U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the transition period from ____________ to _____________
Commission file number 00-22690
INTERAMERICAS COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Texas 87-0464860
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1221 Brickell Avenue
Miami, Florida 33131
Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (305) 377-6790
Securities registered pursuant to Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Check whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes X NO
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Check if there is no disclosure of delinquent filers in response to
item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year ended December
31, 1996 were $652,000.
The aggregate market value of the voting stock held by non-affiliates for the
issuer as of March 27, 1997 was $24,629,094.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes NO X
APPLICABLE ONLY TO CORPORATE REGISTRANTS
During August 1998 the Company restated its December 31, 1997 and 1996 financial
statements to reflect the effect of revising the price per share of Company
common stock issued in connection with the May 1996 acquisition of Resetel from
$2.25 to $5.99 per share. The revised price per share is based on the average
closing price of the Company's common stock for the period of 14 days before and
after the date the terms of the acquisition were announced. The previously
recorded purchase price was based on the Company's March 1996 private placement.
The number of shares outstanding of the registrant's Common Stock, $.001 Par
Value, on March 27, 1997 was 16,154,518 shares.
Transitional Small Business Disclosure Format Yes NO X
Documents incorporated by reference: None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
InterAmericas Communications Corporation (the "Company") is a growing
provider of a wide range of telecommunications services over state-of-the-art
fiber optic networks in Santiago, Chile and Lima, Peru. The Company focuses on
providing advanced telecommunications services in selected markets in Latin
America, where the Company believes market deregulation and high demand for
access to advanced telecommunications networks and services have created
significant opportunities for early market entry and expansion.
The Company has been operating as a competitive access provider ("CAP")
in Chile and Peru by offering high quality voice and enhanced data communication
services to business end users and other carriers on a private network basis.
The Company intends to follow the strategy successfully implemented by CAPs in
the United States to install advanced switching equipment that will enable the
Company to provide both dedicated private network services as well as full
switched services interconnected with the existing public switched network. The
Company believes that it is currently eligible to receive regulatory approval to
provide such services in Chile, and that it will be able to provide such
services in Peru's public and long distance markets upon their deregulation,
scheduled to occur in 1999. As a so-called competitive local exchange carrier
("CLEC"), the Company will be able to offer its corporate customers a full range
of telephone services such as local switched services, value-added services such
as Centrex, high capacity private voice and data lines, dial up data lines and
Internet access, as well as domestic and international long distance services
under a "one stop shop" concept. The Company is also exploring opportunities to
make selective acquisitions of customer bases and businesses, make investments
in companies that complement the Company's current operations, expand its
services and network capabilities and engage in strategic alliances. The Company
believes that these acquisitions, investments and strategic alliances will be an
important means of increasing network traffic volume and achieving economies of
scale.
The Company is currently focusing on providing reliable, high speed
private data networks that link multiple locations of its customers within a
major metropolitan area, resulting in improvements in operating efficiency,
financial controls and customer service. The Company also offers its customers
dedicated high speed, high capacity connections from their corporate sites
directly to long distance carriers' points of presence ("POPs") or to other POPs
such as those operated by Internet service providers ("ISPs"). The Company
believes that dedicated access to ISPs will represent a significant source of
new customer relationships because of the anticipated rapid increase in the
number of Internet users throughout Latin America.
Through its wholly-owned subsidiaries, the Company also holds
international long distance services concessions and licenses which, when fully
developed, will enable it to extend its private network services to provide its
customers with dedicated private voice and data lines between cities within
Latin America and between Latin American cities and the United States, Europe
and in other locations throughout the world. The Company also offers customers a
wide range of network installation and systems integration services in order to
connect customer premise equipment (i.e. PBXs, computers, modems, LANS, etc.) to
the Company's fiber optic networks. The Company connects its customers' office
networks to its fiber optic networks using a variety of wireline and wireless
(i.e. 38 Ghz) technologies "last mile" connections.
The Company's long-term strategy is to integrate its various networks
and operations in order to achieve certain operating and cost efficiencies and
to position itself as provider of choice for multinational corporations, large
Latin American companies and other telecommunications carriers that require an
integrated telecommunications service.
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The Company was incorporated in Nevada in April 1989 under the name
"Theodore Games, Inc. ("TGI"), and initially operated in an unrelated business.
The Company changed it focus to its current business in connection with a change
in control of the Company in July 1994. The Company's principal executive
offices are located at 1221 Brickell Avenue, Miami, Florida 33131, and Its
telephone number is (305) 377-6790.
INDUSTRY OVERVIEW
The continuing deregulation of the telecommunications industry and
technological change have resulted in an increasingly information-intensive
business environment. Regulatory, technological, marketing and competitive
trends have expanded substantially the Company's opportunities in the converging
voice and data communications services markets. Rapid deregulation of the
telecommunications industry in Latin America is expected to expand opportunities
in the local telecommunications services market. Technological advances,
including rapid 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 substantial growth in the high-speed data services
market. The Company believes, along with many industry observers, 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. While significant reductions in prices and improvements in
telecommunications and customer services have occurred and are expected to
continue, the Company expects that market prices will continue to permit
services to be profitably rendered by industry participants generally.
Competitive Local Access. In most countries around the world, revenues
from the local access market substantially exceed revenues from long-distance
and value added telecommunications markets. In the United States, for example,
the local access market generates nearly $100 billion in revenues, while the
long distance market generates approximately $60 billion. In Chile, the local
market represents over $1.0 billion, while the combined national and
international long distance markets generate approximately $440 million. In
Peru, the local market represents over $560 million while the combined national
and international long-distance market generate approximately $740 million.
Once the domain of privately-owned or government-owned monopoly
carriers, the local access market in both developed and emerging countries is
increasingly open to competition. 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. Complete local market deregulation
permits CAPs to interconnect their networks with the existing carrier's network
and to provide basic "dial-tone" telephone service. "Dial-tone" service is
connection to a local network switch which can then route a call to another line
on the local network or to a long distance carrier which will connect it with
other local markets. Typically, such service is provided through the CAP's own
switch which connects one customer with another through a combination of the
CAP's own wired or wireless network and the network of the PTT. In some
countries, open market regulations require the local PTT to allow CAPs to
utilize the PTT's network at competitive cost.
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 networks and often leapfrog existing providers in terms
of bandwidth, reliability and enhanced service capability. Frequently, wireless
technologies, such as 38Ghz used by the Company, 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
end
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user locations with long distance carriers. Private-line services provide high
capacity circuits to transmit voice, data and video between two or more end user
locations across town or across the globe.
Long distance carriers have traditionally been the first customers for
CAPs. Local access in some markets makes up 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 failures can result in
significant expenses and/or lost revenue to businesses, corporate and carrier
customers often utilize CAPs as a back-up for their primary carrier. The CAP
markets its 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 connect their branch
offices and computer networks, and even to connect their internal PBX networks
with the local PTT. Telecommunications carrier networks utilize CAPs to connect
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 be able to provide dialtone 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.
Most CAPs attempt to expand their services from the provision of
private line and special access services to the provision of switched or dial
tone services that are provided through a combination of the company's own
network and through interconnection with the local PTT network. This evolution
enables 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 PTT's receive a volume based
payment for the use of their network.
Satellite Services. Satellite networks provide the transmission
backbone for a substantial portion of worldwide long distance services, and they
currently provide almost all of South America's voice, video and data long
distance connectivity. Increasingly, satellite services are also used throughout
Latin America for domestic private line voice and data telecommunications
networks. With the boom in multichannel television, satellite services are also
experiencing increasing demand for the transmission of television programming to
television stations, cable television systems and households.
Traditionally, Latin America's long distance telecommunications have
been under monopoly control by the region's PTTs. National and international
long distance rates have been set at levels substantially above cost, and the
resulting high margins have been used to subsidize low local service tariffs.
Over the last few years, several Latin American countries have opened or have
announced plans to open their long distance markets to competition. Currently,
Chile's long distance market is open to competition by all entrants. Mexico's
long distance market is opening this year, and Peru and Argentina plan to open
their markets in 1999 and 2000, respectively. As seen in the deregulation
process in the United States where carriers such as MCI and Sprint have
successfully entered formerly monopolized long distance markets, the
traditionally high rates set by the PTTs provide substantial room for new
entrants to profitably compete on a price basis. As PTTs slowly adjust to the
new competitive environment and lower their tariffs, the resulting reduction in
market prices normally creates a more than compensatory increase in market
volume.
Entrance into long distance markets through satellite services can
provide emerging companies with a rapid source of revenues and cash flow. New
entrant service operators can install earth station equipment and then begin to
market long distance services through multiple sales channels to a wide range of
customers. Corporations seeking to reduce their telecommunications expense may
have interest
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in establishing private networks or volume based transmission contracts.
Individuals reached through advertising and telemarketing may be attracted by
improved customer service and more affordable pricing plans. In addition,
non-facilities based long distance resellers will seek to sign volume
commitments with the long distance operator. Such contracts provide the reseller
with a competitive product while enabling the carrier to substantially increase
its volume at minimal marketing expense.
New long distance operators commonly pay the local access provider for
carrying a call from its origin to their network, and they then contract
carriers in other countries to downlink their satellite transmissions and
terminate those transmissions at end user locations around the world. Although
long distance service carriers generally compete on a price basis, such carriers
may also add value to their service offering by bundling long distances services
together with cellular, paging or local exchange access to provide a more
complete, value added telecommunications package at a competitive price.
In addition to national and international long distance services
provided through connection with the landline local exchange network,
telecommunications operators are increasingly providing domestic and
international private line services using VSAT (very small aperture terminal)
technology. VSAT networks utilize relatively small and inexpensive satellite
dishes to provide satellite based, private line services between a central
location and one or more sites. Common applications include remote monitoring of
pipelines and mining facilities, point-of-sale information management, credit
card authorization, reservation systems, car dealer inventory management, and
electronic funds transfer. VSAT networks typically provide higher reliability
because they are not subject to cuts and higher error rates that may be
encountered with existing wireline networks. VSAT networks transmit one way and
two way voice, data and video at high speeds, typically for a fixed monthly
cost.
BUSINESS, MARKETS AND SERVICES
CHILE
General. The Company, through its wholly-owned Chilean subsidiary
Hewster-Chile, currently provides business end users and other carriers in
Santiago, Chile with high quality voice and data communications services on a
private line basis through a 120 kilometer fiber optic network. The Company
helps its customers to increase productivity and reduce costs by linking Local
Area Networks ("LANS"), accessing the Internet at very high speeds, gaining
lower cost access to long distance services and ensuring the integrity of highly
sensitive, high volume data transfers. In addition, Hewster-Chile provides its
customers with local and wide area network design, engineering, installation,
systems integration and support services. The Company provides network services
in Chile through its 120 kilometer fiber optic network which currently extends
throughout Santiago's downtown business district and outlying industrial park
and airport corridor. This network, which became operational in mid-1995,
utilizes advantageous rights-of-way through Santiago's underground subway system
(the "Metro") and over certain facilities of a Chilean electric company.
Santiago, the capital of Chile and a major international economic center, has a
population of approximately 5.4 million people.
The Chilean Market. The Company estimates that the Chilean
telecommunications market currently represents approximately $1.4 billion in
revenues, of which approximately $1.0 billion are local access and services
revenues and approximately $400 million are domestic and international long
distance revenues. These figures do not include other telecommunications sectors
such as wireless telephony and cable television revenues. See "Description of
Business -- Country Overview -- Chile."
Concessions. Hewster-Chile was granted a concession to provide
intermediate telecommunications services in 1991. The concession covers the
installation and operation of a fiber optic cable local network in the
metropolitan Santiago. The Company, through its wholly-owned subsidiary VISAT,
also holds a concession to construct and operate a network of satellite earth
stations throughout
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Chile that can provide national and international long distance
telecommunications services. In addition, the Company has received approval from
the Chilean Ministry of Transport and Telecommunications to provide 38Ghz
wireless technology services in Santiago.
Services and Marketing. The Company believes that an increasing portion
of its future revenues will be generated through Internet driven growth.
Internet customers are increasingly demanding higher speed network connections
in order to take advantage of the Internet's rapidly evolving array of high
bandwidth multimedia and video applications, and therefore require access to
ISPs through high speed circuits such as those available on the Company's fiber
optic network. The Company is rapidly acting to capitalize on the Internet's
explosive growth potential by creating alliances with Santiago's numerous ISPs.
By marketing its network services through the ISP's, the Company is able to take
advantage of the high growth marketing and sales efforts of each of its ISP
customers. Once customers have been introduced to the Company network through
Internet services, the Company believes that it will be able to market to each
customer additional services including other high speed circuits, turn-key LAN
systems, and network connections to information services such as databases
operators and video-conferencing service providers.
Through its systems integration expertise, the Company offers its
customers a complete turn-key network service including LAN design, equipment
sales, installation, and maintenance. The Company then offers its fiber optic
network services to connect its customers' LANs with other offices, customers
and information and ISPs. Through this complete solution sales approach, the
Company is able to educate its customers on rapidly developing technologies and
the ways in which its network services may be best utilized to increase
operating efficiency. This consultative selling approach has been designed to
strengthen the Company's customer relationships, provide it with multiple
revenue streams per customer, and minimize customer turnover.
Network Investment. In conjunction with its sales initiatives, the
Company is now investing 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 typically installs 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 may grow most
efficiently by leasing such last mile connections from other network operators.
In addition to last mile links, the Company is investing to extend its fiber
backbone through a new subway route that will enable it to efficiently serve
additional business districts within Santiago.
Network Systems. The Company's Santiago network employs advanced node
equipment and has been designed to be fully redundant. Configured in
self-healing rings, the intelligent network is able to automatically re-route
transmissions through alternate circuits in the event of a fiber cut or
equipment failure. In most cases where a failure occurs in a portion of the
network, the traffic will be re-routed in fractions of a second, before the
customer ever notices a problem. This network capability provides the Company's
customers with the highest degree of network reliability currently available in
Chile.
The Company's network is being expanded around digital nodes which
allow remote monitoring and flexible management of the network's last mile
connections that link individual customer networks to the Company's network. The
Company believes that it has a competitive advantage through the cost saving
efficiencies of its fiber optic network's "drop and insert" technology. This
technology enables the Company to provide network capacity to users without
dedicating a single fiber strand to a single customer location. While networks
without "drop and insert technology" may have to dedicate entire fiber strands
to individual customers, the Company is able to optimize the capacity in its
network through its ability to share strands among all of the customers on the
network. In addition, customers often want their private networks to provide
different amounts of capacity to different branch offices. "Drop and insert"
technology allows the Company to meet such customer requirements. The Company's
network has the transmission capacity to carry all accepted data requirements
for both compressed and decompressed digital signalization.
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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 tunnels of the Metro protect the network from such hazards as
severe weather and vandalism. Metro access points, such as ventilation shafts
and platform entrances, are available every 250 meters along the subway route.
These facilities serve as the "insert" points for last mile connections between
the 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's total network in Santiago covers
the traditional commercial center of the city where established major businesses
are headquartered and the rapidly growing expansion areas where branch offices
and new companies have been established.
The Company has 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. 38Ghz wireless technology is currently being deployed
throughout the United States and Western Europe by CAPs and by
telecommunications carriers. 38Ghz wireless technology provides circuits with
performance similar to that provided by fiber optic networks. However, unlike
fiber optic networks, 38Ghz wireless networks are deployed by installing
wireless transceivers on rooftops, towers or windows where line-of-sight can be
established between the points to be connected. 38Ghz technology will enable the
Company to develop POPs serving buildings not currently reached by its fiber
optic network without paying interconnection fees to the local telephone
company. For such "last-mile" connections, 38Ghz technology can be installed in
a matter of hours to provide customers a network connection that is similar to a
fiber optic circuit in terms of both bandwidth and service quality.
The Company plans to acquire a satellite earth station with a switch
capable of directing both incoming and out-going international long distance
traffic. The earth station is expected to be located near the Company's network
in Santiago and to be designed to allow upgrading and capacity expansion as
demand requires. The Santiago earth station is expected to serve as the hub for
an extended network of smaller satellite earth stations to be built at locations
throughout Chile. By combining a satellite network with its fiber optic network,
the Company believes that it will be able to provide its Chilean customers with
a completely integrated nationwide, domestic and international communications
solution. However, there can be no assurance that the Company will obtain the
necessary resources to acquire such satellite earth station and implement this
project.
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PERU
General. The Company acquired Red de Servicios Empresariales de
Telecomunicaciones, S.A. ("Resetel") in May 1996. Resetel provides high quality
voice and data communications services on a private line basis through a fiber
optic network in metropolitan Lima pursuant to a renewable local carrier
concession expiring in 2016. The Company leases highly reliable, high speed
access circuits to connect customers with their branch offices, Internet access
providers, vendors, suppliers and long distance carriers. The Company's network
is able to carry all types of telecommunications signals including voice, data
and video. However, the Company may not provide local dial-tone service until
the expiration of the exclusive concession of Telefonica del Peru ("Telefonica")
in 1999. The Company has negotiated aerial right-of-way agreements with two
electric utilities operating in the Company's concession area. By implementing
its private line and planned value added service offerings, the Company expects
to develop a strong customer base and network presence that will enable it to
rapidly enter the local dial tone and long distance markets when Peru's switched
local and long distance services become deregulated, which is scheduled to occur
in 1999.
The Company commenced construction of its fiber optic network in
December 1996. Currently, 30 kilometers of the fiber optic network have been
installed and are in operation. The Company plans to install another 110
kilometers of fiber optic cable by the end of 1997. When installation of this
network is completed, Resetel's fiber optic network will extend throughout the
major commercial and industrial districts of metropolitan Lima and the adjacent
port city of Callao (combined population of approximately 6.4 million people).
Resetel utilizes the same network design, construction, management and marketing
expertise as used by the Company in Chile. The Company's Peruvian fiber optic
network provides high bandwidth, private line services to businesses as a higher
quality service alternative to the dominant local telephone company. The network
will also provide the access for PCS, cellular, and paging service providers and
a route through which major long distance carriers can bypass the higher cost
local telephone company. The Company provides private line voice and data
service, and plans to provide frame relay, Internet access services and other
enhanced network services by the end of 1997.
The Peruvian Market. Based on 1995 operating results for Telefonica,
the local and long distance telecommunications markets in Peru are believed to
account for approximately $1.3 billion in total revenues, of which approximately
$560 million are local access and service revenues and $740 million are domestic
and international long distance revenues. The Company believes that Peru's
telecommunications market offers an excellent environment for rapid
telecommunications business growth. Demand for telecommunications services in
the country is highly unserved, with only 3.8 lines available for every 100
inhabitants as compared to 12.1 per 100 in Chile, 16 per 100 in Argentina and
over 50 per 100 in the United States and Western Europe.1 The Company believes
that the Peruvian economy is also a source of growing demand for
telecommunication services with rapidly growing domestic and multinational
businesses attracting significant foreign investment.
Services and Marketing. As in Chile, the Company's Peruvian network
offers Lima's business customers highly efficient, highly reliable data, voice
and video circuit connections to Internet access providers, branch offices,
vendors, customers and other telecommunications carriers. These types of
telecommunications services enable companies to dramatically improve their
productivity and responsiveness at the same time that they reduce operating
costs. As the first alternative service provider in Peru, the Company has a
waiting list of customers seeking more efficient connections to the Internet,
branch offices, vendors and customers.
To capitalize on its market opportunity, the Company is developing a
partnership with Peru's major Internet access provider to rapidly expand the
marketing and distribution of its services. The Company is also developing a
consultative, systems integration selling capability similar to that employed
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* Source: Kagan World Media, 1996; Smith Barney, "Compania de Telefonos de Chile
S.A.," March 26, 1996; Prudential Securities, "Emerging Markets
Telecommunications Fund," November 1994.
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by the Company in Chile. Customers in Peru are aggressively seeking to utilize
new communications technologies in order to more effectively compete in global
markets. By helping to educate its customers on the use of the latest
technologies, and by providing turn-key corporate networks and metropolitan area
telecommunications solutions, the Company expects to develop strong customer
relationships that will help it to both retain customers and increase average
customer revenues.
Network Investment. The Company's Lima network has been designed to
most efficiently provide a full range of switched, CLEC services upon the
market's deregulation in 1999. The Company has installed four nodes utilizing
the Synchronous Digital Hierarchy ("SDH") protocol and plans to rapidly install
14 additional SDH nodes, as well as a satellite earth station that will
initially enable it to provide Internet access and international private line
data connections. Through this network, the Company will be positioned as the
customer's gateway to the global telecommunications network upon deregulation.
Prior to deregulation, the Company will seek to provide high speed private line
circuits and value added services with a high level of customer service and
quality to foster ever stronger customer relationships. Like the Company's
Santiago network, the Lima network provides the direct, physical connection to
the corporate customer and thus a direct business relationship that will enable
it to market a wide range of enhanced services. This multiple services approach
is expected to assist the Company in retaining customers as other carriers enter
the Peruvian market with new and competing services.
Network Systems. The Company has installed and is operating a 30
kilometer fiber optic network in downtown Lima, and intends to install an
additional 110 kilometers by the end of 1997. The Company's Lima network
provides customers with a scaleable range of bandwidth from 64 Kbps to 2 Mbps.
This network employs SDH protocol equipment and "drop and insert" technology. In
the future, the Company may also deploy Asynchronous Transfer Mode ("ATM")
technology. The Company's network allows revenue generating operations prior to
the completion of the entire network. After the completion of the installation
of the network backbone, extensions to additional buildings and expansions to
other regions will be evaluated based on assessments of market potential.
However, there can be no assurance that the planned extension of the fiber optic
network can be constructed by 1997 or that, even if constructed, that such
portion will be commercially operational within the estimated time period.
By rapidly expanding its Peruvian fiber optic network during 1997, the
Company will seek to establish a strong market presence with which to capture
market share rapidly in Peru's public local and long distance markets upon their
deregulation in 1999. Upon entering the switched services market at that time,
the Company expects to be able to collect revenues based on call volume rather
than on a flat fee basis, thereby generating significantly increased revenues
and margins. However, there can be no assurance that the company will be able to
implement this strategy within the estimated time period.
CUSTOMERS
Chile. Through its wholly-owned subsidiary Hewster, the Company
services 40 customers in Santiago, Chile. Some of the Company's customers
include the XEROX Corporation, Iusatel, Iberia Airlines, Hertz Rent-a-Car, Nike
and the Aetna Life Insurance Company.
Peru. Through its wholly-owned subsidiary, Resetel, the Company
services four customers in Peru, including Sony Music. Nineteen additional
customers have committed to use the services of the Company when the Company
completes the installation of the remaining 110 kilometer fiber optic network,
such installation expected to be completed by the end of 1997.
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BUSINESS STRATEGY
In 1994, the Company adopted a business strategy to enter the
international telecommunications industry, with a focus on acquiring, developing
and operating telecommunications networks and services primarily in Latin
America. The Company has targeted Latin American telecommunications markets due
to perceived opportunities created primarily by the following complementary
factors:
- RAPID ECONOMIC GROWTH. Many countries in Latin America, and most
of the region's major metropolitan areas in particular, have
economies that are growing faster than many other areas of the
world.
- BUSINESS CENTERS. Many of the major metropolitan centers of Latin
America are among the largest cities in the world, are dominant
centers of trade and commerce for a wide region or for an entire
country, and are home to high concentrations of large domestic and
multinational corporations that require advanced telecommunication
services.
- HIGH DEMAND FOR TELECOMMUNICATIONS SERVICES. The
telecommunications infrastructure in many of these markets is very
limited or obsolete, resulting in high pent-up demand for advanced
telecommunications services including reliable high capacity data
circuits, private-line wide area networks (WANs) and domestic and
international long distance connectivity.
- DEREGULATION. Most Latin American governments are opening their
telecommunications markets to competition in order to, among other
things, attract private sector capital to finance expansion and
enhancement of the telecommunications infrastructure.
The Company's strategy for identifying and entering particular
telecommunications markets and business segments in Latin America has been
based, in part, on the experience of other companies conducting business in the
United States and Western European telecommunications markets in the wake of
deregulation during the 1980s and early 1990s. In developing its Latin America
strategy, the Company identified the following market trends in the
telecommunications industry in the United States and Western Europe which it
believed would serve as models for the emerging telecommunications industry in
Latin America:
- THE INCREASE IN DEMAND FOR TELECOMMUNICATIONS SERVICES AS MARKETS
ARE DEREGULATED AND OPENED TO COMPETITION. During the ten year
period following the divestiture of AT&T in 1984, long distance
usage increased over 150 percent in the United States. Despite
rigorous competition, numerous new market entrants ranging from
infrastructure-based carriers, such as Sprint and MCI, to
entrepreneurial switched-based and switchless resellers of long
distance services have generated substantial revenues and have
increased their market share as the overall market has grown.
Long distance services, particularly international long distance
services, remain one of the most lucrative segments of the
overall international telecommunications industry.
- A RECURRING DEVELOPMENT PATTERN FOR NEW TELECOMMUNICATION
NETWORKS. In the United States, and in Western Europe, new market
entrants seeking to develop local, regional or international
network services have followed a recurring pattern based, in
large part, on the desire of governments to phase-in deregulation
and competition in an orderly manner. Typically, new market
entrants are granted licenses to provide private circuits for a
limited number of corporate clients. In time, these new networks
are allowed to introduce switching capabilities and to
interconnect to the established public switched network. In the
United States, this was the evolutionary cycle for CAPs
installing new metropolitan fiber optic networks, many of which
now operate as full service CLECs.
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- SIGNIFICANT COMPETITIVE ADVANTAGES FROM EARLY MARKET ENTRY. The
experience of other telecommunications services providers in the
United States indicates that early market entry is particularly
important for new network service providers. Other competitive
advantages that have resulted in rapid network installation well
in advance of competitors, such as preferable rights-of-way and
lower cost installation, enable a new entrant to more easily
capture customers while competing only against the incumbent
local carrier.
- USE OF WIRELESS TECHNOLOGIES TO CONNECT REMOTE SITES AND
NETWORKS. Fiber optic and other wireline network operators in the
United States have increasingly introduced the use of
satellite-based and other wireless technologies to extend their
networks to add new customers, to include remote sites, to link
stand alone networks and to provide access for their
private-network customers to other services or networks.
Based on market factors in Latin America and on the experience of new
network and service providers in the United States, the Company's three-fold
strategy for Latin America is to: (i) develop metropolitan fiber optic networks
in multiple Latin America commercial and financial centers where it can obtain
an early entry advantage; (ii) utilize these networks as a basis for offering a
wide range of services and access to other value-added services to corporate
customers and other telecommunications carriers and providers; and (iii) develop
regional and international long distance services to link its networks and
customers to the global telecommunications network.
The Company's strategy is to follow the strategy successfully
implemented by CAPs in the United States to install advanced switching equipment
that will enable the Company to provide both dedicated private network services,
as well as full switched services interconnected with the existing public
switched network. As a CLEC, the Company will be able to offer corporate
customers a full range of telephone services such as local switched services,
value-added services (i.e. Centrex), high capacity private voice and data lines,
dial up data lines and Internet access, as well as domestic and international
long distance services. The Company's goal is to become the single source
provider of comprehensive telecommunications services to its customers. To
accomplish this goal, the Company's strategy is to secure a growing portion of
customer's telecommunications business and, over time, through the provision of
additional integrated services, increase the customer's reliance on, and sense
of partnership with, the Company. The Company's strategy is designed to build a
base of recurring revenues and to take advantage of increasing requirements of
business customers for more effective and efficient solutions to their
telecommunications needs. These customers require maximum reliability, high
quality service, broad geographic coverage (including end-to-end connectivity),
solutions-oriented customer service and timely introduction of innovative
services. These customers demand that services be delivered in a cost-effective
manner and, preferably, from a single source. The Company believes that it will
be well-positioned to satisfy such customer requirements due to (i) its
specialized sales and service approach employing engineering and sales
professionals who design and implement customized, cost-effective
telecommunications solutions, (ii) the ongoing development and integration of
new telecommunications services and (iii) the anticipated deployment of
switching equipment and continued development of digital fiber optic networks
designed for redundancy and diversity. The Company believes that it can provide
its customers with complete local and long distance communications services and
achieve its strategic objectives by implementing the following strategies:
- RAPIDLY MIGRATE TO PROVIDING FULL SWITCHED SERVICES. The Company
intends to follow the strategy successfully implemented by CAPs
in the United States to install advanced switching equipment that
will enable the Company to provide both dedicated private network
services as well as full switched services interconnected with
the existing public switched network. The Company believes that
it is currently eligible to receive regulatory authority to
provide such services in Chile, and that it will be able to
provide such services in Peru's public and long distance markets
upon their deregulation, scheduled to occur in
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1999. As a CLEC, the Company will be able to offer its
corporate customers a full range of telephone services such as
local switched services, value-added services such as Centrex,
high capacity private voice and data lines, dial up data lines
and Internet access, as well as domestic and international
long distance services.
- FOCUS ON THE LATIN AMERICAN MARKET. The Company intends to
capitalize on opportunities presented by the rapidly changing
regulatory environment and the size of the Latin American
Market.
- PURSUE ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES. The
Company intends to pursue selective acquisitions of customer
bases or businesses, make investments in companies that
complement the Company's current operations or expand its
services or network capabilities and engage in strategic
alliances. The Company believes that these acquisitions,
investments and strategic alliances are an important means of
increasing network traffic volume and achieving economies of
scale.
- RAPIDLY EXPAND SALES, MARKETING AND DISTRIBUTION CAPABILITIES.
In order to enhance customer service and coverage, the Company
intends to establish a local, customer-oriented single point
of service sales structure, supported by product specialists.
The Company plans to implement this structure and exploit the
opportunities presented by the anticipated increased number
and size of its operational local networks and the
introduction of expanded service offerings by increasing its
sales force during 1997. The Company plans to hire personnel
with both voice and data sales experience to strengthen its
existing direct distribution structure, provide extensive
product and sales training and compensate personnel under a
highly incentivized program.
- INTEGRATE NETWORKS AND OPERATIONS. The Company's goal is to
integrate its various networks and operations in order to
achieve certain operating and cost efficiencies and to
position itself as provider of choice for multinational
corporations, small and medium sized business customers and
other telecommunications carriers that require an integrated
telecommunications service.
The Company's strategy is also designed to reduce risk exposure to any
particular market by building a portfolio of operating subsidiaries in multiple
markets. The Company intends to provide these entities with financial,
marketing, engineering and operational management expertise developed in highly
competitive markets and expects to facilitate access to its relationships with
telecommunications manufacturers, suppliers, vendors and international carriers.
The Company's overall business development strategy for a given subsidiary
typically includes one or more of the following elements:
- Introduction of previously unavailable technologies and services.
- Implementation of advanced information, routing and monitoring
systems.
- Leveraging of vendor relationships to take advantage of larger
scale purchasing power.
- Consolidation of corporate functions, including treasury,
information systems, purchasing and marketing.
- Leveraging of relationships with other international carriers and
service providers to gain market share and operational
efficiencies.
- Increasing efficiency of access to capital markets through the
United States parent company.
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As was the case in Chile and Peru, the Company intends to enter Latin
American markets initially by acquiring controlling interests in Latin American
companies that hold licenses, concessions or rights-of-way to install and
operate fiber optic networks or other complimentary telecommunications services
that enable the Company to develop new customer relationships. The Company may
acquire companies that (i) are already operational or in the process of
installing their networks or (ii) that have been issued licenses or concessions
but that are in their development or pre-installation phase. The Company may
also enter new markets or business segments through acquisitions of new
concessions, licenses or operating units by one of its existing Latin American
subsidiaries. While the Company intends to focus its acquisition and business
development strategy on Latin American markets, the Company may pursue
acquisitions or business opportunities in North America or in other
international markets if such an acquisition will provide the Company with (i)
new technologies or other expertise that it can apply in Latin American markets,
(ii) new vendor relationships, or (iii) high volumes of telecommunications
traffic to or from Latin America or that otherwise create operating efficiencies
and economies of scale for the Company.
The Company's long-term strategy is to integrate its various Latin
American networks and telecommunications services offerings.
COMPETITION
General. The international telecommunications industry is highly
competitive. The Company's success depends upon its ability to compete with a
variety of other telecommunications providers in each of its markets, including
global alliances among some of the world's largest telecommunications carriers.
Other existing and potential competitors include cable television companies,
wireless telephone companies, electric and other utilities with rights of way,
railways, microwave carriers and large end users which have private networks.
The intensity of such competition has recently increased and the Company
believes that such competition will continue to intensify as the number of new
market entrants increases. Many of the Company's existing and potential
competitors have substantially greater financial, marketing and other resources
than the Company. If the Company's competitors devote significant additional
resources to the provision of telecommunications services to the Company's
target customer base businesses, such action could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that the Company will be able to compete successfully
against such existing and potential competitors.
Competition for customers in the telecommunications industry is
primarily based on price and, to a lesser extent, on the type and quality of
services offered. The Company has no control over the prices set by its
competitors, and some of the Company's competitors may be able to use their
financial resources to cause severe price competition in the countries in which
the Company operates. Any such price competition would have a material adverse
effect on the Company's business, financial condition and results of operations.
Additionally, intensified competition in certain of the Company's markets may
cause the Company to reduce its prices. Such price reductions may reduce the
Company's revenue and margins.
Chile. 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 on Chile's former local services monopoly, CTC. Upon
deregulation, six sizable companies and several smaller companies began
competing in the long distance market. These six companies include CTC, Entel
(Chile's former long distance monopoly); TelexChile (Chile's former telex
company); VTR (a privately held cellular network and long distance operator);
Bell South Chile (a long distance and cellular services operator); and lusatel.
Immediately following deregulation, long distance prices fell dramatically, in
some cases to 30 percent of pre-competition levels. All carriers participating
in the price war incurred negative gross margins.
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However, prices have since rebounded and they are now relatively stable at about
70 percent of pre-competition levels. The Chilean telecommunications market
remains highly competitive.
CTC, Entel, TelexChile and VTR are currently providing public local
switched services in certain areas of Santiago and in other regions of Chile. In
the local market, the Company competes with these carriers, and with Teleductos,
a network construction company which also leases telecommunications circuits.
The Company has entered the market using state-of-the-art fiber optic technology
and a loop architecture that gives network efficiencies and capabilities that
the Company believes are not available on the networks of these other carriers.
In addition, the Company has the only right-of-way with Santiago's Metro that
enables it to install, access and operate its network efficiently throughout
Santiago's major business district. Other carriers operating in the downtown
Santiago region must currently dig through the streets and rent equipment space
from various landlords, in a much more time consuming and expensive network
management process.
Peru. Peru's telecommunications market is dominated by Telefonica del
Peru, a company formed by the merger in 1994 of the former local service
monopoly, Compania Peruana de Telefonos and Entel, the former long distance
monopoly. Telefonica del Peru is 35 percent owned by Telefonica de Espana.
Telefonica del Peru 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 del Peru 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. Peru's only other
telecommunications carrier, Tele2OOO, is a private company that currently
operates cellular, public payphone and cable television services in Lima and
other Peruvian cities. Tele2OOO's business is growing rapidly. To date, however,
Tele2OOO has focused largely on providing cellular and cable television
services.
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COUNTRY OVERVIEW
PERU
ECONOMIC AND POLITICAL OVERVIEW OF PERU*
Territory and Population. Peru is the third largest country in South America.
The total estimated population is 23.9 million. Peru is located on the western
part of the continent, and its Pacific coastline extends for 3,080 kilometers.
Peru shares borders with Ecuador, Colombia, Brazil, Bolivia and Chile.
Government and Political Situation. Democracy returned to Peru in 1980 after 12
years of military dictatorship. However, terrorist groups including the "Shining
Path" (Sendero Luminoso) and the "MRTA" (Movimiento Revolucionario Tupac Amaru)
surfaced during the 80's and early 90's and caused an estimated 25,000 deaths
and $25 billion in damages to property and the economy. In 1990, the traditional
political parties were displaced by the election of Alberto Fujimori, a
political outsider, who won the five year presidential term on an independent
ticket. President Fujimori's government made substantial progress toward
suppressing the terrorist activities of both the Shining Path and MRTA. The
progress included the arrest of the leader and the second level of leadership in
each terrorist group, as well as 2,000 others. 3,000 others surrendered on their
own under government amnesty protection. However, in December 1996, the MRTA
took 600 people hostage in the residence of Japan's Ambassador to Peru.
In 1992, President Fujimori dissolved the Congress and called for a new
Congressional body that would be responsible for the drafting of a new
Constitution. The new Constitution of Peru was adopted by a public referendum in
October 1993. It became effective on December 31, 1993.
The new Constitution sets up a system in which the executive power is
vested in a president under whom are two vice presidents. The legislature
consists of a unicameral congressional body with 120 seats that are elected
nationally and are not necessarily associated with any part of Peru. The
president and the representatives are elected for five year terms. The judicial
power is vested in a Supreme Court whose members are generally appointed,
although in special circumstances, they may be elected.
In April 1995, President Fujimori was elected to a second five year
term. Since the election, President Fujimori has continued down the path of
economic and political reforms. Further amnesty measures and a liberalization of
the system of land ownership have been implemented. In addition, Peru reached an
agreement to restructure its debt. The President's ruling alliance has a
majority in Congress and has seen little serious legislative opposition. Peru's
Constitutional Tribunal has ruled that President Fujimori cannot stand for
re-election in 2000, although this ruling is being challenged. Mr. Fujimori's
popularity has fluctuated during the hostage crisis.
The Peruvian Economy. During the Garcia administration (1985-1990), the economy
in Peru hit crisis proportions. Inflation rose to 2,775%, national production
declined to levels of 15 years earlier, and employment and real income declined.
In addition, payments on foreign debt were stopped and Peru was isolated from
the international financial system.
During his tenure, President Fujimori has successfully reduced
inflation and implemented reforms that have resulted in renewed economic growth.
President Fujimori liberalized price and wage controls in the private sector,
eliminated restrictions on capital flows, instituted emergency taxes to reduce
the fiscal deficit, liberalized interest rates, instituted a wide ranging
privatization plan and re-established relations with the international financial
community. In addition, he established an agenda to end corruption and bribery
in the judicial system and stop terrorism.
- ----------
* Data compiled from reports by the Economic Intelligence Unit on Peru in 1996,
The National Trade Data Bank Market Reports in 1995, the InterAmericas
Communications Corporation Fact Sheet, and Telefonica del Peru Prospectus
Statement.
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Growth
In 1993, Peru's Gross Domestic Product (GDP) grew 5.6%. In 1994, GDP
grew 12.6% and in 1995 GDP grew 6.9% to $58.4 billion. GDP growth for 1996 has
been estimated to have been 2.8%. Peru's GDP growth slowed in 1995 and slowed
further in 1996 as the government has reduced expenditures in an effort to avoid
an overheated economy and to combat a current account deficit. In addition,
there has been a significant decline in the growth of Peru's fishing industry
due to restrictions on harvests designed to conserve fish stocks. During the
first four months of 1996, the GDP declined by 1.6%. The composition of GDP in
Peru has changed significantly between 1965 and 1996. Electricity and
construction have grown, while mining and agriculture have declined. Fishing has
remained a major part of the economy. According to the EIU, growth has been
driven by large inflows of foreign investment into the telecommunications,
mining and fishing industry that fueled a boom in investment and subsequently
consumption.
Inflation
Inflation fell dramatically as a result of the President's
stabilization program from 7,649% in 1990 to 39.5% in 1993, 15.4% in 1994 and
10.2% in 1995. In 1996, inflation is expected in the range of 11% to 12%, with a
small increase driven by the current account deficit's depreciating impact on
the nuevo sol and a resulting increase in the price of imports. The EIU predicts
that inflation will remain in the 11%-12% range throughout 1997.
Interest Rates
Real interest rates have stabilized in 1996, after fluctuating
erratically over the past three years. Convertible currency borrowing rates in
mid-January 1997 averaged approximately 16.8%, with domestic currency borrowing
rates at approximately 31% in January 1997.
Currency
In the past decade, Peru has changed its currency twice. In 1985, the
currency has changed from "soles" to "intis" (1 inti= 1,000 soles).
In 1991, the currency was switched again from "intis" to "nuevo soles"
(1 nuevo sole = 1 million intis). President Fujimori established a free-floating
exchange rate, although the Central Bank can intervene by purchasing or selling
U.S. dollars to stabilize the market. In late 1995 and early 1996, the
current-account deficit and a slowdown in foreign investment brought downward
pressure on the exchange rate. Exchange rates remained constant during the
fourth quarter of 1996. The exchange rate at the end of 1996 was 2.62 nuevo
soles per one U.S. dollar. Monetary intervention has been used to defend the
currency and higher interest rates have been maintained. During 1996, the
devaluation of the nuevo sole against the U.S. dollar was approximately 3%.
Current-Account Capital Account & Trade Balance
Strong local currency and trade liberalization have resulted in an
increase in imports. The trade balance dropped from a surplus of $340 million
(1990) to a deficit of $2,116 million (1995). In 1996, the capital account stood
at a surplus of $2,608 million due mainly to direct investment, and the current
account maintained a deficit of $3,745 million due to the increase in the trade
deficiency and expenditures in financial services.
Debt
In October and November of 1990, Peru resumed payments on its current
debt to the World Bank and the IDB. In 1989, Peru began to repay its current
obligations to the IMF after the IMF threatened to expel Peru permanently from
membership.
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A support group created under the leadership of both the U.S. and
Japan, provided approximately $1 billion in financing to Peru between 1991 and
1992. The funds were provided as either donations or as concessionary loans with
low interest rates and long maturity periods. After the support group's
commitment was assured, the IMF approved the Peruvian stabilization plan and set
up a schedule for the arrears obligation. The World Bank entered into a similar
arrangement. The Peruvian government met all of the goals established by the
schedule and effectively rolled over $1.8 billion in loans and received $600
million in new loans.
In 1993, the Paris Club negotiations reduced annual debt payments for
1993-1995 in Peru from an expected $1 billion to approximately $400 million. In
addition, interest rates were re-evaluated, development aid debt and other
credits were rescheduled, and Peru received commitments and donations from other
donor countries and multilateral institutions that convened in Paris in June
1993.
In addition to rescheduling of debt, the IDB disbursed as IDB loans an
estimated $328 million total in 1994 and 1995, and the World Bank committed $100
million for social programs and $40 million credit for health care.
In October 1995, Peru reached an agreement with commercial banks to
restructure its public foreign debt. According to the debt restructuring plan,
the principal debt of $4.4 billion will be converted into long term bonds with a
maturity of 20-30 years. Creditors are offered three choices: (1) conversion
into 30 year par bonds with a low fixed rate of interest (three rising to five
percent max.), (2) 30 year discount bonds with a 45% principal reduction paying
LIBOR plus 3/16, and (3) front loaded interest reduced bonds, which initially
have a fixed interest rate and start to amortize after 8 years. Past-due
interest, which exceeds the value of the principal is to be restructured into
past-due interest bonds with a maturity of 20 years. The bond restructuring is
expected to be executed in July or August of 1996, subject to World Bank and IMF
approval of support.
Foreign Direct Investment
Foreign direct investment increased by $365 million during the fourth
quarter of 1996, to a total of $6.25 million. The communications, mining and
energy sectors represented the highest amounts of foreign investment. The IDB
has announced that over $300 million in new loans will be made [in 1997] for
infrastructure projects and new social programs.
International Agreements
Peru is a member of the Andean Trade Preference Act which gives
duty-free access to the United States and allows Peru to export to the United
States under favorable conditions. In addition, Peru has entered into a free
trade agreement with Bolivia and enjoys a zero percent tariff for certain
products under that agreement. Finally, Peru is discussing the creation of a
free trade zone in Peru for South Korean industries.
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SUMMARY OF PERUVIAN REGULATIONS ON THE
TELECOMMUNICATIONS INDUSTRY, FOREIGN INVESTMENT AND TAXATION
Peruvian Telecommunications Laws and Regulations. The principal features of
Peruvian regulation of telecommunications services include the General
Telecommunications Law (Supreme Decree No. 013-93-TCC, or "the
Telecommunications Law"), State Contracts, the General Regulation to the
Telecommunications Law (Supreme Decree No. 06-94-TCC, or "the General
Regulation"), and the Regulation for the Organization for Supervision of Private
Investments in Telecommunications (Supreme Decree No. 62-94-PCM, or "the OSIPTEL
Regulation"). These laws and their related governmental authorities constitute
the legal and regulatory framework within which the Company provides services in
Peru.
The Telecommunications Law sets out the basic framework for the
provision and regulation of telecommunications services, and has the 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. Under the General Regulation, the Ministry delegated
this power to the Organization for Supervision of Private Investments in
Telecommunications ("OSIPTEL").
OSIPTEL was created pursuant to the Telecommunications Law to oversee
the implementation of State Contracts. OSIPTEL is an independent regulatory body
which reviews on a regular basis the expansion, penetration, service, quality
and tariff structure mandates that are set forth in the State Contracts. Its
enforcement powers include the ability to apply sanctions against violators of
the Telecommunications Law. OSIPTEL's Board of Directors is composed of six
members who are appointed by various groups including the government and the
telecommunications industry.
A private entity may only provide telecommunications services in Peru
pursuant to a concession granted by OPTEL and in accordance with a State
Contract. 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 application for renewal two
years prior to the expiration of the concession. The State Contract outlines,
among other obligations: (1) 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 have the status of contract law, which under Peruvian
law provides the same treatment 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.
Local and Long Distance Services. The provision of dialtone and public, switched
local and long distance services in Peru will be provided exclusively by
Telefonica del Peru until 1999. In that year, the exclusivity provisions in
Telefonica del Peru'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 will seek to obtain
authorization to begin providing dialtone as well as public local and long
distance switched services.
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Technical Requirements
The Company is required to comply with regulations and detailed
technical plans promulgated by 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
OSIPTEL 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 OSIPTEL.
Both Telefonica del Peru 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
comply with the payment of certain fees, tariffs, and other charges 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).
Historically in Peru, local services rates charged by Telefonica del
Peru have been subsidized by both domestic and international long distance
rates. Installation fees exceed equivalent charges in other countries, but the
State Contracts now mandate gradual reduction to those fees.
The tariff levels for Telefonica del Peru under the State Contract
rebalance the telephone service charges by increasing the monthly service
charges while reducing the measured service charges, especially for long
distance. The State Contracts allow a fluctuation between 5% above and 15% below
the established telephone service maximum tariff rate set by the Contract. The
tariffs are currently computed according to two formulas, one annually and the
other quarterly. As of 1998, Telefonica del Peru's rates for local and long
distance service will be computed according to a formula that factors in
inflation and a "productivity factor," the components of which remain to be
determined, but will probably be based upon the degree of competitiveness in the
Peruvian telecommunications industry.
The Company may set its own tariff levels for its private line service,
subject to certain maximum tariff levels set by OSIPTEL.
Foreign Investment. 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 a non-discriminatory right to foreign investors
and provides mechanisms to stimulate and secure foreign capital. Foreign
investors can freely remit all of their profit and capital in hard currency and
are permitted to invest in any economic activity. Investors can sign a legal
stability agreement with the National Commission of Foreign Investment and
Technology to guarantee tax stability, free availability of foreign currency,
and non-discriminatory rights.
Taxation. 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.
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CHILE
ECONOMIC AND POLITICAL OVERVIEW OF CHILE*
Territory and Population. Chile is a narrow country stretching down the western
coast of South America and sharing borders with Peru, Bolivia and Argentina.
With over 6000 kilometers of Pacific coastline, Chile has a population of
approximately 14.2 million. Since its transition from a military dictatorship to
democracy in 1990, Chile's essentially free market economy has prospered. Chile
is the world's largest producer of copper, and a major exporter of fruit, fish
and timber products.
Government and Political Situation. Between 1973-1990, Chile was controlled by
the military dictator Augusto Pinochet, who implemented conservative economic
policies and privatization of many state enterprises. In 1990, Pinochet also
implemented a peaceful transition to democracy. Chile's government today is made
up of an executive branch with a President elected to a six year term, a
legislative branch with a 46 seat Senate and a 120 seat Chamber of Deputies and
an independent judiciary. The political environment in Chile is stable and
economically progressive. In December 1993, Eduardo Frei was elected to a
six-year presidential term, in an election interpreted by analysts to reflect
the Chilean voter's desire for continuity in their government. Parties of the
right control the upper house of the legislature, while parties of the left
control the lower house. This balance of power requires a consensus building
approach to legislation. In 1995, a constitutional crisis sparked by a Supreme
Court ruling on human rights threatened to break apart the Concertacion por la
Democracia, the ruling coalition of 7 political parties. However, a
strengthening of the relationship between the government and the Partido
Socialista (PS) will most likely result in continued political stability as it
is expected that the ruling coalition will back the current government until
1999. Mr. Eduardo Aninat, the chief economist under Frei, is expected to
continue a focus on capital market reform, export stimulation, and inflation
control.
The Chilean Economy. With one of Latin America's most market oriented economic
systems, Chile has a thriving economy. Chile has few restrictions on foreign
trade and investment and its businesses enjoy almost complete freedom to set
prices. Even after the aggressive privatization programs of Pinochet, Chile's
government maintains a significant role in the economy through its ownership of
several state enterprises including Codelco-Chile, the state owned copper
company.
Since 1990, Chile has successfully combated inflation and encouraged
foreign investment. GDP growth from 1991-1994 averaged 6.5% per year and during
that period over one million Chileans moved out of poverty. Chilean exports have
risen steadily over the past three years. Chile's rules of competition and
company formation are limited and fair. Chile benefits from a robust middle
class that is the mainstay of growth and consumer power in the country. The
country's strong reserve position, diversified export structure and continuing
high levels of domestic saving and investment make Chile well positioned to
continue achieving high levels of economic growth.
Growth
Chile's GDP growth exceeded estimates of 5%-6% in 1996, with growth
through June achieving approximately 8.1% on an annualized basis. Chile's GDP
growth in 1995 reached 7.9%. Growth has been driven by strong prices for Chile's
exports of copper, cellulose and fishmeal, as well as by activity in the
construction industry where both the government and the private sector have been
aggressively improving the country's infrastructure.
- ---------------------
* Data compiled from reports by The Economist Intelligence Unit on Chile
in 1996 and the American Embassy in Santiago, Chile in December 1995.
Bank of America 1996.
National Trade Data Bank Market reports in 1995.
19
<PAGE>
Inflation
Chile's government has successfully combated inflation over recent
years, with annual inflation falling to 11.4% in 1994 and 8.2% in 1995 and 7.4%
in 1996. The EIU predicts that inflation will fall to 5.5% by the end of 1997.
Chile's Central Bank is expected to seek to limit inflation to 5.0% in 1998.
Interest Rate
Almost all interest rates for periods over 30 days are indexed to
consumer price inflation and are expressed in terms of the Unidad de Fomento
(UF) inflation index. Interest rates in Chile exceed those in the U.S. For
example, bank deposits of up to a year earned an annual rate of 7.2% above
inflation and loan rates exceeded inflation by 9.6%. Moreover, 10 year central
bank bonds paid 6.5% over inflation and home mortgage rates exceeded inflation
by 8%.
Currency
Chile's Central Bank acts to keep the Chilean Peso within 12.5% above
or below a reference exchange rate based on a basket of currencies including the
US dollar, German Mark, and Japanese Yen. The Central Bank intervenes when the
rate nears the edges of the currency's band to avoid sharp fluctuations in the
band. There are two markets for foreign exchange trading, the official market
and a separate informal market. The central bank regulates access to the
official market that operates through a private banking system. Any foreign firm
that invests in the foreign investment saw D.L 600 is guaranteed the right to
purchase dollars through commercial banks so that it can repatriate profits and
capital. The informal rate is usually within one Peso of the official market
rate (0.25%). Most business transactions, however, occur through the banking
system. At the end of 1996, the exchange rate was 424.3 pesos per U.S. dollar.
Current Account and Trade Balance
In 1995 Chile showed a trade surplus of $1.3 billion with imports of
$14.7 billion and exports of $16 billion. In 1996 Chile recorded a trade deficit
estimated at $1.2 billion, primarily as a result of lower worldwide copper
prices and higher crude oil prices.
Capital Account
At the end of 1995, Chile had a capital account surplus of nearly $1.2
billion. In 1995, total gross direct foreign investment totaled nearly $4.3
billion. In November 1995, Chile had $14.4 billion in net international
reserves, up from $13.5 billion at the end of 1994.
Debt
In 1995, Standard & Poors gave Chile a rating of A-, the highest in
Latin America and the 10th highest of any emerging market. Between 1986 and
1991, a total of $10.9 billion was redeemed through debt conversion programs.
Chile has had access to the international financial markets and received
disbursements of $11.6 billion in loans (excluding IMF borrowings between 1986
and 1992). Chile's debt service burden, as measured by conventional ratios, has
fallen substantially, and Chile is one of the least indebted countries in Latin
America. Total debt service was 24.7% and 24.9% in 1995 and 1996, respectively.
20
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International Agreements
In 1994, Chile joined the Asia Pacific Economic Co-operation (APEC)
forum which opened the possibility of $200M-300M in new business. Chile was also
the first country besides the United States, Canada and Mexico to be invited to
joint NAFTA, although the devaluation of the peso in Mexico which threw
inter-American Commerce into chaos, has delayed the prospect of entry in NAFTA.
Chile is currently working on associating with other groups such as Mercosur,
with which it hopes to negotiate associate status, and the European Union. In
addition, Chile has signed free trade agreements with Mexico, Columbia,
Venezuela, and Ecuador and has tariff reducing agreements with Argentina and
Bolivia. Chile has also entered into talks with Peru to establish a free trade
zone by 2001. In November 1996, Chile and Canada signed a free-trade agreement
which includes both goods and services and certain side agreements similar to
those included in NAFTA. This agreement is expected to facilitate the addition
of Chile to NAFTA, which is expected to occur in 1988. In addition, Chile's
trade agreement with Mexico has been expanded to include services. Finally,
Chile pays very low tariffs in the US because it is eligible for the Generalized
System of Preferences. These trade agreements are expected to further stimulate
Chile's growth and international telecommunications needs.
21
<PAGE>
SUMMARY OF CHILEAN REGULATIONS ON THE
TELECOMMUNICATIONS INDUSTRY, FOREIGN INVESTMENT AND TAXATION
Chilean Telecommunications Law. References herein to (i) the "Telecommunications
Law" are to the Ley General de Telecomunicaciones (General Law of
Telecommunications), Law No. 18,168 (1982) and (ii) the "Amended
Telecommunications Law" are to the Telecommunications Law as amended by Law No.
19,277 (1994) and Law No. 19,032 (1994), in each case unless the context
otherwise requires.
Regulations and Concessions. The 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.
Amended Telecommunications Law and Decree 95. Law No. 19,277, effective
as of January 20, 1994, and Law No. 19,302, effective as of March 10, 1994,
modified the Telecommunications Law to promote greater competition in the
telecommunications sector and to establish a framework for a multicarrier
dialing system. The Amended Telecommunications Law embodies certain terms of a
January 4, 1994 Documento de Acuerdo (Multicarrier Agreement) among all the
telecommunications entities then existing in Chile, the Ministry of
Transportation and Telecommunications and the Secretary General of the
Presidency that (i) provided that only affiliates of local telephone carriers
rather than the local telephone carriers themselves can provide public long
distance services and (ii) established 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 being measured
from the inception of the multicarrier dialing system, as set forth in the
following table. Under the new law, companies that carry traffic in excess of
these maximums will be subject to substantial financial penalties and the
Undersecretary of Telecommunications may suspend their service.
22
<PAGE>
MAXIMUM MARKET SHARE CAPS
(in minutes)
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4
------ ------ ------ ------
<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 Amended 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, the
Amended Telecommunications Law authorizes long distance carriers to establish
direct connections to end users through their own networks. The Amended
Telecommunications Law is similar to the "equal access" regulations adopted in
the United States.
The framework established by the Amended Telecommunications Law was
implemented by Regulation No. 189 issued by the Undersecretary of
Telecommunications on June 10, 1994, and published in the Official Gazette on
August 1, 1994.
The Amended Telecommunications Law provides for substantial fines, the
suspension of service by the Undersecretary of Telecommunications or 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.
Decree 95, published on May 4, 1994 by the Ministry of Transportation
and Telecommunications, establishes for the principal local carrier new tariffs
for local services and domestic long distance calls and new inbound and outbound
international long distance access charges, as well as several such local
carrier administrative and service charges, payable to it by long distance
carriers.
Regulations and Technical Plans. The Company is required to comply with
regulations and detailed technical plans promulgated by the Ministry of
Transportation and Telecommunications that apply to such matters as the
transmission, routing, signaling and assignment of numbers in the Chilean
telephone network as well as use of the radio frequency spectrum. Before
concessionaires initiate service, their facilities must have been authorized by
the Undersecretary of Telecommunications 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 Undersecretary of Telecommunications.
Such termination can be appealed to the courts. In February 1992, the
Undersecretary of Telecommunications issued modifications to the Plan Tecnico
Fundamental de Encaminamiento Telefonico (the Fundamental Technical Plan for
Telephone Routing) to establish the framework for a multicarrier system for the
provision of public long distance services. Final regulations relating to the
multicarrier system are currently in the process of being implemented.
23
<PAGE>
Concessions. The 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 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. Under Law 19,277 (1994), concessions to provide public
telecommunications and intermediate telecommunications services are granted for
a term of thirty years; they can be renewed for a like period if so requested by
the concessionaire. However, as the Company's concession was granted before the
enactment of Law 19,277(1994), such concession is deemed to be indefinite in
accordance to its terms.
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.
Concessions to provide public telecommunications and intermediate
telecommunications services must contain information as to the type of service
and the term of the concession. Decrees that grant such concessions must contain
the following information: (i) the holder of the concession, (ii) the service
area, (iii) the technical characteristics of facilities as they may be specified
in the technical plans for such service, (iv) how long it will take to construct
facilities and begin service, (v) the location of radio stations and (vi) the
power, frequency and other technical characteristics of the radio stations. More
than one concession or permit may be granted for a particular type of service or
for a geographic area, except when there are technical limitations, such as
mobile telephones, in which case only two concessions may be granted for any one
geographic area.
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. Outages must be
corrected within 12 hours or users are entitled to indemnification and the
concession holder is subject to fines.
The Telecommunications Law provides that holders of concessions and
permits shall have access, on equal economic and technical basis, to satellite
systems and international cables.
The Telecommunications Law establishes the grounds upon which
concessions may be terminated by a ministerial decree of the Ministry of
Transportation and Telecommunications or a resolution of the Undersecretary of
Telecommunications. The grounds for termination include dissolution of the
concession holder, a failure to publish the grant of the concession in the
Official Gazette within thirty days of its notification to the applicant or
noncompliance with the terms and conditions specified in the Telecommunications
Law, the regulations promulgated thereunder or the concession. A holder of a
concession may appeal such termination to the Chilean courts if it believes that
the termination is illegal. 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.
The Company does not believe that its concessions will be terminated in
the foreseeable future. There can, however, be no assurance that its concession
will not be terminated for reasons beyond
24
<PAGE>
management's control. In the event of such a termination the Company believes
that it would have available legal recourse.
Tariff System. Currently, providers of domestic and international long distance
services are subject to maximum tariffs fixed by the Chilean government. The
Company expects that in the competitive environment of the multicarrier system,
rates will decline from present levels.
At present, the Company's services are subject to maximum tariffs
pursuant to the Telecommunications Law as modified by D.F.L. No. 1 (1987). Title
V of the Telecommunications Law, which was not substantially modified by Law No.
19,302, establishes the general principle that the prices of telecommunications
services, including the services of the Company, may be freely established by
service providers except if the Comision Resolutiva de la Fiscalia Nacional
Economica (the Resolutory Commission of the Fair Trade Enforcement Commission)
(the "Resolutory Commission"), a tribunal created by the Ley Antimonopolios (the
"Antimonopoly Law") has previously concluded that market conditions are
insufficient to guarantee that, absent tariff regulation, service providers
would set prices fairly. In May 1994, the Resolutory Commission determined that
the market conditions prevailing in the period previous to the implementation of
the multicarrier system in the domestic and international long distance
telephone markets, as well as the local telephone markets (excluding mobile
telephones) are not sufficient to permit providers to establish prices for such
services without regulation. As a result the Ministry of Transportation and
Telecommunications created a tariff which will be effective until 1999.
The Chilean government establishes the maximum tariffs of regulated
services by using a methodology that provides for the recovery of investments
and operating costs required to operate such services, as well as a profit based
on the cost of capital. Pursuant to the 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, Development and Reconstruction) (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 tariffing. The tariff for each service that is subject to tariff
regulation reflects the theoretical cost components associated with such
service.
The Telecommunications Law specifies that the tariff 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. The
law specifies that the 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 costs of
settling with foreign correspondents.
The Telecommunications Law specifies that providers 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 concessionholder 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
25
<PAGE>
and level of future tariffs. New tariff proposals must be presented to the
Ministries of Transportation and Telecommunications and the Economy 180 days
prior to the end of each five-year period.
The Company (as other intermediate service providers) is subject to the
maximum tariffs established by the corresponding authorities for the principal
intermediate service provider.
Foreign Investment and Exchange Controls. Foreign investments in Chile are
regulated by Law No. 18.840 of the Ministry of Finance published in the Official
Gazette on October 10, 1989 and further regulated in Chapter XIV ("Chapter XIV")
of the Compendium of Foreign Exchange Regulations issued by the Central Bank of
Chile (the "Foreign Exchange Regulations"), and the Foreign Investment Statute.
The Foreign Exchange Regulations. Chapter XIV of the Foreign Exchange
Regulations provides that legal entities, Chilean or foreign, who transfer
foreign currency to Chile foreign currency must register with the Central Bank
of Chile in order to sell such foreign currency, subject to the corresponding
statutory limitations and to those of a general character established by the
Central Bank at the time of the conversion to pesos of such foreign currency.
For these purposes, the Central Bank authorizes the investment and issues a
certificate of registration which is nominative and non-transferable, without
the prior approval of the Central Bank. A foreign entity which has used the
foregoing provision may freely reexport, totally or partially, the amounts
invested in Chile, subject to the corresponding statutory limitations, and to
those of a general character established by the Executive Committee of the
Central Bank which were in force at the time the corresponding certificate was
delivered.
Similarly, and in accordance with the above-mentioned conditions and
within applicable legal limitations, the Central Bank authorizes remittances of
profits (generated by the investment). Therefore, pursuant to the Foreign
Exchange Regulations, a foreign investor who has registered an investment in
accordance with the Foreign Exchange Regulations provisions may remit abroad the
amount registered with the Central Bank and the profits derived therefrom,
subject to the statutory limitation in force at the time the registration of the
investment was made. Presently, there are no such statutory limitations, and the
regulations of the Central Bank now in force are summarized below.
The foreign investor wishing to make an investment in Chile must request
the prior authorization from, and register the investment with, the Central
Bank. The application requesting such authorization must be made through a
commercial bank and must identify the foreign investor and indicate the amount
and purpose of the investment. If possible, the investor is requested to
anticipate when it expects to repatriate the amount invested.
Once the Central Bank grants approval (which normally takes place within
no more than 72 hours), the foreign investor may convert the investment into
local currency through the same commercial bank which processed the request to
make the investment. Within the following five days after such conversion, the
Central Bank is required to issue a certificate which will evidence the foreign
investor's right to transfer abroad the investment and the related profits, if
any.
The foreign currency registered with the Central Bank may be repatriated
only after a period of 12 months has lapsed from the date on which such
investment was made. Thereafter, the foreign investor may re-export the
investment, in whole or in part. In case the repatriation is for the total
amount invested, the investment certificate must be returned to the Central
Bank. Otherwise, the Central Bank simply makes annotations in the investment
certificate of any partial remittance. A foreign investor may assign its
investment rights at any time, subject to the prior authorization of the Central
Bank.
All profits derived from the registered investment may be re-exported
abroad. Profits may also be reinvested in Chile with the prior authorization of
the Central Bank, which reinvestment is also registered with the Central Bank.
The Central Bank issues a new investment certificate covering the reinvested
amount.
26
<PAGE>
In order to re-export the investment and its profits, the foreign
investor must present to the Central Bank a sworn statement attesting that the
local currency used to purchase the foreign currency required to make the
remittance abroad originates exclusively from the sale of the investment or from
profits generated by the authorized investment. In addition, the investor must
prove that the relevant Chilean income taxes have been duly paid. Presently, the
minimum amount of foreign currency to be registered under Chapter XIV of the
Foreign Exchange law is US$10,000.
The Foreign Investment Statute. The Foreign Investment Statute (DL-600) sets
forth objective standards applicable to all investors who qualify thereunder. It
has eliminated to a considerable degree the discretionary powers exercised by
Chilean authorities in the past. The Foreign Investment Statute is summarized
below.
Pursuant to Article 1 of the Foreign Investment Statute, foreign
entities, resident or domiciled abroad, which transfer foreign capital to Chile
can enter into an investment agreement with the Republic of Chile. A foreign
investor has the right to resort to the Chilean courts in case the Chilean
government does not allow it to exercise its rights contemplated in the
investment agreement. Foreign capital may consist of: freely convertible foreign
currency; tangible assets, in any form or condition; technology in its various
forms, subject to certain conditions, provided it can be capitalized; credits
associated with an approved foreign investment; capitalization of foreign loans
and debts in freely convertible currency, provided such contracts have been duly
authorized; and capitalization of profits which enjoy repatriation rights.
Any investment made under the Foreign Investment Statute requires the
prior approval of the Executive Vice President of the Foreign Investment
Committee unless (i) the value of the investment will exceed US$5 million; (ii)
the investment is to be made in sectors or activities normally performed by the
State and those carried out by public utility services; (iii) the investment is
to be made in the communications media; or (iv) the prospective investor is a
foreign State or a foreign public entity. In such cases, the prospective
approval has to be granted by the Foreign Investment Committee itself (whose
members are high governmental officials of Cabinet level). In general, approvals
are normally granted automatically since the present policy of the Chilean
Government is to be as liberal as possible in connection with the inflow of
foreign investments.
The Foreign Investment Committee has decided that any investment under
US$25,000 must be channelled through the Foreign Exchange Regulations.
Therefore, to qualify for the benefit of the Foreign Investment Statute any
proposed investment would have to exceed such amount.
The Foreign Investment Statute provides, as its basic principle, that
foreign investors will be treated in the same manner as local investors.
Therefore, no discrimination can be made against a foreign investor or a company
in which a majority or minority interest is owned by such an investor. This
principle is formally incorporated into an investment agreement which is entered
into between the Republic of Chile and the investor. The investment agreement
also grants the foreign investor the right to repatriate its investments and the
profits derived therefrom, without any limitation. The investment may be made
not only in foreign currency, but also in goods, etc. and may be made freely to
set up a new business, buy an existing business, buy property of any nature,
etc., provided, however, that there is no specific limitation in connection with
such activities contained in Chilean legislation. Presently, very few
restrictions exist. Existing restrictions relate to investment in certain
sectors which are politically sensitive or strategic, such as the communications
media, mining, shipping and commercial aviation.
The investment agreement is of an indefinite duration. Therefore, the
right, inter alia, to repatriate or transfer abroad the amount invested plus its
profits, will not be subject to a time limitation. However, the amount
representing the foreign investment (capital) may be repatriated abroad only
after a period of 12 months has elapsed from the date on which the investment
was brought into Chile. Profits derived therefrom are not subject to any time
limit and may be freely repatriated after paying the relevant Chilean taxes.
27
<PAGE>
A foreign investor may effectively assign its investment rights, at any
time, subject to the prior authorization of the Foreign Investment Committee.
Special situations to consider include the following:
For a period of ten years from the date of start-up of the
project in which the investment was made, foreign investors have the
right to fix the overall income tax payable in Chile at an effective tax
rate of 42%. This fixed income tax rate would apply to the corporate
taxes payable by the company in Chile in which the investment was made,
as well as those taxes payable by the foreign investors. At any time
during the ten year period, a foreign investor may waive its rights to
fix the tax rate and become subject to the normal taxation regime
applicable to Chilean companies.
Foreign investors may freeze custom duties and value added
taxes payable on the importation of equipment, machinery and other goods
which will comprise the foreign investment.
Foreign investors or companies in which they have made their
investment may be limited in their access to local credit.
Taxation. The following discussion summarizes the principal Chilean income tax
consequences of an investment in shares of a Chilean company by a person who is
neither domiciled in nor a resident of Chile for tax purposes (a "foreign
holder"). It is not intended as tax advice to any particular investor, which can
be rendered only in light of that investor's particular tax situation.
Under Chilean law, provisions contained in statutes, such as the tax
rates applicable to foreign investors, the computation of taxable income for
Chilean purposes and the manner in which Chilean taxes are imposed and
collected, may only be amended by another statute. In addition, the Chilean tax
authorities enact rulings and regulations of either general or specific
application and interpret the provisions of Chilean tax law. Chilean tax may not
be assessed retroactively against taxpayers who act in good faith relying on
such rulings, regulations and interpretations, but Chilean tax authorities may
change said rulings, regulations and interpretations prospectively. There is no
income tax treaty in force between Chile and the United States of America.
Cash Dividends and Other Distributions. Cash dividends paid by the Chilean
Companies with respect to shares held by the Company will be subject to a 35%
Chilean withholding tax, which is withheld and paid over by the Chilean
Companies (the "Withholding Tax"). A credit against the Withholding Tax is
available based on the level of corporate income tax actually paid by the
Chilean Companies on the income to be distributed (the "First-Category Tax");
however, this credit does not reduce the Withholding Tax on a one-for-one basis
because it also increases the base on which the Withholding Tax is imposed. In
addition, if the Chilean Companies distribute less than all of their
distributable income, the credit for the FirstCategory Tax paid by the Chilean
Companies is proportionately reduced. Presently, the First-Category Tax rate is
15%.
The example below illustrates the effective Chilean Withholding Tax
burden on a cash dividend received by a foreign holder (such as the Company),
assuming a Withholding Tax rate of 35%, an effective First-Category Tax rate of
15% and a distribution of 50% of the net income of the Chilean Companies
distributable after payment of the First-Category Tax:
28
<PAGE>
Chilean Subsidiary taxable income Ch $100.0
First-Category Tax (15% of Ch$100) (15.0)
Net distributable income Ch $ 85.0
Dividend distributed (50% of net distributable income) Ch $ 42.5
Withholding Tax (35% of the sum of Ch$42.5 dividend
plus Ch$7.5 First-Category Tax paid) (17.5)
----
Credit for 50% of First-Category Tax 7.5
----
Net Withholding Tax (10.0)
----
Net dividend received Ch $32.5
Effective dividend withholding rate 23.5%
In general, the effective dividend Withholding Tax rate, after giving effect to
the credit for the FirstCategory Tax, can be calculated using the following
formula:
Effective dividend (Withholding Tax rate) - (First-Category Tax rate)
-------------------------------------------------
Withholding Tax rate = 1 - (First-Category Tax rate)
Under Chilean income tax law, dividends generally are assumed to have
been paid out of the Company's oldest retained profits for purposes of
determining the level of First-Category Tax that was paid by the Company.
Dividend distributions made in property would be subject to the same Chilean tax
rules as cash dividends. Stock dividends are not subject to Chilean taxation at
distribution except for the reduction of the tax basis.
Capital Gains. Capital gains are included in taxable income if they are derived
from company business. The following income are not considered revenue: capital
contributions received, excess over par value received on the issue of shares,
stock dividends, return of capital, and gains on the sale of shares in
corporations or mining rights. There are no differences with regard to the
treatment of long-term and short-term holdings. Capital gains are not treated
differently from any other type of ordinary income and are adjusted for
inflation. Capital losses are not taxable.
Gain recognized on the sale of shares will be subject to both the
First-Category Tax and the Withholding Tax (the former being creditable against
the latter) 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 flat 15% First-Category Tax and no
Withholding Tax will apply.
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. In the event of a stock dividend
distribution, the tax basis of the shares and of the new shares will be
determined by dividing the purchase value of the shares by the total number of
shares and the new shares owned by the shareholder. Additionally, if the
investment in the shares has been made through DL-600, upon total or partial
liquidation of the investment notwithstanding the foregoing general rules, no
taxes will be applied on gains up to the U.S. dollar equivalent of the foreign
investment. If the investment is made through Chapter XIV, only the general
rules on capital gains will apply.
Value-Added Tax. An 18% value-added tax (IVA) applies to all sales transactions.
The tax is predicted to fall to 17% in 1998.
29
<PAGE>
RECENT DEVELOPMENTS
CONVERTIBLE DEBENTURES AND WARRANTS
On February 3, 1997, the Company issued $1,500,000 aggregate principal
amount of 7% Convertible Debentures due February 3, 2000 (the "Debentures") and
Warrants to purchase an aggregate of 100,000 shares of the Company's Common
Stock at any time or from time to time on or before February 2, 2002, at an
exercise price of $5.00 per share, subject to adjustment.
The Debentures. Interest on the outstanding principal amount of the
Debentures is compounded annually and payable on a semi-annual basis commencing
six months from the issue date. In lieu of cash interest payment, the holders of
the Debentures (each a "Holder," collectively the "Holders") may require the
Company to issue shares of its Common Stock or a combination of Common Stock and
cash as payment of the interest then due and payable. If the Holder elects to
receive all or a portion of the Common Stock, the Company shall issue to the
Holder such number of fully paid and non-assessable shares of Common Stock as
shall have an aggregate average closing bid price (as reported by NASDAQ) for
the five (5) consecutive trading days ending on the trading day prior to the
date such interest is payable, equal in amount to the interest which the Holder
has elected to receive in kind.
The Debentures are convertible, at the option of the Holders, into
shares of Common Stock at any time prior to maturity at a conversion price of
each share of Common Stock equal to the lesser of (i) the average closing price
(as reported by NASDAQ) of the Company's Common Stock for the five (5)
consecutive trading days ending on January 31, 1997 or, (ii) eighty-three
percent (83%) of the average closing bid price (as reported by NASDAQ) of the
Company's Common Stock for the five (5) consecutive trading days ending on the
trading day immediately preceding the conversion date. Notwithstanding the
foregoing, in the event that the closing bid price (as reported by NASDAQ) of
the Company's Common Stock for ten (10) consecutive trading days is equal to, or
less than $2.25 (as adjusted for stock splits, combinations and similar
recapitalizations affecting the Common Stock), the Company may, on one and only
one occasion, suspend the Holders' ability to convert any part of the
outstanding Debentures for a period not to exceed forty-five (45) days.
The Company is entitled to prepay the entire amount of the Debentures
or any portion thereof, at any time or from time to time, upon not less than ten
(10) (nor more than twenty (20) days' prior written notice. The prepayment price
shall equal One Hundred Seventeen Percent (117%) of the principal amount to be
prepaid plus all accrued and unpaid interest. Any such prepayment shall be made
pro rata among each of the Debentures in proportion to the original principal
amount thereof.
The obligation of the Company to pay the principal of and interest in
this Debenture, and to discharge all its other obligations thereunder, are
subordinate and junior in right of payment, to (x) all obligations of the
Company to commercial banks for borrowed money, (y) all obligations of the
Company to commercials banks under guarantees by the Company of obligations of
wholly-owned subsidiaries of the Company to commercial banks for borrowed money,
in each case, whether such obligations are outstanding at the date of the
Debentures or created or incurred after the date of the Debentures but prior to
the maturity of the Debentures and (z) all obligations of the Company to holders
of the Company's indebtedness issued in connection with one or more underwritten
public offerings by the Company.
The Series A Warrants. The Series A Warrants represent the right to
purchase an aggregate of one hundred thousand shares of Common Stock of the
Company at any time, or from time to time, on or before February 2, 2002 for the
exercise price of five dollars ($5.00) per share, subject to certain adjustments
in the exercise price or the number of Warrant shares.
30
<PAGE>
ACQUISITION OF RESETEL
On May 7,1996, the Company acquired all issued and outstanding shares
of Resetel, in exchange for 1,250,000 shares of Common Stock of the Company
issued to the shareholders of Resetel pursuant to a stock purchase agreement
dated May 7, 1996.
ACQUISITION OF HEWSTER, S.A. AND MERGER OF HEWSTER INTO HSI
On July 31,1996, the Company's wholly-owned subsidiary, HSI, acquired
99% of all issued and outstanding common stock of Hewster, S.A., a Chilean
corporation ("Hewster") controlled by Hernan Streeter Rios, the Company's former
President and Chairman of the Board. On September 2, 1996, the Company acquired
the remaining 1% of the issued and outstanding shares of Hewster from Hernan
Streeter Rios. Hewster was subsequently merged into HSI. The purpose of the
merger of Hewster into HSI was to consolidate Hewster's strong revenue base and
existing contracts to enhance the operation of HSI.
EMPLOYEES
As of March 28, 1997, the Company had 50 full-time employees, of which
approximately 23 are in administration, 20 are in operations and 7 are in sales
and marketing. The Company's employees are not represented by any labor union.
The Company believes that relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's corporate offices are located at 1221 Brickell Avenue,
Miami, Florida. These offices are occupied under a lease that expires in
December 1997. The Company's offices in Santiago, Chile are occupied under a
lease which expires in October 1997, at a rent of approximately $8,000 per
month. The Company is currently seeking alternative facilities for its operation
in Chile, and believes that such facilities can be obtained without unreasonable
effort or additional expense. The Company also occupies office space at a
separate location in Santiago under a lease which expires in March 2007. This
lease provides that the Company will purchase the property by no later than the
expiration date of the lease term. The Company intends to renegotiate the lease
to extend the lease term and eliminate its obligation to purchase the property.
The Company's offices in Lima, Peru are occupied under a three year lease
terminating on October 15, 1999 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.
31
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to
the conduct of its business. There is no pending legal proceeding to which the
Company is a party which, in the opinion of the Company's management, is likely
to have a material adverse effect on the Company's business, financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
32
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock was traded in the over-the-counter market and quoted
on the OTC Bulletin Board between June 1994 and November 1996. In November 1996,
the Common Stock began trading in the NASDAQ Small Cap market. The Common Stock
is currently quoted under the symbol "ICCA." Prior to October 6, 1994, the
Common Stock was quoted under the symbol "TDGI". As of March 23, 1997, there
were 202 holders of record of the Common Stock. On March 28, 1997, the closing
price of the Common Stock as reported on the NASDAQ Small Cap Market was $2.25.
The following table sets forth, for the periods indicated, the high and low bid
price for the Common Stock. The quotations do not include retail markups,
markdowns or commissions.
Period High Low
------ ---- ---
First Quarter 1995....................... $4.50 $2.00
Second Quarter 1995...................... 3.50 1.00
Third Quarter 1995....................... 2.25 0.50
Fourth Quarter 1995...................... 2.38 0.50
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
DIVIDEND POLICY
The Company has not declared or paid, and does not presently anticipate
declaring or paying in the foreseeable future, any cash dividends on the
outstanding Common Stock. The Company currently intends to retain any future
earnings to finance the Company's operations and growth. In addition, the
Company's ability to declare and pay cash dividends is affected, in part, by the
ability of the Company's present and future subsidiaries to declare and pay
dividends or otherwise transfer funds to the Company since the Company conducts
substantially all of its operations through its subsidiaries.
33
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto. Throughout this section,
InterAmericas Communications Corporation ("ICCA"), Hewster-Chile, S.A.
("Hewster"), VISAT Telecomunicaciones, S.A. ("VISAT") and Red de Servicios
Empresariales de Telecomunicaciones ("RESETEL") are collectively referred to as
the "Company".
Except for the historical information contained herein, this report
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from such forward-looking
statements. Factors which could cause or contribute to such differences include,
but are not limited to, uncertainty as to sufficiency of funds, management of
the business, technological changes, global economic factors, successful
development of telecommunications network and other factors.
OVERVIEW
During 1996 the Company concentrated its efforts on continuing the
development and marketing of its telecommunications network in Chile, initiating
the construction of its network in Peru, and arranging for the financing of its
ongoing business development.
In November, 1996, the Company recruited a new Chairman and Chief Executive
Officer, Patricio Northland, in order to improve the management of its existing
operations and accelerate the Company's strategy to develop and acquire
additional telecommunications operations in markets throughout Latin America.
Born in Chile, Mr. Northland is a U.S. citizen who brings to the Company
extensive relationships with telecommunications carriers and potential customers
throughout Latin America. In 1991, Mr. Northland founded AmericaTel Corporation,
a Miami based international telecommunications carrier, and, in 1992, Mr.
Northland successfully completed a joint venture agreement between AmericaTel
Corporation and Entel, Chile's major long distance carrier. Under Mr.
Northland's leadership, AmericaTel Corporation grew to provide satellite based
voice, data and fax telecommunications services to corporate customers in eleven
Latin American nations. In 1996, Mr. Northland sold his interest in AmericaTel
Corporation to Entel.
Prior to his development of AmericaTel, Mr. Northland spent seven years as
a marketing executive for IntelSat and PanAmSat, and three years as a
telecommunications network engineer for COMSAT and Northrop.
Mr. Northland is now taking steps intended to strengthen the marketing of
the Company's Chilean products and services and to accelerate the roll-out of
the Company's operations in Lima, Peru. In addition, Mr. Northland is actively
negotiating potential acquisitions in accordance with the Company's strategy to
develop an integrated network connecting markets throughout Latin America and
the United States, although no definitive agreements have been entered into to
date.
Mr. Northland plans to further strengthen the Company's management through
the recruitment of a highly experienced Chief Financial Officer and additional
corporate personnel to be based in Miami.
34
<PAGE>
This staff will provide both oversight of Latin American operations as well as
treasury and investor relations functions.
RESTATED FINANCIAL STATEMENTS
During August 1998 the Company restated its December 31, 1996 financial
statements to reflect the effect of revising the price per share of Company
common stock issued in connection with the May 1996 acquisition of Resetel from
$2.25 to $5.99 per share. The revised price per share is based on the average
closing price of the Company's common stock for the period of 14 days before and
after the date the terms of the acquisition were announced. The previously
recorded purchase price was based on the Company's March 1996 private placement.
The effect of the change in price per share increased the reported purchase
price from approximately $2,800 to $7,500. The effect of the restatement on (1)
the Company's annual statements of operations, related to increased amortization
expense, was to increase net loss by $136 resulting in a net loss of $4,762 for
the year ended December 31, 1996, (2) on the Company's stockholders' equity,
related to the increased purchase price, was to increase additional paid in
capital by $4,675, resulting in additional paid in capital of $23,168 as of
December 31, 1996, and (3) on the Company's net basic and diluted loss per
share, related to increased amortization expense of $0.01 per share, resulting
in net basic and diluted loss per share of $0.32 for the year ended December 31,
1996.
During October 1997 and August 1998 the Company amended certain financial
information as reported on Form 10-QSB during 1996. A summary of the
original and amended unaudited financial information and a description of the
related impact of the Company's statement of operations follows:
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996
------------ ---------- -------------
Revenues ....................... $ 58 $ 113 $ 477
Loss from Operations ........... (591) (1,646) (2,911)
Net loss, as amended ........... $ (621) $(1,711) $(2,981)
====== ======= =======
Net basic and diluted loss per
share as amended ............. $(0.05) $ (0.13) $ (0.21)
====== ======= =======
General and administrative
expenses ..................... 247 (a) 247 (a)
Depreciation expense ........... 110 (a) 240 (a) 240 (a)
Interest expense ............... 36 (a) 36 (a)
Amortization expenses .......... 64 (b) 122 (b)
------ ------- -------
Net loss, as originally reported $ (511) $(1,124) $(2,336)
====== ======= =======
Net basic and diluted loss per
share, as originally reported $(0.04) $ (0.08) $ (0.16)
====== ======= =======
- ------------
(a) Reflects (i) adjustment identified in the fourth quarter of 1996 to
provide depreciation on assets placed in use during the first quarter of
1996, for which depreciation initially had not commenced until the second
quarter of 1996 and (ii) adjustments for various expenses and costs
identified by the Company in the fourth quarter of 1996 as relating to
earlier 1996 quarters.
(b) Reflects the quarterly effect of the Resetel purchase price described in
the introductory language to the above table.
RESULTS OF OPERATIONS
The Consolidated Statement of Operations reflects a net loss of $4,762,000
for the year ended December 31, 1996. Losses are attributable primarily to
selling, general and administrative expenses incurred in the Company's
operations in Chile and Peru, as well as corporate expenses including legal and
accounting expenses related to the Company's business development activities.
The Company expects that it will continue to incur losses from operations during
1997. The Consolidated Balance Sheet dated December 30, 1996 reflects and
accumulated deficit of ($10,287,000).
The Company's Chilean subsidiary, Hewster, is currently focusing on
marketing voice and data private circuit connections, including Internet
connections, to corporate customers in Santiago. These activities are conducted
through direct sales, a co-marketing agreement with a long distance carrier and
marketing relationships with internet service providers ("ISPs"). In addition,
Hewster is offering its corporate customers the systems integration services
acquired in Hewster, S.A. These services include Local Area Network ("LAN")
design, equipment sales, installation and maintenance services. In Peru, the
Company's subsidiary, Resetel, is continuing to expand its fiber-optic network
throughout downtown Lima. Resetel began providing services to its first
corporate customers in February 1997. The Company's revenue for the year ended
December 31, 1996 was $652,000 as compared to $224,000 for the year ended
December 31, 1995. The growth in revenues was attributable to the Company's
acquisition of Hewster, S.A. and its systems integration consulting business and
the initial marketing of the Company's Santiago fiber-optic network services.
The selling, general and administrative expenses of the Company for the
year ended December 31, 1996 were $4,187,000 as compared to $1,918,000 for the
year ended December 31, 1995. The increase in expenses was due to the increase
in the number of employees of Hewster, the initiation of Resetel's network
construction and marketing operations in Peru, and legal and general corporate
expenses relating to corporate financing and business development activities.
During 1997 the Company will continue to focus on expanding its Chilean
customer base, developing and marketing its Peruvian network, and executing the
acquisition of complementary telecommunications networks in additional Latin
American markets, as and if available.
LIQUIDITY AND CAPITAL RESOURCES
The business of the Company requires substantial continuing capital
investment to complete the construction and development of its
telecommunications networks and services. Although the Company has been able to
obtain debt and equity financing to date, there can be no assurance that
sufficient additional financing will continue to be available in the future, nor
that it will be available on terms acceptable to the Company. The failure to
obtain such financing would have a material adverse effect on the Company's
business and prospects.
The Company received net proceeds of approximately $1.1 million in
connection with a private placement of Common Stock during March 1996 and $6.6
million in a private placement of Common Stock during June 1996. A significant
portion of these funds have been allocated to finance ongoing operating,
administrative and business development activities of the Company and to pay
debt which accrued from these activities. In addition, $1.5 million of these
funds have been utilized to acquire Hewster, S.A. (See "Recent Developments -
Acquisition of Hewster, S.A.) and approximately $1.45 million in proceeds were
used for capital expenditures.
35
<PAGE>
On February 3, 1997, the Company issued $1,500,000 aggregate principal
amount of its 7% Convertible Debentures due February 3, 2000 (the "Debentures").
The proceeds were used to finance the operating and administrative expenses of
the Company and construction of the Resetel Network. Interest on the outstanding
principal amount of the Debentures is compounded annually and payable on a
semi-annual basis commencing six months from the issue date. In lieu of cash
interest payment, the holders of the Debentures (each a "Holder", collectively
the "Holders") may require the Company to issue shares of its Common Stock or a
combination of Common Stock and cash as payment the interest then due and
payable. If the Holder elects to receive all or a portion of the Common Stock,
the Company is required to issue to the Holder such number of fully paid and
non-assessable shares of Common Stock as shall have an aggregate average closing
bid price (as reported by Nasdaq) for the five (5) consecutive trading days
ending on the trading day prior to the date such interest is payable, equal in
the amount to the interest which the Holder has elected to receive in kind.
The Debentures are convertible, at the option of the Holders, into shares
of Common Stock at any time prior to maturity at a conversion price for each
share of Common Stock equal to the lesser of: (i) the average closing price (as
reported by the Nasdaq Small Capital Market) of the Company's Common Stock for
the five (5) consecutive trading days ending on the trading day immediately
preceding January 31, 2000, (the "Fixed Conversion Price") or, (ii) eighty-three
percent (83%) of the average closing bid price (as reported by the Nasdaq Small
Capital Market) of the Company's Common Stock for the five (5) consecutive
trading days ending on the trading day immediately preceding the conversion
date. Notwithstanding the foregoing, in the event that the closing bid price (as
reported by Nasdaq) of the Company's common Stock for ten (10) consecutive
trading days is equal to, or less than $2.25 (as adjusted for stock splits,
combinations and similar recapitalizations affecting the Common Stock), the
Company may, on one and only one occasion, suspend the Holders' ability to
convert any part of the outstanding Debentures for a period not to exceed
forty-five (45) days.
The Company is entitled to prepay the entire amount of the Debentures or
any portion thereof, at any time or from time to time, upon not less than ten
(10) nor more than twenty (20) days' prior written notice. The prepayment price
is equal to One Hundred Seventeen Percent (117%) of the principal amount to be
prepaid plus all accrued and unpaid interest. Any such prepayment is required to
be made pro rata among each of the Debentures in proportion to the original
principal amount thereof.
The obligation of the Company to pay the principal of an interest in the
Debentures, and to discharge all its other obligations thereunder, are
subordinate and junior in right of payment, to (x) all obligations of the
Company to commercial banks for borrowed money, (y) all obligations of the
Company to commercial banks under guarantees by the Company of obligations of
wholly-owned subsidiaries of the Company to commercial banks for borrowed money,
in each case, whether such obligations are outstanding at the date of the
Debentures or created or incurred after the date of the Debentures but prior to
the maturity of the Debentures and (z) all obligations of the Company to holders
of the Company's indebtedness issued in connection with one or more underwritten
public offerings by the Company.
The Company estimates that it will need approximately $23 million in
additional debt and/or equity financing to (i) fully develop its fiber-optic
network and expand its customer base in Chile, (ii) complete first phase network
construction and marketing in Lima, Peru, and (iii) provide sufficient working
capital for its operations over the next year. There can be no assurance that
the Company will be successful in obtaining all or any of this required
financing. Should the Company not be able to obtain this financing in full, or
in part, the Company's business and prospects would be materially adversely
affected and the Company would be required to delay capital expenditures on
certain projects until such financing becomes available. This, in turn, would
delay the revenue streams associated with those projects until such time, if
any, as such financing becomes available. The Company estimates that the present
cash level would allow the Company to continue operations for approximately one
month, although no assurance can be given in this regard.
36
<PAGE>
OPERATING ACTIVITIES
Cash used by operating activities was $3,934,000 for the year ended
December 31, 1996 as compared to $2,150,000 for the year ended December 31,
1995. The cash flow used by operating activities is utilized for operational,
administrative and business development expenses incurred prior to the
generation of significant revenues. The Company's Chilean subsidiary, Hewster,
has substantially completed its core fiber-optic network, and it is now
marketing that network's services to business customers in Santiago. The
Company's Peruvian subsidiary, Resetel, commenced network construction
operations in Lima, Peru in October 1996 and will be focused largely on
continued network construction during 1997. The Company has already begun
connecting customers to its Lima network, and it will continue to connect
additional customers as this network expands throughout major Lima business
districts.
FINANCING ACTIVITIES
Net cash provided by financing activities during 1996 was $7,570,000. In
the quarter ended March 31, 1996, this Company raised net proceeds of $1.1
million in connection with a private placement of its Common Stock and, in June
1996, the Company raised net proceeds of $6.4 million, in connection with a
private placement of its Common Stock. The cash provided by financing in the
same period in 1995 was $3,263,000.00.
INVESTING ACTIVITIES
The net cash used in investing activities was $2,968,000 for the year ended
December 31, 1996 and $1,170,000 for the corresponding period in 1995. In 1996,
these funds were used primarily to purchase network equipment for the Hewster
and Resetel networks and to purchase Hewster, S.A. The Company's Chilean fiber
optic network now extends for 120 kilometers throughout downtown Santiago. The
Company's Peruvian fiber optic network now extends for over 30 kilometers
throughout downtown Lima.
EFFECTS OF INFLATION
The rate of inflation in Chile has been of the lowest rates in South
America for the past five years, with rates below double digit. The rate of
inflation in Peru was estimated to be between 11% - 12% in 1996, and the
Economist Intelligence Unit expects that it will remain in the same range during
1997. The Company does not believe that inflation had any significant impact on
operations in 1996, nor does it expect that it will have any significant impact
on operations throughout 1997.
37
<PAGE>
ITEM 7. FINANCIAL STATEMENTS Page Number
PAGE
NUMBER
------
Financial Statements:
Report of Independent Certified
Public Accountant F - 1
Consolidated Balance Sheets as of
December 31, 1996 and 1995 F - 2
Consolidated Statements of Operations for the years
ended December 31, 1996, December 31, 1995 and
December 31, 1994 F - 3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, December 31, 1995 and
December 31, 1994 F - 4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, December 31, 1995 and December 31
1994 F - 5
Notes to the Consolidated Financial Statements F - 6
38
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
<PAGE>
PART III
Incorporated by reference from the Company's definitive proxy statement
to be filed with the Securities and Exchange Commission.
40
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
(i) The Company filed a report on Form 8-K on October 15, 1996. The
Report contains statements on (A) the acquisition of Resetel, (B) the
acquisition by HSI of the remaining common stock of Hewster, S.A. and
(C) pro forma condensed consolidated financial statements of the
Registrant reflecting such acquisitions.
(b) EXHIBITS NO. DESCRIPTION OF EXHIBIT
------------ ----------------------
3.1 Articles of Incorporation of the Registrant, previously filed
as an exhibit to the Registrant's Form 8-A Registration
Statement, filed with the SEC on November 29, 1994, and
incorporated herein by reference.
3.2 Amended and Restated Bylaw of Registrant, previously filed as
an Exhibit to the Registrant's Form 8-A Registration
Statement, filed with the SEC on November 29, 1994, and
incorporated herein by reference.
10.1 Employment Agreement between ICCA and Patricio E. Northland
dated November 4, 1996.
10.2 Subscription Agreement dated February 3, 1997 by and between
NU Investments, LLC and the Registrant
10.3 InterAmericas Communications Corporation 7% Convertible
Debentures Due February 3, 2000 issued to NU Investments, LLC
10.4 Warrant to Purchase 60,000 Shares of Common Stock of
InterAmericas Corporation dated February 3, 1997 Issued to NU
Investments LLC
10.5 Subscription Agreement dated February 3, 1997 by and Between
KA Investments, LDC and InterAmericas Corporation
10.6 InterAmericas Communications Corporation 7% Convertible
Debentures Due February 3, 2000 issued to KA Investments, LDC
10.7 Warrant to Purchase 40,000 Shares of Common Stock of
InterAmericas Communications Corporation dated February 3,
1997 issued to KA Investments, LDC
10.8 Concession granted by Chilean Department of Transportation and
Telecommunications to HSI, dated July 19, 1991, re:
telecommunication services, and incorporated herein by
reference
41
<PAGE>
10.9* Modification of concession granted by Chilean Department of
Transportation and telecommunications to HSI, dated January
10, 1995 previously filed with the SEC on Form 10-KSB filed on
April 15, 1996
10.10* Modification of concession granted by Chilean Department of
Transportation and telecommunications to HSI, dated February
3, 1995, previously filed with the SEC on Form 10-KSB filed on
April 15, 1996
10.11 Stock Purchase and Sale Agreement dated May 9, 1996 between
the Company and Mayhelm, Ltd. the shareholder of Red de
Servicios de Telecomunicationes (Resetel) for the acquisition
by the Company of all issued and outstanding shares of
Resetel, previously filed as an exhibit to the Registrant's
Form 8-K filed with the SEC on October 15, 1996, and
incorporated herein by reference
10.12 Stock Purchase and Sale by and between the Registrant and
Mayhelm Ltd., previously filed as an Exhibit on Registrant's
Form 8-K, filed with the SEC on October 15, 1996, and
incorporated by reference
10.13 Stock Purchase and Sale Agreement by and between Registrant
and Hewster Servicios Intermedios, S.A. dated July 30, 1996,
previously filed as an Exhibit to the Registrant's Form 8-K,
filed with the SEC on October 15, 1996, and incorporated
herein by reference
10.14 Stock Purchase and Sale Agreement by and between Hewster
Servicios Intermedios, S.A. and Inverones Durna S.A. dated
July 30, 1996, previously filed as an Exhibit to the
Registrant's Form 8-K, filed with the SEC on October 15, 1996,
and incorporated herein by reference
10.15 Stock Purchase and Sale Agreement by and between Hewster
Servicios Intermedios, S.A. and Santiago Boza Saavedira dated
July 31, 1996, previously filed as an Exhibit to the
Registrant's Form 8-K, filed with the SEC on October 15, 1996,
and incorporated herein by reference
10.16 Stock Purchase and Sale Agreement by and between Registrant
and Devono Company LTD. dated July 4, 1996, previously filed
as an Exhibit to the Registrant's Form 8-K, filed with the SEC
on October 15, 1996, and incorporated herein by reference
27.1 Financial Data Schedule (for SEC use only)
- ----------
* Previously filed as an exhibit to the Registrant's Form 10-KSB for the year
ended December 31, 1994 and incorporated herein by reference.
42
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: April 15, 1997
INTERAMERICAS COMMUNICATIONS CORPORATION
By: /s/ PATRICIO E. NORTHLAND
---------------------------------
Patricio E. Northland, Chairman
In accordance with the Securities Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ PATRICIO E. NORTHLAND President, Chairman of the Board April 15, 1997
- ------------------------------ and Chief Executive Officer (Principal
Patricio E. Northland Executive Officer and Principal Accounting
Financial Officer)
/s/ PATRICIO SILVA ECHENIQUE Director April 15, 1997
- ------------------------------
Patricio Silva Echenique
/s/ PHILIP MAGIERA Director April 15, 1997
- ------------------------------
Philip Magiera
/s/ PAUL A. MOORE Director April 15, 1997
- ------------------------------
Paul A. Moore
/s/ DOUGLAS A. MCCLELLAN Director April 15, 1997
- ------------------------------
Douglas A. McClellan
/s/ GEORGE A. CARGILL Director April 15, 1997
- ------------------------------
George A. Cargill
</TABLE>
43
<PAGE>
InterAmericas
Communications
Corporation
Consolidated Financial Statements
For the three years ended
December 31, 1996
F-1
<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,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These consolidated 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.
The accompanying consolidated financial statements have been prepared on a
going-concern basis. As described in Note 3 to the consolidated financial
statements, the Company has suffered recurring losses and negative cash flows
from operations and has a working capital deficiency that raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments relating to the recoverability of
recorded asset amounts, including property and equipment and intangible assets,
that might be necessary should the Company be unable to continue as a
going-concern.
As described in Note 10, the Company has transactions and relationships with
related parties. Because of these relationships, it is possible that the terms
of these transactions may not be the same as those that would result from
transactions among wholly unrelated parties.
As described in Note 4, the Company has restated its financial statements for
the year ended December 31, 1996.
PricewaterhouseCoopers LLP
Miami, Florida
April 11, 1997,
except as to the fourth and fifth
Paragraphs of Note 4 which are as of
August 6, 1998
F-2
<PAGE>
INTERAMERICAS COMMUNICATION CORPORATION
CONSOLIDATED BALANCE SEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
DECEMBER 31,
--------------------
Assets 1996 1995
(As Restated, Note 4)
-------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 723 $ 57
Accounts receivable 113 8
Other receivables 97 7
Prepaid expenses 330 119
Due from related parties 26 93
Other 38 4
-------- -------
Total current assets 1,327 288
Property and equipment at cost, net 3,956 2,885
Intangible assets, net 9,568 1,166
Other assets 42 8
-------- -------
Total assets $ 14,893 $ 4,347
======== =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable:
Related parties $ 176 $ 779
Other 539 342
Accrued expenses 674 536
Notes payable, including $634 to related parties in 1995 -- 1,647
Lease obligations, current 114 11
Other current liabilities 171 --
-------- -------
Total current liabilities 1,674 3,315
Lease obligations, less current portion 248 210
Deferred income taxes 152 152
-------- -------
Total liabilities 2,074 3,677
-------- -------
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, 16,152,518 and 11,951,685 issued and outstanding
in 1996 and 1995, respectively 16 12
Additional paid in capital 23,168 6,153
Accumulated deficit (10,287) (5,525)
Cumulative translation adjustments (78) 30
-------- -------
Total stockholders' equity 12,819 670
-------- -------
Total liabilities and stockholders' equity $ 14,893 $ 4,347
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
1996 1995 1994
------------ ----------- -----------
(As Restated, Note 4)
Sales $ 652 $ 224 $ 34
Cost of sales 958 804 163
------------ ----------- -----------
Gross profit (loss) (306) (580) (129)
Selling, general and
administrative expenses 4,187 1,918 2,044
------------ ----------- -----------
Loss from operations (4,493) (2,498) (2,173)
Interest income 80 10 1
Interest expense (246) (319) (313)
Other (103) (66) (46)
------------ ----------- -----------
Net loss $ (4,762) $ (2,873) $ (2,531)
============ =========== ===========
Net loss per share $ (.32) $ (.31) $ (1.30)
============ =========== ===========
Weighted average common
shares outstanding 14,795,660 9,407,000 1,952,000
============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
ADDITIONAL CUMULATIVE
COMMON STOCK PAID-IN ACCUMULATED TRANSLATION ACCRUED
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENTS DISTRIBUTIONS TOTAL
------ ------ ------- ------- ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1993 19,302 $-- $ 676 $ (121) $ (80) $-- $ 475
Recapitalization of
HSI shares and other 331,008 -- 488 -- -- -- 488
Common stock issued in
private placements 315,714 -- 1,002 -- -- -- 1,002
Conversion of debt 4,500,000 5 197 -- -- -- 202
Issuance of notes payable
for purchase of common
stock of HSI -- -- -- -- -- (6,088) (6,088)
Stock issued for consulting
services 1,150,000 1 274 -- -- -- 275
Currency translation
adjustment -- -- -- -- 66 -- 66
Net loss -- -- -- (2,531) -- -- (2,531)
========== === ======= ======== ===== ====== =======
Balances at
December 31, 1994 6,316,024 6 2,637 (2,652) (14) (6,088) (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 7,487 -- -- -- 7,488
Imputed interest on related
party notes -- -- 40 -- -- -- 40
Stock option grants -- -- 73 -- -- -- 73
Currency translation
adjustment -- -- -- -- (108) -- (108)
Net loss -- -- -- (4,762) -- -- (4,762)
========== === ======= ======== ===== ====== =======
Balances at
December 31, 1996
(as restated, Note 4) 16,152,518 $16 $23,168 $(10,287) $ (78) $ -- $12,819
========== === ======= ======== ===== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
1996 1995 1994
---- ---- ----
(As Restated, Note 4)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(4,762) $(2,873) $(2,531)
Adjustments to reconcile net loss to cash
used in operating activities
Amortization and depreciation expense 842 396 76
Services exchanged for common stock 73 12 275
Interest converted to equity 49 183 --
Changes in assets and liabilities:
(Increase) in accounts receivable (105) (70) (9)
(Increase) in accounts receivable - related parties (73) -- --
(Increase) decrease in prepaid expenses (217) 167 (221)
(Increase) decrease in other current assets 93 35 304
(Increase) decrease in other assets (53) 76 (69)
Increase in accounts payable 401 402 622
(Decrease) increase in accounts payable - related parties (491) (66) 112
Increase (decrease) in accrued expenses 138 (406) 941
Increase in other current liabilities 171 -- 11
(Decrease) in deferred taxes -- (6) --
------- ------- -------
Cash used in operating activities (3,934) (2,150) (489)
Cash flows from investing activities:
Purchase of property and equipment (1,453) (720) (1,849)
Acquisition of Visat -- (450) (200)
Acquisition of Hewster (1,515) -- --
------- ------- -------
Cash used in investing activities (2,968) (1,170) (2,049)
------- ------- -------
Cash flows from financing activities:
Issuance of common stock 7,432 1,963 1,490
(Repayments) additions to notes payable (1,063) 893 1,067
Additions to notes payable to related party 1,232 407 92
Payments under leasing obligations (31) -- --
------- ------- -------
Cash provided by financing activities 7,570 3,263 2,649
------- ------- -------
Net increase (decrease) in cash and cash equivalents 668 (57) 111
Effect of exchange rate changes on cash (2) -- --
Cash and cash equivalents at beginning of year 57 114 3
------- ------- -------
Cash and cash equivalents at end of year $ 723 $ 57 $ 114
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
1. Organization and Business
InterAmericas Communications Corporation ("the Company") is a provider
of telecommunications services over a fiber optic network in Santiago,
Chile, and, through its subsidiaries, holds international long distance
services and satellite communication concessions and licenses. The
Company is currently integrating the Santiago fiber-loop and satellite
station. During 1996 the Company acquired a telecommunications
concession in Peru and commenced operations in Lima. The Company
operates in Chile as Hewster Chile, S.A. ("Hewster") and VISAT S.A.
("Visat") and in Peru as Red de Servicios de Telecomunicaciones, S.A.
("Resetel"). During the three years ended December 31, 1996, the
Company has only generated revenues from Hewster.
The Company is the successor to Theodore Games, Inc. ("TGI"), a "public
shell," which acquired Hewster Servicios Intermedios, S.A. ("HSI") on
July 15, 1994 (Note 4). The acquisition of HSI was treated for
accounting purposes as a reverse acquisition as if HSI acquired TGI;
accordingly, the historical financial statements are those of HSI. TGI
was originally incorporated in the State of Nevada in 1989 for the
purpose of marketing a copyrighted board game. On June 28, 1994, the
stockholders of TGI approved a 7.025 to 1 reverse stock split, which
resulted in the reduction of outstanding shares of common stock from
1,405,000 shares, par value $.001 to 200,000 shares, par value $.001.
On July 15, 1994, Maroon Bells Capital Partners, Inc. ("MBCP") acquired
from TGI's stockholders, 150,000 shares of common stock of TGI
representing 75% of the issued and outstanding stock of TGI for
$90. Effective July 31, 1994, the Company sold its board game
business. In September 1994, HSI acquired Visat S.A. (Note 4).
Effective October 5, 1994, TGI changed its state of incorporation from
Nevada to Texas and its name to InterAmericas Communications
Corporation.
During the three years ended December 31, 1996 the Company concentrated
its efforts on the installation of fiber optic cable, raising capital
and acquiring rights to erect and operate satellite earth stations. The
Company has developed a long-term financial plan to address future cash
flow needs which contemplates significant debt and equity financings
(Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies applied in the
accompanying consolidated financial statements follows:
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-7
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The future recoverability of its investments is contingent upon the
Company's ability to complete its construction of fiber optic networks
and to establish an effective marketing plan that will enable it to
generate revenues in its competitive environment. Given the
uncertainties surrounding these matters, as well as the Company's
limited operations to date, it is not presently known whether the
Company's investments in Hewster, Visat and Resetel will ultimately be
recoverable. No adjustment has been recorded in the accompanying
financial statements regarding the recoverability of invested amounts.
The Company's continuously evaluate the recoverability of its long lived
assets, and provides for impairment at the time which, in management's
judgment, the asset is impaired.
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.
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.
REVENUE RECOGNITION
Revenue is recognized as service is provided in accordance with
contracts with customers.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Maintenance and repair
expenditures are expensed as incurred and expenditures for improvements
which increase the expected useful lives of the assets are capitalized.
Depreciation expense is computed using the straight line method over the
estimated useful lives of the related assets.
INTANGIBLE ASSETS
Long-lived assets are reviewed by management for impairment whenever
events or changes in circumstances indicate that the projected cash
flows of related activities may not provide for cost recovery.
Goodwill relating to the acquisition of Hewster is being amortized using
the straight line method over the estimated useful life of ten years.
Satellite transmission rights acquired in the acquisition of Visat
consist of permits and concessions granted by the Chilean governmental
authorities. The consolidated statement of operations for the three
years ended December 31, 1996 do not reflect amortization of these
rights because the Company has not yet begun the use of satellite
transmission. The amortization will be calculated using the
straight-line method over their estimated remaining useful lives.
F-8
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The concession acquired by Resetel, which was granted by the Peruvian
governmental authorities to operate a fiber optic network in Peru, is
being amortized using the straight line method over the life of the
concession, which is twenty years.
NET LOSS PER SHARE
All share and per share data presented in the financial statements
reflect the retroactive effects of the 7.025 to 1 reverse stock split
which occurred on June 28, 1994. 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.
Antidilutive common stock equivalents are excluded from the calculation.
CONTRIBUTED SERVICES
Common stock exchanged for services and as inducements to make loans
have been recorded as consulting expense or interest expense and
additional paid in capital at the estimated fair value of the common
stock as determined by the Board of Directors of the Company.
INCOME TAXES
The Company uses the liability method in 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.
STOCK BASED COMPENSATION
On January 1, 1996 the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
SFAS 123 establishes a fair value based method of accounting for stock
based compensation, the effect of which can either be recorded or
disclosed. Upon adoption the Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25 "), and is providing proforma disclosure
of net income and earnings per share as if the fair value based method
prescribed by SFAS 123 had been applied in measuring compensation
expense for options granted in 1996 and 1995. In accordance with APB 25
compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities are translated at end-of-period rates of
exchange. Income, expense and cash flows are translated at weighted
average rates of exchange for the period. The resulting currency
translation adjustments are accumulated and reported as a component of
stockholders' equity. The effect of foreign exchange rates on the
consolidated statements of operations and of cash flows is not
significant.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements were reclassified to
conform with the 1996 presentation.
F-9
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
3. FINANCIAL CONDITION
The Company has developed a long-term financial plan to address future
cash flow needs. The plan contemplates significant debt and equity
financings to continue the development of the Chilean and Peruvian
telecommunications system and for working capital. In February 1995, the
Company completed a private placement equity offering which generated
net proceeds of approximately $3.2 million. In March and August of 1996,
the Company completed private placement equity offerings of $1.1 million
and $6.4 million, respectively. These proceeds have been used to
continue construction and development of the Chilean telecommunication
system, acquire Visat and Hewster S.A. and provide working capital. Also
in 1996, the Company converted $2 million of debt to equity. The Company
expects that additional financing will be obtained in the near future;
however, no assurance can be given that the financing will be obtained
and on reasonable terms.
The Company has suffered recurring losses and negative cash flow from
operations and has a net working capital deficiency that raise
substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
4. ACQUISITIONS
ACQUISITION OF HSI
On July 15, 1994, Theodore Games, Inc. ("TGI"), a public shell, now
InterAmericas Communications Corporation, acquired 99.9% of the
outstanding common stock of Hewster Servicios Intermedios, S.A. , a
Chilean Corporation controlled by the Company's former President and
Chairman of the Board. The acquisition was effected through the issuance
by TGI of two notes to the major stockholders of HSI in exchange for
99.9% of the issued and outstanding common stock of HSI. One of the
notes, in the amount of $3,112, was convertible into 2.3 million shares
of common stock of the Company and the second note, in the amount of
$6,088, was convertible into 4.5 million shares. This $6,088 convertible
note was recorded at December 31, 1994 as a liability and as a reduction
of stockholders' equity as "accrued distribution ". Effective September
30, 1994, the first note was converted and effective June 30, 1995 the
second note was converted. The former holders of the notes are currently
directors of the Company.
The acquistion of HSI was accounted for as a reverse acquisition,
resulting in HSI acquiring the Company, for accounting purposes, and the
recapitalization of HSI. The Company's negative net worth at the date of
acquisition was $8, represented by assets of $317 and liabilities of
$325. The historical stockholders' equity of HSI was restated for the
equivalent number of shares of TGI's stock outstanding.
F-10
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
ACQUISITION OF VISAT
Effective September 23, 1994, the Company acquired 11 of the 20 issued
and outstanding common shares of Visat for $200. Visat holds a
government concession to provide intermediate telecommunication
services, including the installation and operation of a network of up to
12 satellite earth stations, throughout Chile. The Company and an
officer of the Company and the remaining shareholder of Visat also
entered into an agreement, effective September 1994, whereby the Company
and the officer of the Company agreed to acquire the 9 remaining
outstanding shares of common stock of Visat for $900 ($850 for the
Company and $50 for the officer), payable during 1995. During 1995, the
Company paid $450 in cash and the remaining $400 was satisfied on June
30, 1995 by the issuance of 111,000 shares of common stock. Visat had no
operations and no assets other than a government concession to provide
intermediate telecommunication services. The acquisition is being
accounted for under the purchase method of accounting. The total cost of
the acquisition of Visat totaled $1,050 and is included as part of
intangible assets in the accompanying consolidated balance sheet.
ACQUISITION OF RESETEL
Pursuant to a stock purchase agreement dated May 7, 1996, the Company
acquired 100% of the issued and outstanding stock of Resetel, a Peruvian
corporation, in exchange for 1,250,000 shares of Common Stock of the
Company. In addition, the Company paid debts to the shareholders and
others in the amount of approximately $300. The purchase price of
approximately $7,500,( including $6 of capitalized acquisition costs),
net of cash acquired of approximately $300, has been substantially
allocated to a concession and is included as part of intangibles in the
accompanying consolidated balance sheet. The acquisition has been
accounted for under the purchase method of accounting. A fair value of
$5.99 was assigned to each share issued to the shareholders of Resetel.
The Company has restated its December 31, 1996 financial statements to
reflect the effect of revising the price per share of Company common
stock issued in connection with the May 1996 acquisition of Resetel from
$2.25 to $5.99 per share. The revised price per share is based on the
average closing price of the Company's common stock for the period of 14
days before and after the date the terms of the acquisition were
announced. The previously recorded purchase price was based on the
Company's March 1996 private placement. The effect of the change in
price per share increased the reported purchase price from approximately
$2,800 to $7,500. The effect of the restatement on (1) the Company's
annual statements of operations, related to increased amortization
expense, was to increase net loss by $136, resulting in a net loss of
$4,762 for the year ended December 31, 1996, (2) on the Company's
stockholders' equity, related to the increased purchase price, was to
increase additional paid in capital by $4,675, resulting in additional
paid in capital of $23,168 as of December 31, 1996, and (3) on the
Company's net basic and diluted loss per share, related to increased
amortization expense of $0.01 per share, resulting in net basic and
diluted loss per share of $0.32 for the year ended December 31, 1996.
During October 1997 and August 1998 the Company amended certain
financial information as reported on Form 10-QSB during 1996.
A summary of the original and amended unaudited financial information
and a description of the related impact of the Company's statement of
operations follows:
(IN THOUSANDS OF U.S. DOLLARS,
EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS NINE MONTHS
ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996
------------ ---------- -------------
Revenues ....................... $ 58 $ 113 $ 477
Loss from Operations ........... (591) (1,646) (2,911)
Net loss, as amended ........... $ (621) $(1,711) $(2,981)
====== ======= =======
Net basic and diluted loss per
share as amended ............. $(0.05) $ (0.13) $ (0.21)
====== ======= =======
General and administrative
expenses ..................... 247 (a) 247 (a)
Depreciation expense ........... 110 (a) 240 (a) 240 (a)
Interest expense ............... 36 (a) 36 (a)
Amortization expenses .......... 64 (b) 122 (b)
------ ------- -------
Net loss, as originally reported $ (511) $(1,124) $(2,336)
====== ======= =======
Net basic and diluted loss per
share, as originally reported $(0.04) $ (0.08) $ (0.16)
====== ======= =======
- ------------
(a) Reflects (i) adjustment identified in the fourth quarter of 1996 to
provide depreciation on assets placed in use during the first quarter of
1996, for which depreciation initially had not commenced until the second
quarter of 1996 and (ii) adjustments for various expenses and costs
identified by the Company in the fourth quarter of 1996 as relating to
earlier 1996 quarters.
(b) Reflects the quarterly effect of the Resetel purchase price described in
the introductory language to the above table.
Resetel obtained a local carrier concession to operate a fiber-optic
telecommunications network serving corporate customers in metropolitan
Lima, Peru and the port city of Callao. The Company has commenced the
construction and operation of the fiber-optic network in Peru.
Effective May 7, 1996 the Company has consolidated the financial
position, results of operation and cash flows of Resetel.
ACQUISITION OF HEWSTER, S.A.
On July 31, 1996 the Company's wholly owned subsidiary, Hewster
Servicios Intermedios, S.A. acquired 99% of Hewster, S.A., a Chilean
corporation controlled by the Company's former President and Chairman of
the Board.
F-11
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
On September 2, 1996, the Company paid $15 to the former Chairman of
the Board of Directors for the acquisition of the remaining 1% of the
outstanding stock of Hewster. The combined entity is operating under
the name of Hewster Chile, S.A.
The acquisition has being accounted for under the purchase method of
accounting. The estimated fair value of net assets acquired amounted
to approximately $183. The excess of cost over the fair value of net
assets acquired in the amount of $1,332 was recorded as goodwill and
is included as part of intangibles in the accompanying consolidated
balance sheet. Effective July 31, 1996, the Company has consolidated
the financial position, results of operation and cash flows of
Hewster.
5. Property and Equipment
Property and equipment consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------- --------------
<S> <C> <C>
Fiber optic network $ 2,868 $ 2,781
Office space - capital lease 209 218
Office equipment, including $311 in 1996 566 117
($0 in 1995) under capital leases
Furniture and fixtures 62 34
Motor vehicles, including $13 in 1996
($0 in 1995) under capital leases 114 -
Equipment pending installation and
construction in progress 1,021 -
Other 56 117
4,896 3,267
Less: accumulated depreciation, including
$132 in 1996 ($9 in 1995) under capital leases (940) (382)
$ 3,956 $ 2,885
</TABLE>
F-12
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
6. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
--------------- -------------
<S> <C> <C>
Satellite transmission rights $ 1,166 $ 1,166
Concession 7,494 -
Goodwill 1,289 -
9,949 1,166
Less: Accumulated Amortization (381) -
$ 9,568 $ 1,166
============== ===========
</TABLE>
7. Accrued Expenses
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------- --------------
<S> <C> <C>
Accrued expenses consist of:
Purchases of telecommunication equipment $ 376 $ 14
Professional fees 63 85
Interest 83 80
Salaries 14 67
Travel 17 -
Other 121 290
$ 674 $ 536
</TABLE>
F-13
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
8. Notes Payable
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-------- -------
<S> <C> <C>
Promissory note payable to unrelated party, dated May 2,
1995, bearing interest at 8% per annum, due May 1, 1996. This note is
secured by the shares of common stock of HSI owned by the Company, the
shares of VISAT owned by HSI, and all of the assets of HSI. As part of
this note, the Company issued the note holder warrants to purchase
200,000 shares of common stock of the Company at $3.50 per share. This
note, plus accrued interest, was paid on March 15, 1996. $ $1,000
Convertible promissory note payable to Laura Investments, Ltd (a
company wholly-owned by the former President of the Board), dated
September 30, 1995, bearing interest at 6% per annum. This note, plus
accrued interest, was converted into shares of common stock of the
Company as described in Note 9. 115
Convertible promissory note payable to Laura Investments, Ltd, dated
December 31, 1995, bearing interest at 6% per annum. This note, plus
accrued interest, was converted into shares of common stock of the
Company as described in Note 9. 284
Unsecured promissory note payable on demand, dated November 8, 1994,
bearing interest at 6% per annum through June 30, 1995, and the lesser
of 12% or the highest rate allowed by applicable law, thereafter. This
note, plus accrued interest, was converted into shares of common stock
of the Company as described in Note 9. 35
Notes payable to MBCP: On June 1, 1994 MPCB loaned the Company $300
pursuant to a convertible secured promissory note. MBCP assigned the
note as described in Note 10. The note bears interest at 8% per annum
and is due June 30, 1996. A portion of the note ($100) was converted
into 1.7 million shares of common stock of the Company on September
23, 1994 upon the completion of the HSI acquisition. The remaining
$200, plus accrued interest, was converted into shares of common stock
as described in Note 9. 200
Other notes payable 13
$ $1,647
</TABLE>
F-14
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
On July 8, 1994 the Company borrowed $1,000 through bridge loan
financings from Cabelex Electronique, Ltd. and Teleport Chile, Inc. The bridge
loans bear interest at 7% per annum and are due June 1, 1996. As an inducement
to make the loans, the Company also issued an aggregate of 500,000 shares of
restricted common stock valued at $.20 per share.
Cabelex Electronique, Ltd. transferred its interest in the $1,000 bridge
loan described above to Teleport and the outstanding principal plus accrued
interest at July 1, 1995, of $781 was converted into 388,900 shares of common
stock and the Company issued to Teleport warrants to purchase 388,900 shares of
common stock at $3.00 per share, which was no less than the fair market value of
the common shares as determined by the Board of Directors. The Company
attributed no value to the warrants given the financial condition of the Company
at the time.
In 1996, several loans from related parties were converted to shares of
the Company's common stock in accordance with the respective loan agreements, as
follows:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST CONVERSION CONVERSION SHARES
INTEREST LOAN DATE RATE DATE PRICE ISSUED
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Laura Investments:
Convertible promissory
note payable $ 115 9/30/95 6% 3/31/96 $ 1.87 61,499
Convertible promissory
note payable 284 12/31/95 6% 3/31/96 1.96 144,770
Convertible promissory
note payable 1,233 3/31/96 6% 3/31/96 1.96 628,980
Interest on promissory note-
9/30/95 $ 3 1.87 1,865
Interest on promissory note-
9/30/95 4 1.96 2,171
MBCP:
Convertible note payable $ 200 7/1/94 8% 3/1/96 $ 2.25 88,888
Ted Swindells note payable 35 11/8/94 6% 1/1/96 1.75 20,000
Accounts payable 81 Various 0% 3/1/96 1.75 46,515
Interest on notes payable $ 30 1.75 17,103
---------
1,011,791
=========
</TABLE>
9. Stockholders' Equity
Stock Options
In anticipation of the HSI acquisition, the Board of Directors granted,
in 1994, stock options to three key executives to each purchase 100,000
shares of common stock at a purchase price of $.35 per share, which was
no less than the estimated fair value of the common shares as determined
by the Board of Directors. The options are fully vested and expire in
2004. Subsequently, of the three, two key executives terminated their
relationship with the Company and 200,000 options were cancelled.
F-15
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
Under the terms of employment agreements dated August 1, 1994, three key
executives were granted options to purchase 350,000, 250,000, and
135,000 shares of common stock, respectively, all at $2.50 per share,
which was no less than the estimated fair value of the common shares as
determined by the Board of Directors. Subsequently, two key executives
terminated their relationship with the Company and 600,000 of the
options were cancelled.
On August 1, 1994, the Board of Directors granted one employee options
to purchase 65,000 shares of common stock and another employee options
to purchase 15,000 shares of common stock at a purchase price of $2.50
per share, which was no less than the fair value of the common shares as
determined by the Board of Directors. Options to purchase 50,000 shares
of common stock vest monthly over a three year period and expire on July
31, 2004. The remaining options to purchase 30,000 shares of common
stock vest immediately on the date of grant.
On August 1, 1994, for serving on the Board of Directors, options were
granted to each of the four directors to purchase 50,000 shares of
common stock at a purchase price of $2.50 per share, which was no less
than the fair value of the common shares as determined by the Board of
Directors. In addition, each director who served on a committee also
received options to purchase an additional 15,000 shares at $2.50 per
share. Six directors serving on a committee received a total of 90,000
options to purchase 90,000 shares of common stock. The options vested
immediately on the date of grant.
Effective in September 1994, the Board of Directors and a majority of
the stockholders of the Company approved a Long-term Incentive Plan (the
"Plan") for key employees. The Plan authorizes grants of incentive stock
options, non-qualified stock options and stock equivalents. On December
19, 1995, the Board of Directors approved a stock option plan for
directors for the years 1995 and 1996. Under this plan the Board, in
1995, granted to each director options to purchase 10,000 shares and to
certain directors additional options were given to purchase from 90,000
to 150,000 shares of common stock of the Company at a price based upon
the preceding ten day moving average of the closing price of the stock
at December 19, 1995, which was $1.96 per share. The total number of
options granted in 1995 was 840,000 options.
On December 19, 1995, the Board of Directors approved the issuance to
outside consultants options to acquire 120,000 shares of common stock of
the Company at a price based upon the preceding ten day moving average
of the closing price of the stock at December 19, 1995, which was $1.96
per share. The related estimated fair market value of these options
($12) was expensed in 1995.
On March 14, 1996, the Board of Directors granted to five directors and
an underwriter options to purchase 925,000 and 100,000 shares of common
stock respectively at a purchase price of $2.25 per share which was not
less than the fair value of the common shares as determined by the Board
of Directors. The Board also granted options to acquire 35,000 shares of
common stock to an outside consultant. The option price of $2.35 per
share was based upon the stock's trading price from the private
placement in February 1996. The related fair value of these options of
$73 is included as part of general and administrative expenses in the
accompanying consolidated statement of operations for the year ended
December 31, 1996.
F-16
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
On November 13, 1996, the Board of Directors granted an option to the
Chief Executive Officer to acquire 1,000,000 shares of common stock at a
purchase price based on the average closing price of the first fifteen
calendar days after the date of issue. The option vests over a two year
period and expires in ten years.
Private Placements
In October 1994, the Company commenced a private offering of its common
stock. The Company issued 315,714 shares of common stock and raised $1.1
million 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 $3.0 million, 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
$1.12 million 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
$6.4 million through August 1996, net of expenses of $520.
10. Related Party Transactions
Pursuant to a consulting agreement with MBCP and other consultants, as
amended on June 5, 1994, the Company issued 1,150,000 shares of common
stock as consideration for contributed advisory services in connection
with the recapitalization of HSI described in Note 4. These shares were
valued at $.25 per share by the Board of Directors. The Company has also
paid MBCP $25 and issued warrants to purchase 75,000 shares of common
stock at $.25 per share in connection with services rendered in
connection with the bridge loans totalling $1,000 described in Note 8.
Included in general and administrative expenses at December 31, 1994 are
approximately $300 relating to this compensation.
On July 12, 1994, the Company entered into an agreement with MBCP,
amended October 13, 1994, which provides that MBCP will perform certain
financial advisory services for the Company for a fee of $10 per month
up to a maximum of $50 per month. The term of the agreement was for
twelve months. The amounts expensed relating to this agreement were $100
and $60 in 1995 and 1994, respectively.
Pursuant to the terms of the MBCP Note (Note 8), MBCP was to receive
1,700,000 shares of common stock of the Company in connection with the
partial conversion of the Note in the amount of $100.
Pursuant to the terms of an agreement dated March 28, 1997, the Company
accrued $240 for consulting services provided by MBCP for the year ended
December 31, 1996.
In 1996, the Company purchased $493 in equipment where by MBCP acted as
a broker.
F-17
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
The Company purchased approximately $172, $205 and $946 of certain
telecommunication equipment in 1996, 1995 and 1994, respectively, from
Telectronic, S.A. A Director of the Company is a founder and general
manager of Telectronic, S.A. Prior to its acquisition, Hewster, S.A.
provided to the Company approximately $206 in telecommunications
services and $31 in communication services during 1995. The Company's
former President and Chairman of the Board controlled Hewster, S.A.
The Company has issued notes payable to related parties which are at
rates below those that would have prevailed had the notes been between
unrelated parties. The Company imputed additional interest to these
loans in the aggregate amount of approximately $40, $16 and $0 in 1996,
1995 and 1994, respectively, based on the prevailing market interest
rates. The imputed interest on the loans was credited as additional paid
in capital.
All debt converted to common stock of the Company during the three years
ended December 31, 1996 was transacted with related parties (Note 8).
Pursuant to employment agreements, the Company paid $110,000 and
$120,000 to a shareholder in 1996 and 1995, respectively, to serve as
President and Chairman of the Board (Note 13).
Other non-interest bearing balances with related parties are as follows:
Due from related parties:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
Inversiones Druma, S.A. $ 10 $ 45
Former Chairman of the Board and shareholder 16 48
$ 26 $ 93
</TABLE>
<TABLE>
<CAPTION>
Due to related parties: DECEMBER 31,
1996 1995
--------- ---------
<S> <C> <C>
Hewster, S.A. $ - $ 50
Inversiones Druma, S.A. - 118
Telectronic, S.A. 98 442
Directors - 38
Shareholders 16 50
MBCP - 81
General Manager 62 -
$ 176 $ 779
</TABLE>
F-18
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
During April and May, 1996, the Company borrowed an aggregate of $173
from Laura Investments, Ltd. (Note 8) pursuant to three Promissory Notes
(the "Notes"). The principal sum of the Notes, together with simple
interest at the rate of 6% per annum was paid on September 30, 1996. On
June 21, 1996, the Company borrowed an additional $50 from Laura
Investments, Ltd. pursuant to a Promissory Note. The principal sum
together with simple interest at the rate of 6% was paid on July 18,
1996.
In addition, the Company has entered into the following related party
transactions:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Expense reimbursements to directors $ 57 $ - $ -
Expense reimbursements to other shareholders 166 - -
Consulting fees to directors 50 56 -
Fixed asset installation and maintenance
services provided by a company controlled
by a shareholder - 150 -
Interest paid to a company controlled by a
shareholder 86 - -
Communication services paid to a company
controlled by a shareholder - 31 -
</TABLE>
11. Income Taxes
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, 1996 the Company has net tax operating loss carryforwards
of approximately $3,782 for U.S. income tax purposes and approximately
$4,466 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 2011 and do not expire for
foreign income tax purposes. As a result of a substantial change in the
Company's ownership at July 15, 1994, approximately $475 of the U.S. net
operating loss carryforward is subject to an annual limitation on the
amount that can be utilized.
F-19
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The Company's deferred tax balances consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---------------- ----------------
<S> <C> <C>
Deferred asset:
Net operating loss carryforward $ 2,081 $ 1,036
Deferred liability:
Purchase accounting adjustments (VISAT) (152) (152)
--------------- ----------------
1,929 884
Valuation allowance 1,929 (884)
--------------- ----------------
$ - $ -
=============== ================
</TABLE>
The valuation allowance results from the uncertainty surrounding the
future realization of the net operating loss carryforwards.
The Company has not yet filed its federal and income tax returns for the
year ended December 31, 1995, for which the extended due date was
September 16, 1996. Because of its net operating loss position,
management believes that the tax consequences of not yet filing the 1995
tax return will not have a material impact on the financial statements
and related income tax disclosures.
12. Employee Stock Option Plan
As discussed in Note 9, the Company established in 1994 a Long-term
Incentive Plan (the "Plan") for key employees. The Company applies APB
25 and related interpretations in accounting for the Plan. The policy of
the Company has been to grant options under the Plan 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 for
which $12 was charged to expense in that year. Had compensation costs
for the Company's Plan been determined based on the fair value at the
grant dates of options granted consistent with the method of SFAS 123,
the Company's loss and loss per share would have been increased to the
proforma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
-------------- ---------------
<S> <C> <C>
Net loss As Reported $ (4,762) $ (2,873)
Proforma (7,596) (4,375)
Net loss per share As Reported (.32) (.31)
Proforma (.51) (.47)
</TABLE>
F-20
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The Company's Plan provides for the granting of non qualified stock
options to officers and key employees. Under the terms of the Plan,
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 thirty sixth per month to the end of the option term. A summary
of the Plan's activity is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- -----------------------
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 1,565,000 $ 2.03 605,000 $ 2.13 - $ -
Granted 2,060,000 2.52 960,000 1.96 1,405,000 2.04
Exercised - - - - - -
Cancelled - - - - (800,000) 1.96
--------- -------- --------- ---------- --------- ---------
Outstanding at
end of year 3,625,000 $ 2.31 1,565,000 $ 2.03 605,000 $ 2.13
========= ======== ========= =========== ========= =========
Options
exercisable
at year-end 2,754,734 $ 2.54 1,250,350 $ 2.57 534,170 $ 2.10
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- -------------------------
WEIGHTED AVERAGE
EXERCISE NUMBER REMAINING NUMBER EXERCISE
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE PRICE
-------- ----------- ----------------- ----------- --------
<S> <C> <C> <C> <C>
$ .35 100,000 8 100,000 .35
$1.96 960,000 9 860,000 1.96
$2.25 1,025,000 10 1,025,000 2.25
$2.35 35,000 8 35,000 2.35
$2.50 505,000 8 401,400 2.50
$2.81 1,000,000 10 333,334 2.81
--------- ------------- ---------
3,625,000 9 years 2,754,734
========= =========
</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 used for grants in
F-21
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
1996 and 1995: volatility of 113 percent (computed based on historical
daily stock prices and considered management's best estimate), risk-free
interest rates of 6.72 percent, zero dividend yield and expected lives
ranging from 4 to 8 years. The fair value of options granted during 1996
and 1995 includes 2,060,000 shares at a weighted average exercise price
of $2.38 in 1996 and 960,000 shares at a weighted average exercise price
of $1.77 in 1995.
13. COMMITMENTS AND CONTINGENCIES
LEASE AGREEMENTS
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. In addition, the
Company must pay $250 over the next two years to Metro, S.A. for the
right to use their installations for the development of the optical
fiber telecommunications network and they are obligated to provide
certain telecommunications services to Metro, S.A.
Effective April 8, 1996 the Company entered into a one year lease
agreement by assignment from a consultant to the Company. The Company
maintained its corporate office at this location until December 31,
1996. The original leaseholder has occupied this office subsequent to
December 31, 1996.
Effective December 12, 1996 the Company entered into a one year lease
agreement for its corporate offices in Miami, Florida.
The following summarizes future minimum payments under non-cancelable
operating lease agreements at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 769
1998 776
1999 838
2000 923
2001 1,077
2002-2003 1,941
----------
$ 6,324
==========
</TABLE>
Rental expense for the leases was $508, $255 and $88 for the years ended
December 31, 1996, 1995 and 1994, respectively.
F-22
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
On March 10, 1995 the Company entered into a 144 month capital lease
agreement with Aetfin - Mixto, S.A. for the offices its occupies in
Santiago, Chile. During 1996 the Company entered into several 12-24
month capital lease agreements for office equipment and vehicles. Its
obligations under these leases, including deferred interest, are
summarized as follows:
<TABLE>
<S> <C>
1997 $144
1998 82
1999 34
2000 34
2001 34
Thereafter 176
----
504
Less-Amount Representing Deferred Interest (142)
----
Present Value of Obligations Under Capital Lease 362
Less-Current Portion (114)
----
$ 248
====
</TABLE>
EMPLOYMENT AGREEMENT
On November 13, 1996 the Board of Directors appointed a new Chairman and
Chief Executive Officer. The new Chairman and Chief Executive Officer
entered into an agreement with the Company through December 31, 1999.
Terms of the employment and severance agreement include base salary,
performance awards up to 100% of base salary, non-qualified stock option
to purchase 1,000,000 shares of the Company's common stock (Note 9), a
severance payment equal to 100% of base salary and 100% vesting of the
options.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was as follows:
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest 153 2 35
</TABLE>
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations of $172, $221 and $-0- were incurred in 1996,
1995 and 1994 respectively, as a result of the Company entering into
equipment leases.
Notes payable were converted to shares of the Company's common stock in
the amounts of $1,986, $7,219 and $202 in 1996, 1995 and 1994,
respectively.
In 1996, common stock was issued in connection with the acquisition of
Resetel in the amount of $2,813.
F-23
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
In 1995, common stock was issued for the purchase of Visat in the amount
of $400.
In 1994, notes payable were issued in connection with the acquisition of
Hewster in the amount of $6,088.
15. SUBSEQUENT EVENTS
CONVERTIBLE DEBENTURES AND WARRANTS
On February 3, 1997, the Company issued $1,500 aggregate principal
amount of 7% Convertible Debentures due February 3, 2000 (the
"Debentures") and Warrants to purchase an aggregate of 100,000 shares of
the Company's Common Stock.
Interest on the outstanding principal amount of the Debentures is
compounded annually and as payable on a semi-annual basis commencing six
months from the issue date. In lieu of cash interest payment, the
holders of the Debentures (each a "Holder," collectively the "Holders")
may require the Company to issue shares of its Common Stock, $.001 par
value per share ("Common Stock"), or a combination of Common Stock and
cash as payment of the interest then due and payable. If the Holder
elects to receive all or a portion of the Common Stock, the Company
shall issue to the Holder such number of fully paid and non-assessable
shares of Common Stock as shall have an aggregate average closing bid
price (as reported in the NASDAQ Small Cap Market) for the five
consecutive trading days ending on the trading day prior to the date
such interest is payable, equal in amount to the interest which the
Holder has elected to receive in kind.
The Debentures are convertible, at the option of the Holder, into shares
of Common Stock at any time prior to maturity at a conversion price of
each share of Common Stock equal to the lesser of (i) the average
closing price (as reported by the NASDAQ Small Cap Market) of the
Company's Common Stock for the five consecutive trading days ending on
the trading day immediately preceding the date of the Debentures (the
"Fixed Conversion Price") or, (ii) 83% of the average closing bid price
(as reported by The NASDAQ Small Cap Market) of the Company's Common
Stock for the five consecutive trading days ending on the trading day
immediately preceding the conversion date. Notwithstanding the
foregoing, in the event that the closing bid price (as reported by The
NASDAQ Small Cap Market) of the Company's Common Stock for ten
consecutive trading days is equal to or less than $2.25 (as adjusted for
stock splits, combinations and similar recapitalizations affecting the
Common Stock), the Company may, on one and only one occasion, suspend
the Purchaser's ability to convert any part of the outstanding
Debentures for a period not to exceed 45 days.
The Company is entitled to prepay the entire amount of the Debentures or
any portion thereof, at any time or from time to time, upon not less
than ten nor more than twenty days' prior written notice. The prepayment
price shall equal one hundred seventeen percent (117%) of the principal
amount to be prepaid plus all accrued and unpaid interest. Any such
prepayment shall be made pro rata among each of the Debentures in
proportion to the original principal amount thereof.
F-24
<PAGE>
INTERAMERICAS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------
The obligation of the Company to pay the principal of and interest in
this Debenture, and to discharge all its other obligations hereunder,
are subordinate and junior in right of payment, to (a) all obligations
of the Company to commercial banks for borrowed money, (b) all
obligations of the Company to commercial banks under guarantees by the
Company of obligations of wholly-owned subsidiaries of the Company to
commercial banks for borrowed money, in each case, whether such
obligations are outstanding at the date of the Debentures or created or
incurred after the date of the Debentures but prior to the maturity of
the Debentures and (c) all obligations of the Company to holders of the
Company's indebtedness issued in connection with one or more
underwritten public offerings by the Company.
The Warrants allow the grantee to purchase an aggregate of 100,000
shares of Common Stock of the Company at any time, or from time to time,
on or before February 2, 2002 for the exercise price of $5.00 per share,
subject to certain adjustments in the exercise price or the number of
Warrant shares.
F-25
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE COMPANY FILED UNDER ITEM 7. HEREIN AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 723
<SECURITIES> 0
<RECEIVABLES> 210
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,327
<PP&E> 3,956
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,893
<CURRENT-LIABILITIES> 1,674
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 12,803
<TOTAL-LIABILITY-AND-EQUITY> 14,893
<SALES> 652
<TOTAL-REVENUES> 652
<CGS> 958
<TOTAL-COSTS> 958
<OTHER-EXPENSES> 4,187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 246
<INCOME-PRETAX> 4,762
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<NET-INCOME> 4,762
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
</TABLE>
