- $ 9,700,000
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
- ------
11.1 - Statement re: Computation of per share earnings
21.1 - Subsidiaries of the Registrant
27.1 - Financial Data Schedule
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------- ------------
<S> <C> <C> <C>
Net loss per common share:. . . . . $ (.31) $ (.31) $ (.94)
============ ============ ============
Weighted average shares outstanding: 9,407,000 14,795,000 16,667,719
============ ============ ============
</TABLE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
FirstCom Long Distance, S.A.
Visat, S.A.
Red Servicios Empresariales de Telecomunicaciones, S.A.
FirstCom Networks, S.A.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 73364
<SECURITIES> 20404
<RECEIVABLES> 2367
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 97343
<PP&E> 10837
<DEPRECIATION> (1489)
<TOTAL-ASSETS> 170031
<CURRENT-LIABILITIES> 10708
<BONDS> 131626
<COMMON> 19
0
0
<OTHER-SE> 27603
<TOTAL-LIABILITY-AND-EQUITY> 170031
<SALES> 1130
<TOTAL-REVENUES> 1130
<CGS> 1203
<TOTAL-COSTS> 1203
<OTHER-EXPENSES> 12075
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5934
<INCOME-PRETAX> (15632)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15632)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15632)
<EPS-PRIMARY> (.94)
<EPS-DILUTED> 0
</TABLE>
