UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) July 28, 1999
FIRSTCOM CORPORATION
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(Exact name of registrant as specified in its charter)
Texas 0-25194 87-0464860
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(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation or organization) File Number) Identification No.)
220 Alhambra Circle
Suite 910
Coral Gables, Florida 33134
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(Address, including zip code, of principal executive office)
(305) 448-4422
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Registrant's telephone number, including area code
N/A
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(Former name, former address and fiscal year, if changed since last report)
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ITEM 5. OTHER EVENTS
(a) On July 28, 1999, a subsidiary of the registrant entered into an
amended credit facility with Cisco Systems Capital ("Cisco"), a division of
Cisco Systems, Inc., which increased the registrant's existing credit facility
with Cisco from $10 million to approximately $30 million.
(b) The registrant is also filing this Form 8-K to reflect a change in
the report of PricewaterhouseCoopers LLP with respect to the registrant's
financial statements as of December 31, 1997 and for each of the two years in
the period ended December 31, 1997 from their report filed with the registrant's
Form 10-KSB for the year ended December 31, 1998. The revised report of
PricewaterhouseCoopers LLP and the related financial statements are filed as an
Exhibit to this Form 8-K.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
10.1 Amendment Agreement dated as of July 28, 1999 between FirstCom
Equipment Ltd. And Cisco Systems Capital Corporation.
10.2 Amended and Restated Promissory Note dated July 28, 1999.
99.1 Financial Statements of FirstCom Corporation as of December
31, 1997 and for each of the two years in the period ended
December 31, 1997.
2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 2, 1999 By: /s/ PATRICIO E. NORTHLAND
--------------------------------
Patricio E. Northland
Chairman of the Board, President
and Chief Executive Officer
3
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Amendment Agreement dated as of July 28, 1999 between FirstCom
Equipment Ltd. And Cisco Systems Capital Corporation.
10.2 Amended and Restated Promissory Note dated July 28, 1999.
99.1 Financial Statements of FirstCom Corporation as of December 31, 1997
and for each of the two years in the period ended December 31, 1997.
EXHIBIT 10.1
AMENDMENT AGREEMENT
THIS AMENDMENT AGREEMENT (this "Amendment"), dated as of July
28, 1999, is made between FirstCom Equipment, Ltd., a British Virgin Islands
corporation ("Borrower"), and Cisco Systems Capital Corporation , a Nevada
corporation ("Lender").
Borrower and Lender are parties to an Agreement dated as of
November 11, 1998 (the "Credit Agreement"). Borrower has requested that Lender
agree to certain amendments to the Credit Agreement. Lender has agreed to such
request, subject to the terms and conditions hereof.
Accordingly, the parties hereto agree as follows:
SECTION 1 DEFINITIONS; INTERPRETATION.
(a) TERMS DEFINED IN CREDIT AGREEMENT. All capitalized terms
used in this Amendment and not otherwise defined herein shall have the meanings
assigned to them in the Credit Agreement.
(b) INTERPRETATION. The rules of interpretation set forth in
Section 1.3 of the Credit Agreement shall be applicable to this Amendment and
are incorporated herein by this reference.
SECTION 2 AMENDMENTS TO THE CREDIT AGREEMENT.
(a) AMENDMENTS. The Credit Agreement shall be amended as
follows, effective as of the date of satisfaction of the conditions set forth in
Section 4 of this Amendment (the "Effective Date"):
(i) Section 1.1. of the Credit Agreement is hereby amended to
add the following definitions:
"'CONSOLIDATED TOTAL DEBT' means, as of any date of
determination, all Indebtedness of Borrower and its
Subsidiaries on such date, on a consolidated basis
and as determined in accordance with GAAP."
"'EBITDA' means, with respect to any fiscal period of
a Person, such Person's earnings (excluding
extraordinary items (determined in accordance with
GAAP), PLUS (except to the extent attributable to
extraordinary items (determined in accordance with
GAAP)) the amount of any interest, taxes,
depreciation, amortization deducted in arriving at
such earnings, and, without duplication, PLUS losses
and less gains upon dispositions of properties added
or deducted in arriving at such earnings."
1.
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(ii) Section 2 of the Credit Agreement is hereby amended to
add the following as Section 2.14:
"2.14 THIRD PARTY FINANCING. In the event that
Borrower obtains any commitment for third party
financing of the project costs proposed to be
financed by Lender, Lender's Commitment hereunder
shall be reduced on a dollar for dollar basis to the
extent of any credit support provided by Lender in
connection therewith (which credit support shall be
on terms acceptable to Lender in its sole
discretion)."
(iii) Section 3.2(b) of the Credit Agreement is hereby amended
to read as follows:
"(b) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. On
the date of such Loan, both before and after giving
effect thereto and to the application of proceeds
therefrom: (i) the representations and warranties
contained in Section 4.1 and in the other Loan
Documents shall be true, correct and complete on and
as of the date of such Loan as though made on and as
of such date; and (ii) no Default shall have occurred
and be continuing or shall result from the making of
such Loan. For purposes of this Section 3.2, clause
(i) shall take into account any amendments to any
disclosures made in writing by Borrower and any
Guarantor to Lender after the initial Borrowing Date
and approved by Lender. The giving of any notice of
borrowing and the acceptance by Borrower of the
proceeds of each Loan made following the initial
Borrowing Date shall each be deemed a certification
to Lender that on and as of the date of such Loan
such statements are true. Upon the request of Lender,
Borrower shall deliver to Lender a certificate of the
secretary or other appropriate officer of Borrower,
dated as of the Borrowing Date, or a date not more
than five (5) Banking Days prior to the applicable
Borrowing Date, certifying the representations,
warranties and statements described in this
subsection (b)."
(iv) Section 3.2 of the Credit Agreement is hereby amended by
adding the following as new subsection (d):
"(d) FINANCIAL CONDITIONS.
(i) MINIMUM TOTAL REVENUES. On a consolidated basis,
Borrower and its Subsidiaries shall not fail to
maintain total revenues of the Borrower and its
Subsidiaries in existence as of the Borrowing Date
for each quarterly period set forth below of not less
than the correlative amount indicated:
2.
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- ---------------------------------------- ---------------------------------------
QUARTERLY PERIOD ENDING REQUIRED AMOUNT
- ---------------------------------------- ---------------------------------------
June 30, 1999 $10,076,000
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September 30, 1999 $11,029,000
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December 31, 1999 $17,677,000
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March 31, 2000 $24,937,000
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June 30, 2000 $27,431,000
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September 30, 2000 $31,172,000
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December 31, 2000 $41,147,000
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March 31, 2001 $48,236,000
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(ii) MINIMUM EBITDA. On a consolidated basis,
Borrower and its Subsidiaries shall not fail to
maintain EBITDA for each quarterly period set forth
below of not less than the correlative amount
indicated (bracketed amounts (< >) are negative):
- ---------------------------------------- ---------------------------------------
QUARTERLY PERIOD ENDING REQUIRED AMOUNT
- ---------------------------------------- ---------------------------------------
June 30, 1999 [N/A]
- ---------------------------------------- ---------------------------------------
September 30, 1999 ($ 1,826,000)
- ---------------------------------------- ---------------------------------------
December 31, 1999 $ 1,371,000
- ---------------------------------------- ---------------------------------------
March 31, 2000 $ 6,269,000
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June 30, 2000 $ 6,895,000
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September 30, 2000 $ 7,835,000
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December 31, 2000 $10,343,000
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March 31, 2001 $15,844,000
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(iii) MAXIMUM TOTAL DEBT TO CAPITALIZATION. On a
consolidated basis, Borrower and its Subsidiaries
shall not permit the ratio of Consolidated Total Debt
to Capitalization to exceed the percentage amount set
forth below (determined as of the end of quarterly
period set forth below):
- ---------------------------------------- ---------------------------------------
QUARTERLY PERIOD ENDING PERCENTAGE
- ---------------------------------------- ---------------------------------------
June 30, 1999 78%
- ---------------------------------------- ---------------------------------------
September 30, 1999 76%
- ---------------------------------------- ---------------------------------------
December 31, 1999 75%
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March 31, 2000 76%
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June 30, 2000 76%
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September 30, 2000 76%
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December 31, 2000 76%
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March 31, 2001 76%
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(iv) MINIMUM CASH REQUIREMENTS. On a consolidated
basis, Borrower and its Subsidiaries shall at all
times maintain minimum cash (including cash
equivalents and restricted cash) of at least
$1,500,000."
3.
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(v) Section 5.1 of the Credit Agreement is hereby amended to
add the following as new subsection (j):
"(j) MINIMUM CASH REQUIREMENTS. Borrower shall
maintain at all times the minimum cash requirement as
specified in Section 3.2(d)(iv) herein."
(vi) Section 6.1(c) of the Credit Agreement is hereby amended
to read as follows:
"(c) FAILURE OF BORROWER TO PERFORM CERTAIN
COVENANTS. Borrower shall fail to perform or observe
any term, covenant or agreement contained in
subsections (b)(i), subsections (c) through (h), or
subsection (j) of Section 5.1."
(vii) Section 1(a) of the Schedule of Information is hereby
amended to read as follows:
"(a) Commitment: $29,500,000. The Loan facility will
consist of three tranches in the respective amounts
of (i) $7,000,000 ("Tranche A"), (ii) $9,500,000
("Tranche B"), and (iii) $10,000,000 ("Tranche C").
Borrower may request Loans under Tranche B only after
all Tranche A Loans have been disbursed, and may
request Loans under Tranche C only after all Loans
under Tranche B have been disbursed. Lender
acknowledges that, with respect to any Loan
disbursement under Tranche A only, Borrower need only
be in compliance with the condition set forth in
subsection (iv) of Section 3.2(d) and not any other
condition set forth in Section 3.2(d). As of July 26,
1999, the principal balance of all Loans outstanding
hereunder (excluding accrued interest) equals
approximately $2,784,245.25. The Commitment includes
Loan amounts currently outstanding under the Credit
Agreement. As used herein, the term "Loans" shall
mean all Loans under Tranche A, Tranche B and Tranche
C."
(viii) Section 1(b) of the Schedule of Information is hereby
amended to read as follows:
"(b) Fee(s): Utilization Fee: On or before the making
of any Loan by Lender under this Agreement, Borrower
shall have paid to Lender by check or wire transfer a
utilization fee in the amount of one percent (1%) of
the amount of such Loan. The parties acknowledge that
no utilization fee shall be payable with respect to
any Loans made prior to July 28, 1999."
(ix) Section 2(d)(ii) of the Schedule of Information is hereby
amended to read as follows:
4.
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"(ii) Lender shall have been furnished copies of the
Leases (including any lease schedules and amendments
or modifications thereto) to be entered into by the
Borrower with FirstCom S.A. (Peru) and FirstCom Long
Distance S.A. (Chile) (the "Leases"), which Leases
shall permit the Liens created under the Security
Agreement and shall otherwise be in form acceptable
to Lender;"
(x) Section 2(d)(iv) of the Schedule of Information is hereby
amended to read as follows:
"(iv) At the time any Loan is made, the ratio of the
amount of all Loans outstanding (after giving effect
to the making of such Loan) to the value of the Cisco
Products financed shall not be more than 0.74 to
1.00."
(xi) Section 2(d) of the Schedule of Information is hereby
amended to add the following as new subsection (v):
"(v) Together with each notice of borrowing, Borrower
shall deliver to Lender copies of any schedules,
amendments or other modifications, if any, to any
Lease submitted or executed subsequent to the
immediately preceding notice of borrowing."
(b) REFERENCES WITHIN CREDIT AGREEMENT. Each reference in the
Credit Agreement to "this Agreement" and the words "hereof," "herein,"
"hereunder," or words of like import, shall mean and be a reference to the
Credit Agreement as amended by this Amendment.
SECTION 3 FEES.
(a) DOCUMENTATION DEPOSIT. Borrower has paid to Lender a
documentation deposit in the amount of $15,000. Such amount shall be applied (i)
to the utilization fee payable in connection with the first Loan disbursement
hereunder, or (ii) if the conditions set forth in Section 4 of this Amendment
are not satisfied, to the legal fees and expenses owing to Lender in connection
with this Amendment and the Credit Agreement (with any excess amount being
refunded to Borrower).
SECTION 4 CONDITIONS OF EFFECTIVENESS. The effectiveness of
Section 2 of this Amendment shall be subject to the satisfaction of each of
the following conditions precedent:
(a) FEES AND EXPENSES. Borrower shall have paid all fees then
due in accordance with Sections 3(a)(ii) of this Amendment.
(b) AMENDMENTS TO OTHER LOAN DOCUMENTS. Lender shall have
received the following amendments, waivers and consents with respect to the
other Loan Documents, in form and substance satisfactory to it:
(i) the Amended and Restated Master Promissory Note, executed
by Borrower.
5.
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(c) DOCUMENTS AND ACTION RELATING TO COLLATERAL. Lender shall
have received the following, in form and substance satisfactory to it:
(i) executed copies of all UCC-1 financing statements
necessary or appropriate in the reasonable opinion of Lender to continue the
perfected security interests
(d) ADDITIONAL CLOSING DOCUMENTS AND ACTIONS. Lender shall
have received the following, in form and substance satisfactory to it:
(i) copies of the Lease(s) (including any lease schedules, and
any amendments or modifications thereto) entered into by the Borrower with
Borrower's Columbian Subsidiary, which Lease(s) shall permit the Liens created
under the Security Agreement and shall otherwise be in form acceptable to
Lender;
(ii) evidence that the Persons party to the Lease described
above have been irrevocably directed and instructed to make all payments due
under the Lease to the account of Lender at the California Bank;
(iii) evidence that all (A) authorizations or approvals of any
Governmental Authority, and (B) approvals or consents of any other Person, if
any, required in connection with the execution, delivery and performance of this
Amendment shall have been obtained;
(iv) a certificate of a senior officer of Borrower, stating
that (A) the representations and warranties contained in Section 4 and in the
amendments to the other Loan Documents are true and correct on and as of the
date of such certificate as though made on and as of the Effective Date and (B)
on and as of the Effective Date, after and giving effect to the amendment of the
Credit Agreement contemplated hereby, no Default shall have occurred and be
continuing; and
(v) a certificate of the Secretary or Assistant Secretary of
Borrower, dated the Effective Date, certifying (A) copies of the resolutions of
the Board of Directors of Borrower authorizing the execution, delivery and
performance of this Amendment and the amendments to the other Loan Documents and
(B) the incumbency, authority and signatures of each officer of Borrower
authorized to execute and deliver this Amendment and the amendments to the other
Loan Documents.
(e) LEGAL OPINIONS. Lender shall have received the opinion of
Borrower's counsel, dated the Effective Date, in substantially the form of
Exhibit A.
(f) MATERIAL ADVERSE CHANGE. On and as of the Effective Date,
there shall have occurred no Material Adverse Change since the date of this
Amendment.
(g) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. On the
Effective Date, after giving effect to the amendment of the Credit Agreement
contemplated hereby:
(i) the representations and warranties contained in Section 4
and in the amendments to the other Loan Documents shall be true and correct on
and as of the Effective Date as though made on and as of such date; and
6.
<PAGE>
(ii) no Default shall have occurred and be continuing.
(h) ADDITIONAL DOCUMENTS. Lender shall have received, in form
and substance satisfactory to it, such additional approvals, opinions, documents
and other information as Lender may reasonably request.
SECTION 5 REPRESENTATIONS AND WARRANTIES. To induce Lender to
enter into this Amendment, Borrower hereby confirms and restates, as of the date
hereof, the representations and warranties made by it in Section 4.1 of the
Credit Agreement and in the other Loan Documents. For the purposes of this
Section 5, (i) each reference in Section 4.1 of the Credit Agreement to "this
Agreement," and the words "hereof," "herein," "hereunder," or words of like
import in such Section, shall mean and be a reference to the Credit Agreement as
amended by this Amendment, and each reference in such Section to "the Loan
Documents" shall mean and be a reference to the Loan Documents as amended as
contemplated hereby, and (ii) , clause (i) shall take into account any
amendments to any disclosures made in writing by Borrower and any Guarantor to
Lender after the Closing Date and approved by Lender.
SECTION 6 MISCELLANEOUS.
(a) CREDIT AGREEMENT OTHERWISE NOT AFFECTED. Except as
expressly amended pursuant hereto, the Credit Agreement shall remain unchanged
and in full force and effect and is hereby ratified and confirmed in all
respects. Lender's execution and delivery of, or acceptance of, this Amendment
and any other documents and instruments in connection herewith (collectively,
the "Amendment Documents") shall not be deemed to create a course of dealing or
otherwise create any express or implied duty by it to provide any other or
further amendments, consents or waivers in the future.
(b) NO RELIANCE. Borrower hereby acknowledges and confirms to
Lender that Borrower is executing this Amendment and the other Amendment
Documents on the basis of its own investigation and for its own reasons without
reliance upon any agreement, representation, understanding or communication by
or on behalf of any other Person.
(c) COSTS AND EXPENSES. Borrower agrees to pay to Lender on
demand the reasonable out-of-pocket costs and expenses of Lender, and the
reasonable fees and disbursements of counsel to Lender, in connection with the
negotiation, preparation, execution and delivery of this Amendment and any other
documents to be delivered in connection herewith. Such costs and expenses may be
paid out of the documentation deposit pursuant to the terms of Section 3(a) of
this Amendment.
(d) BINDING EFFECT. This Amendment shall be binding upon,
inure to the benefit of and be enforceable by Borrower, Lender and their
respective successors and assigns.
(e) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
7.
<PAGE>
(f) COMPLETE AGREEMENT; AMENDMENTS. This Amendment, together
with the other Amendment Documents and the other Loan Documents, contains the
entire and exclusive agreement of the parties hereto and thereto with reference
to the matters discussed herein and therein. This Amendment supersedes all prior
commitments, drafts, communications, discussions and understandings, oral or
written, with respect thereto. This Amendment may not be modified, amended or
otherwise altered except in accordance with the terms of Section 7.1(a) of the
Credit Agreement.
(g) SEVERABILITY. Whenever possible, each provision of this
Amendment shall be interpreted in such manner as to be effective and valid under
all applicable laws and regulations. If, however, any provision of this
Amendment shall be prohibited by or invalid under any such law or regulation in
any jurisdiction, it shall, as to such jurisdiction, be deemed modified to
conform to the minimum requirements of such law or regulation, or, if for any
reason it is not deemed so modified, it shall be ineffective and invalid only to
the extent of such prohibition or invalidity without affecting the remaining
provisions of this Amendment, or the validity or effectiveness of such provision
in any other jurisdiction.
(h) COUNTERPARTS. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute but one and the same agreement.
(i) INTERPRETATION. This Amendment and the other Amendment
Documents are the result of negotiations between and have been reviewed by
counsel to Lender, Borrower and other parties, and are the product of all
parties hereto. Accordingly, this Amendment and the other Amendment Documents
shall not be construed against Lender merely because of Lender's involvement in
the preparation thereof.
(j) LOAN DOCUMENTS. This Amendment and the other Amendment
Documents shall constitute Loan Documents.
8.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment, as of the date first above written.
FirstCom Equipment, Ltd.
By
---------------------------------------
Title:
Cisco Systems Capital Corporation
By
---------------------------------------
Title:
9.
EXHIBIT 10.2
AMENDED AND RESTATED MASTER PROMISSORY NOTE
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933, AS AMENDED, OR ANY OTHER APPLICABLE SECURITIES LAWS. IT MAY NOT
BE SOLD OR OTHERWISE TRANSFERRED UNDER CIRCUMSTANCES THAT WOULD RESULT
IN A VIOLATION OF THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES
ACT OF 1933 OR SUCH OTHER LAWS.
Up to U.S.$29,500,000 July 28, 1999
FOR VALUE RECEIVED, the undersigned, FirstCom Equipment, Ltd.
("Borrower"), a corporation organized and existing under the laws of the British
Virgin Islands (the "British Virgin Islands"), HEREBY UNCONDITIONALLY PROMISES
TO PAY to the order of Cisco Systems Capital Corporation ("Lender"), a
corporation organized and existing under the laws of the State of Nevada, United
States of America, the principal sum representing the aggregate principal amount
of the Loans made by Lender to Borrower pursuant to the Credit Agreement
referred to below, not to exceed Twenty-Nine Million Five Hundred Thousand
United States Dollars (U.S.$29,500,000) in the aggregate.
Borrower promises to repay each Loan made to it in 20
substantially equal consecutive quarterly installments, commencing on the
Quarterly Date occurring at the end of the first full calendar quarter after the
date any Loan is made to Borrower under the Credit Agreement, with subsequent
installments payable on each Quarterly Date thereafter, and with the last such
installment to be due and payable on the twentieth such Quarterly Date upon
which principal installments are due (the "Maturity Date") and in the amount
necessary to repay in full the unpaid principal balance hereof.
As used herein, "Quarterly Date" means the last day of each
calendar quarter in each year.
Borrower further promises to pay interest on the principal
amount of each Loan outstanding hereunder on each Quarterly Date until the
Maturity Date, at a rate per annum equal at all times during each Interest
Period (as defined below) to LIBOR (as defined below) for such Interest Period
plus 5.5% per annum. The period between the date of a Loan and the Maturity Date
shall be divided into successive periods, each such period being an "Interest
Period" for purposes of this Promissory Note. The initial Interest Period shall
begin on the date such Loan is made and end on the Quarterly Date occurring at
the end of the fourth full calendar quarter after the date such Loan is made.
Each subsequent Interest Period shall begin on the last day of the immediately
preceding Interest Period and shall end on the next succeeding twelve month
anniversary of such date. As used herein, "LIBOR" means for any Interest Period
the rate of interest per annum determined by Lender to be the average (rounded
upward, if necessary, to the
<PAGE>
nearest 1/16 of 1%) of the offered rates for deposits in Dollars for a term of
three months appearing in the Wall Street Journal on the second Business Day
preceding the first day of the applicable Interest Period.
As used herein, "Banking Day" means a day other than a
Saturday or Sunday on which commercial banks are not required or authorized by
law to close in San Jose, California and New York, New York, except that if the
applicable Banking Day relates to any determination of LIBOR, "Banking Day"
means such a day on which dealings are carried out in the applicable offshore
U.S. Dollar interbank market.
Interest on any outstanding Loan shall be payable in arrears
to Lender on each Quarterly Date; provided that if any prepayment hereof is
effected other than on an Quarterly Date, accrued interest hereon shall be due
on such prepayment date as to the principal amount prepaid.
In the event that any amount of principal hereof, or (to the
extent permitted by applicable law) any interest hereon or any other amount
payable hereunder or under the Loan Agreement, is not paid in full when due
(whether at stated maturity, by acceleration or otherwise), Borrower shall pay
interest on such unpaid amount to Lender, from the date such amount becomes due
until the date such amount is paid in full, payable on demand of Lender, at a
fluctuating rate per annum equal at all times to the Reference Rate (as defined
below) plus 6% per annum.
As used herein, "Reference Rate" means for any day the rate of
interest in effect for such day as publicly announced from time to time by Bank
of America National Trust and Savings Association in San Francisco, California,
United States of America, as its "reference rate". Each change in the interest
rate hereon based on a change in the Reference Rate shall be effective at the
opening of business on the day specified in the public announcement of such
change.
All computations of interest hereunder shall be made on the
basis of a year of 360 days for the actual number of days occurring in the
period for which any such interest or fee is payable.
Whenever any payment hereunder shall be stated to be due, or
whenever any Quarterly Date or any other date specified hereunder would
otherwise occur, on a day other than a Banking Day, then, except to the extent
otherwise provided hereunder, such payment shall be made, and such Quarterly
Date or other date shall occur, on the next succeeding Banking Day, and such
extension of time shall in such case be included in the computation of payment
of interest hereunder; PROVIDED, HOWEVER, that if such extension would cause
such payment to be made, or such Quarterly Date or other date to occur, in the
next following calendar month, such payment shall be made and such Quarterly
Date or other date shall occur on the next preceding Banking Day.
Each such payment shall be made on the date when due, in Same
Day Funds, to the Lender's account at Bank of America N.T. & S.A., ABA no.
121-000-358, to account
2
<PAGE>
number 12338-57430, ref. "FirstCom Equipment, Ltd," or to such other account of
Lender as it from time to time shall designate in a written notice to Borrower.
All payments of principal, interest and other amounts made on
or in respect to this Promissory Note shall be made in freely transferable
United States Dollars for value received on the date of payment, without setoff,
counterclaim or, to the extent permitted by applicable law, defense, and free
and clear of and without deduction for any present and future British Virgin
Islands taxes or charges whatsoever.
Lender shall record the date and amount of each Loan made to
Borrower, the amount of principal and interest due and payable from time to time
hereunder, each payment thereof, and the resulting unpaid principal balance
hereof, in Lender's internal records, and any such records shall be conclusive
evidence absent manifest error of the amount of the Loans made by Lender and the
interest and payments thereon; PROVIDED, however, that Lender's failure so to
record shall not limit or otherwise affect the obligations of Borrower hereunder
and under the Credit Agreement to repay the principal of and interest on the
Loans.
This Promissory Note amends and restates that certain Master
Promissory Note dated November 19, 1998, and is the Note referred to in, and is
subject to and entitled to the benefits of, the Agreement dated as of November
11, 1998, as amended by that certain Amendment Agreement dated as of July 28,
1999 (as amended, modified, renewed or extended from time to time, the "Credit
Agreement") between Borrower and Lender. Capitalized terms used herein shall
have the respective meanings assigned to them in the Credit Agreement.
The Credit Agreement provides, among other things, for
acceleration (which in certain cases shall be automatic) of the maturity hereof
upon the occurrence of certain stated events, in each case without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived.
This Promissory Note is subject to prepayment in whole or in
part as provided in the Credit Agreement.
Borrower hereby waives diligence, presentment, protest or
notice of total or partial nonpayment or dishonor with respect to this
Promissory Note.
Failure by the holder hereof to exercise any of its rights
hereunder in any instance shall not constitute a waiver thereof in that or any
other instance.
Borrower agrees to pay on demand all costs and expenses of
Lender and its affiliates, and fees and disbursements of counsel (including
allocated costs and expenses for internal legal services), in connection with
the enforcement or attempted enforcement of, and preservation of any rights or
interests under, (i) this Promissory Note, and (ii) any out-of-court workout or
other refinancing or restructuring or any bankruptcy or insolvency case or
proceeding, including any losses, costs and expenses sustained by Lender as a
result of any failure by Borrower to perform or observe its respective
obligations contained herein.
3
<PAGE>
THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA.
Borrower hereby (a) submits to the non-exclusive jurisdiction
of the courts of the State of New York and the Federal courts of the United
States sitting in the Borough of Manhattan (collectively, the "New York
Courts"), for the purpose of any action or proceeding arising out of or relating
to this Promissory Note, (b) irrevocably waives (to the extent permitted by
applicable law) any objection which it now or hereafter may have to the laying
of venue of any such action or proceeding brought in any of the New York Courts,
and any objection on the ground that any such action or proceeding in any New
York Court has been brought in an inconvenient forum, and (c) agrees that (to
the extent permitted by applicable law) a final judgment in any such action or
proceeding brought in a New York Court shall be conclusive and may be enforced
in other jurisdictions by suit on the judgment or in any other manner permitted
by law.
IN WITNESS WHEREOF, Borrower by its duly authorized legal
representatives has executed this Promissory Note on the date and in the year
first above mentioned.
FIRSTCOM EQUIPMENT, LTD.
By
---------------------------------------
Title:
4
EXHIBIT 99.1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
FirstCom Corporation
We have audited the accompanying consolidated balance sheet of FirstCom
Corporation as of December 31, 1998 and the related consolidated statements of
operations and stockholders' equity and cash flows for the year ended December
31, 1998. Our audit also included the financial statement schedule listed in the
index of Item 13(b). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FirstCom Corporation at December 31, 1998, and the consolidated results of their
operations and their cash flows for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Miami, Florida
February 19, 1999
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders
of FirstCom 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
Firstcom Corporation and its subsidiaries at December 31, 1997, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1997, 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.
As described in Note 4, during 1996 the Company had transactions and
relationships with related parties. Because of these relationships, it is
possible that the terms of these transactions may not be the same as those that
would result from transactions among wholly unrelated parties.
/S/ Pricewaterhouse Coopers LLP
Miami, Florida
March 2, 1998, except as
to the fourth paragraph of Note 1,
which is as of August 6, 1998
<PAGE>
FIRSTCOM CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 8,892 $ 14,936
Restricted cash ................................................................... 22,599 61,028
Restricted investments ............................................................ 19,670 20,404
Accounts receivable, net of allowance for doubtful accounts
of $953 in 1998 .................................................................. 6,935 2,367
Prepaid expenses and other current assets ......................................... 624 1,208
--------- ---------
Total current assets ............................................................. 58,720 99,943
Restricted investments ............................................................. 20,021 37,488
Telecommunications networks, net ................................................... 45,901 9,348
Intangible assets, net ............................................................. 15,765 15,186
Deferred financing costs ........................................................... 14,437 14,971
--------- ---------
Total assets ..................................................................... $ 154,844 $ 176,936
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Vendor financing, current ......................................................... $ 254 $ --
Convertible debentures ............................................................ -- 1,550
Lease obligations, current ........................................................ 136 313
Accounts payable .................................................................. 8,238 4,023
Accrued interest .................................................................. 3,695 3,925
Other accrued expenses ............................................................ 1,963 2,631
Due to related parties ............................................................ -- 263
Other current liabilities ......................................................... 471 322
--------- ---------
Total current liabilities ........................................................ 14,757 13,027
Senior notes, net .................................................................. 132,338 131,626
Vendor financing ................................................................... 1,337
Lease obligations, less current portion ............................................ 238 356
--------- ---------
Total liabilities ................................................................ 148,670 145,009
--------- ---------
Commitments and contingencies ...................................................... -- --
Stockholders' equity
Preferred stock, $.001 par value, authorized 10,000,000 shares,
none issued
Common stock, $.001 par value, authorized 50,000,000 shares,
issued and outstanding 19,084,300 shares ......................................... 19 19
Additional paid in capital ........................................................ 31,737 31,562
Warrants .......................................................................... 26,737 26,737
Accumulated deficit ............................................................... (51,475) (26,153)
Cumulative translation adjustments ................................................ (238) (238)
--------- ---------
6,780 31,927
Shareholder loans .................................................................. (606) --
--------- ---------
Total stockholders' equity ....................................................... 6,174 31,927
--------- ---------
Total liabilities and stockholders' equity ....................................... $ 154,844 $ 176,936
========= =========
</TABLE>
See accompanying notes
<PAGE>
FIRSTCOM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenues ....................... $ 19,059 $ 1,130 $ 652
Operating expenses:
Cost of revenues ............. 14,996 1,203 958
Selling, general and
administrative .......... 12,293 4,678 3,272
Non-cash compensation and
Consulting expenses ..... 175 4,640 73
Depreciation and
amortization ............ 2,237 1,201 842
------------ ------------ ------------
29,701 11,722 5,145
------------ ------------ ------------
Loss from operations ......... (10,642) (10,592) (4,493)
Interest expense ............. (19,578) (6,521) (246)
Interest income .............. 5,448 1,315 80
Other expense, net ........... (550) (68) (103)
------------ ------------ ------------
Net loss ..................... $ (25,322) $ (15,866) $ (4,762)
============ ============ ============
Net basic and diluted loss
per share ................. $ (1.33) $ (.95) $ (.32)
============ ============ ============
Weighted average common
shares outstanding ........ 19,084,300 16,667,719 14,795,660
============ ============ ============
See accompanying notes
<PAGE>
FIRSTCOM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN
SHARES AMOUNTS CAPITAL WARRANTS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at January 1, 1996 ................................. 11,951,685 $ 12 $ 6,153 --
Common stock issued in private
placements ................................................ 1,939,042 2 7,430 --
Conversion of debt .......................................... 1,011,791 1 1,985 --
Stock issued for acquisitions ............................... 1,250,000 1 7,487 --
Imputed interest on related party
notes ..................................................... -- -- 40 --
Stock option grants ......................................... -- -- 73 --
Currency translation adjustment ............................. -- -- -- --
Net loss .................................................... -- -- -- --
---------- ---------- ---------- ----------
Balances at December 31, 1996 ............................... 16,152,518 16 23,168 --
Conversion of debt .......................................... 1,101,782 1 1,993 --
Beneficial conversion feature ............................... -- -- 810 --
Reversal of beneficial conversion feature upon
redemption of debt .......................................... -- -- (344) --
Stock issued to a former director in connection with the
FirstCom Long Distance acquisition
100,000 -- 205 --
Stock issued as compensation to officers and former directors
1,350,000 2 3,756 --
Stock option grants to officers and former directors
-- -- 882 --
Conversion of liabilities ................................... 80,000 -- 240 --
Stock issued for past financial assistance
300,000 -- 852 --
Warrants to purchase common stock ........................... -- -- -- 26,737
Currency translation adjustment ............................. -- -- -- --
Net loss .................................................... -- -- -- --
---------- ---------- ---------- ----------
Balances at December 31, 1997 .............................. 19,084,300 19 31,562 26,737
Shareholder loans ........................................... -- -- -- --
Stock Option Grants ......................................... -- -- 175 --
Net loss .................................................... -- -- -- --
---------- ---------- ---------- ----------
Balances at December 31, 1998 .............................. 19,084,300 $ 19 $ 31,737 $ 26,737
========== ========== ========== ==========
CUMULATIVE
ACCUMULATED TRANSLATION SHAREHOLDER
DEFICIT ADJUSTMENT LOANS TOTAL
---------- ---------- ---------- ----------
Balances at January 1, 1996 ................................. $ (5,525) $ 30 -- $ 670
Common stock issued in private
placements ................................................ -- -- -- 7,432
Conversion of debt .......................................... -- -- -- 1,986
Stock issued for acquisitions ............................... -- -- -- 7,488
Imputed interest on related party
notes ..................................................... -- -- -- 40
Stock option grants ......................................... -- -- -- 73
Currency translation adjustment ............................. -- (108) -- (108)
Net loss .................................................... (4,762) -- -- (4,762)
---------- ---------- ---------- ----------
Balances at December 31, 1996 ............................... (10,287) (78) -- 12,819
Conversion of debt .......................................... -- -- -- 1,994
Beneficial conversion feature ............................... -- -- -- 810
Reversal of beneficial conversion feature upon
redemption of debt .......................................... -- -- -- (344)
Stock issued to a former director in connection with the
FirstCom Long Distance acquisition
-- -- -- 205
Stock issued as compensation to officers and former directors
-- -- -- 3,758
Stock option grants to officers and former directors
-- -- -- 882
Conversion of liabilities ................................... -- -- -- 240
Stock issued for past financial assistance
-- -- -- 852
Warrants to purchase common stock ........................... -- -- -- 26,737
Currency translation adjustment ............................. -- (160) -- (160)
Net loss .................................................... (15,866) -- -- (15,866)
---------- ---------- ---------- ----------
Balances at December 31, 1997 .............................. (26,153) (238) -- 31,927
Shareholder loans ........................................... -- -- (606) (606)
Stock Option Grants ......................................... -- -- -- 175
Net loss .................................................... (25,322) -- -- (25,322)
---------- ---------- ---------- ----------
Balances at December 31, 1998 .............................. $ (51,475) $ (238) $ (606) $ 6,174
========== ========== ========== ==========
</TABLE>
See accompanying notes
<PAGE>
FIRSTCOM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (25,322) $ (15,866) $ (4,762)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense ...................................... 2,237 1,201 842
Amortization of deferred financing costs and original issue
discounts .................................................................... 1,279 518 --
Accretion of discount on restricted investments ............................ (2,799) (583) --
Beneficial conversion features on convertible debentures, net .............. -- 466 --
Capitalized interest related to network construction ....................... (2,955) (712) --
Services exchanged for common stock ........................................ -- 852 73
Non-cash compensation and consulting expense ............................... 175 4,640 --
Interest converted to equity ............................................... -- 45 49
Changes in operating assets and liabilities:
Accounts receivable ....................................................... (4,291) (29) (105)
Prepaid expenses and other current assets ................................. 645 (258) (197)
Other assets .............................................................. (203) (64) (53)
Accounts payable and accrued expenses ..................................... 2,560 4,602 299
Due to related parties .................................................... (263) (179) (251)
Other current liabilities ................................................. 548 (105) 171
--------- --------- ---------
Net cash used in operating activities .................................... (28,389) (5,472) (3,934)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of telecommunications network ...................................... (34,674) (2,763) (1,453)
Restricted cash ............................................................. 38,429 (61,028) --
Acquisition of FirstCom Long Distance ....................................... -- (5,799) --
Acquisition of RDC .......................................................... (1,528) -- --
Acquisition of FirstCom Networks ............................................ -- -- (1,515)
--------- --------- ---------
Net cash provided by (used in) investing activities ...................... 2,227 (69,590) (2,968)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Use of (proceeds from) restricted investments ............................... 21,000 (57,309) --
Repayment of convertible debentures ......................................... (1,550) -- --
Shareholder loans ........................................................... (606)
Vendor financing ............................................................ 1,591
Issuance of Senior Notes .................................................... -- 150,000 --
Deferred financing costs .................................................... -- (7,000) --
Proceeds from convertible debentures ........................................ -- 3,500 --
Issuance of common stock .................................................... -- -- 7,430
Net proceeds from issuance of (repayments to)
notes payable and Bridge Notes ............................................. -- -- (1,061)
Additions to notes payable to related party ................................. -- -- 1,232
(Payments under) proceeds from leasing obligations .......................... (317) 84 (31)
--------- --------- ---------
Net cash provided by financing activities ................................ 20,118 89,275 7,570
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ......................... (6,044) 14,213 668
Effect of exchange rate changes on cash ...................................... -- -- (2)
Cash and cash equivalents at beginning of year ............................... 14,936 723 57
--------- --------- ---------
Cash and cash equivalents at end of year ..................................... $ 8,892 $ 14,936 $ 723
========= ========= =========
Supplemental Cash Flow Disclosure
Cash paid for interest ....................................................... $ 21,000 $ 545 $ 153
========= ========= =========
</TABLE>
Capital lease obligations of $172 were incurred in 1996.
During 1998 and 1997, the Company capitalized $2,955 and $712 of interest costs
related to the construction of a fiber optic network.
See accompanying notes
<PAGE>
FIRSTCOM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA)
1. ORGANIZATION AND BUSINESS FORMATION
FirstCom Corporation ("the Company", formerly InterAmericas
Communications Corporation) is a provider of telecommunications services in
Chile, Peru and Colombia. The Company has historically operated as a Latin
American telecommunications development stage company which has developed its
operations in Latin America through the acquisition of holding and operating
companies that own licenses, concessions or rights-of-way in what the Company
believes to be attractive markets. The Company operates in Chile as FirstCom
Networks, S.A. ("FirstCom Networks"), formerly Hewster Chile, S.A., FirstCom
Long Distance, S.A. ("FirstCom Long Distance"), formerly Iusatel Chile, S.A. and
Red de Computadores S.A. ("RDC"), in Peru as FirstCom, S.A. ("FirstCom Peru",
formerly Resetel) and as of February 1999, in Colombia as Teleductos S.A.
("Teleductos").
Although separate legal entities, the Company operates its Chilean
subsidiaries as one functional entity, providing seamless service delivery of
integrated telecommunication solutions to its Chilean customers. Services
provided by the Company to businesses in Santiago include: (i) high speed data
transmission (ii) domestic and international long distance services in Chile,
(iii) internet access services on a dial-up and dedicated access basis, as well
as related value-added services such as webhosting and corporate e-mail.
FirstCom Peru is completing a fiber optic telecommunications network in Lima and
Callao, Peru and will begin providing integrated telecommunication solutions to
its customers, including: (i) high-speed data transmission, (ii) internet access
and (iii) long distance telephony services during 1999. During February 1999,
the Company acquired 76% of Teleductos, an operating entity currently providing
high-speed data transmission services in Bogota, Colombia.
During the three years ended December 31, 1998, the Company made the
following acquisitions, each of which was accounted for as a purchase. The
consolidated financial statements include the operating results from the
effective date of acquisition.
ACQUISITION OF FIRSTCOM PERU
On May 7, 1996, the Company acquired 100% of FirstCom Peru's
outstanding stock in exchange for 1,250,000 shares of Common Stock of the
Company. The purchase price of approximately $7,490 has been substantially
allocated to a local carrier concession.
ACQUISITION OF FIRSTCOM NETWORKS
On July 31 and September 2, 1996 the Company acquired 99% and 1%,
respectively, of FirstCom Networks' outstanding stock for $1,500 in cash.
Goodwill of approximately $1,300 was recorded representing the excess cost over
the fair value of net assets acquired in the transaction.
ACQUISITION OF FIRSTCOM LONG DISTANCE
On December 17, 1997, the Company acquired 100% of FirstCom Long
Distance's outstanding stock for $5,799 in cash, net of cash acquired. In
addition, the Company incurred other direct acquisition costs totaling
approximately $300, which includes the fair market value of 100,000 shares of
Company Common Stock paid to a former director for his services in facilitating
the transaction.
The excess purchase price, of approximately $6,200, over the fair value
of the net assets acquired has been allocated to FirstCom Long Distance's
telephone carrier concession. The Company has accounted for the acquisition of
FirstCom Long Distance as if it occurred on December 31, 1997.
ACQUISITION OF RDC
On October 7, 1998 the Company acquired 99.9% of RDC outstanding stock
for $1,528 in cash, net of cash acquired. Goodwill of approximately $1,400 was
recorded representing the excess cost over the fair value of net assets acquired
in the transaction.
ACQUISITION OF TELEDUCTOS - A SUBSEQUENT EVENT
On February 2, 1999, the Company acquired 76% of Teleductos'
outstanding stock for approximately $6,000 million in cash, $7,000 in short-term
promissory notes, a $2,000 stock subscription payable on February 8, 2000 and
100,000 shares of the Company's common stock. The promissory notes bear interest
at 5% per annum and mature at various dates through February 2000. Goodwill of
approximately $11,300 will be recorded during 1999 representing the excess cost
over the fair value of net assets acquired in the transaction.
The allocation of the purchase price described in the preceeding
paragraph is preliminary, pending finalization of appraisals and other
estimates.
OTHER RELATED ACQUISITION DISCLOSURES - UNAUDITED
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisition of FirstCom Networks, FirstCom Peru,
FirstCom Long Distance, RDC and Teleductos had occurred at the beginning of the
periods presented, and do not purport to be indicative of the results that
actually would have occurred if the acquisitions had been consummated on those
dates or of results which may occur in the future:
DECEMBER 31,
----------------------------------
1998 1997
Revenue .................... $25,428 $18,798
Net loss ................... (26,333) (37,524)
Net loss per share ......... $(1.38) $(2.25)
Following is a summary of the intangible assets resulting from the
Company's acquisitions:
ESTIMATED
DECEMBER 31, USEFUL
1998 1997 LIFE
----------- ---------- ----------
Satellite transmission rights $1,166 $1,166 10 years
Concessions 13,870 13,770 20 years
Goodwill 2,730 1,289 10-20 years
----------- ----------
17,766 16,225
Less: accumulated amortization (2,001) (1,039)
----------- ----------
$15,765 $ 15,186
=========== ==========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED ITEMS
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
Through December 31, 1997, the Company's subsidiaries used the
following functional currency: FirstCom Peru-Peruvian sole, FirstCom Networks
- -Chilean peso. As such, assets and liabilities are translated at end-of-period
exchange rates. Income, expense and cash flows are translated at weighted
average exchange rates for the period. The resulting currency translation
adjustments are accumulated and reported as a component of stockholders' equity.
As a result of (1) the Company's U.S. dollar denominated senior note
financing during October 1997, (2) the acquisition of FirstCom Long Distance on
December 17, 1997 and (3) the fact that FirstCom Long Distance and FirstCom
Networks operate as one functional entity of which FirstCom Long Distance
represents the majority of the operations, effective January 1, 1998 the
Company's Chilean subsidiaries began using the U.S. dollar as their functional
currency. This change did not have a significant impact on the Company's results
of operations.
Effective January 1, 1998 the Company's Peruvian subsidiary, FirstCom
Peru, began using the U.S. dollar as its functional currency. Although, through
December 31, 1997 FirstCom Peru incorrectly used the local currency as its
functional currency, the impact of using the U.S. Dollar as FirstCom Peru's
functional currency on prior periods is not significant. This change did not
have a significant impact on the Company's results of operations.
Included in other expense in 1998 is approximately $500 of foreign
exchange losses resulting from the translation into U.S. dollars of the
Company's subsidiaries financial statements.
During 1999, the Company intends to use the U.S. dollar as the
functional currency for Teleductos.
RECLASSIFICATIONS
Certain amounts in the 1996 consolidated financial statements were
reclassified to conform with the 1997 presentation.
CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations
of credit risk are primarily cash and cash equivalents, restricted cash,
restricted investments and accounts receivable.
The Company places its cash and cash equivalents, restricted cash, and
restricted investments with high-quality institutions. Accounts receivable are
due primarily from commercial telecommunications customers. Credit is extended
based on evaluation of the customer's financial condition and generally
collateral is not required. Anticipated credit losses are provided for in the
consolidated financial statements and have been within management's
expectations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, restricted cash,
accounts receivable and accounts payable approximated fair value based on the
short maturity of these financial instruments. The carrying amount of debt and
capital leases approximated fair value based on the prevailing market rates
currently available to the Company for similar financial instruments.
CASH AND CASH EQUIVALENTS
The Company considers all certificates of deposit and highly liquid
debt instruments purchased with a maturity of three months or less to be cash
equivalents.
RESTRICTED CASH AND INVESTMENTS
Restricted cash represents proceeds from the senior note offering (see
Note 3) to be used, in accordance with the terms of the related indenture
agreement, primarily for the purchase of telecommunications equipment in Peru
and Chile. Restricted investments are U.S. Treasury Notes that are restricted
for the repayment of interest on the senior notes, and are stated at amortized
cost, which approximated fair value at December 31, 1998. These investments
mature at various dates through October 2000. Management designated these
investments as held-to-maturity.
TELECOMMUNICATIONS NETWORKS
Telecommunications networks are recorded at cost and are depreciated
using the straight-line method over the estimated useful lives of the related
assets. Construction, engineering, interest and labor costs directly related to
the development of the Company's networks are capitalized. The Company begins
depreciating these costs when the networks become commercially operational.
Telecommunications networks consists of:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
------------------------------ USEFUL
1998 1997 LIFE
-------- -------- -------------
<S> <C> <C> <C>
Telecommunications equipment ................................. $ 15,837 $ 6,547 5 to 20 years
Telecommunications equipment pending installation
and construction in progress ................................. 27,635 2,627 --
Office equipment and furniture ............................... 5,104 1,663 3 to 7 years
-------- --------
48,576 10,837
Less: accumulated depreciation ............................... (2,675) (1,489)
======== ========
Implement of Long-Lived Assets ............................... $ 45,901 $ 9,348
======== ========
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the carrying amount of its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Measurement of any impairment would
include a comparison of estimated future cash flows to be generated during the
remaining life of each intangible asset to its net carrying value.
ACCOUNTING ESTIMATES
The preparation of financial statements require management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
ACCRUED EXPENSES
Accrued expenses consist of:
DECEMBER 31,
---------------------
1998 1997
------ ------
Telecommunication equipment ...................... $ 749 $ --
Convertible debenture settlement ................. -- 922
Professional fees ............................... -- 622
Payroll ......................................... 1,214 447
Other ........................................... -- 640
====== ======
$1,963 $2,631
====== ======
COMMON STOCK EXCHANGED FOR OTHER THAN CASH
Common stock exchanged for services and as inducements to make loans
have been recorded as consulting, compensation or interest expense and
additional paid in capital based on the fair value of the common stock at the
date of grant. Through November 1996, the grant date fair, value of the common
stock was estimated by the Company's Board of Directors. After November 1996,
the grant date fair value of the common stock was based on the NASDAQ trading
price.
REVENUE RECOGNITION
Revenues from telecommunication services are recognized as services are
provided.
ADVERTISING COSTS
Advertising costs, included in selling, general and administrative
expenses, are expensed as incurred and were $1,664 for 1998.
NET LOSS PER SHARE
The computation of net loss per share of common stock is computed by
dividing net loss for the year by the weighted average number of shares
outstanding during the year. The weighted average number of shares outstanding
for the years ended December 31, 1998, 1997 and 1996 excludes 16.7 million, 15.6
million and 4.3 million, respectively, of antidilutive stock options and
warrants.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic
value method which requires the recognition of related expense on the grant date
when the exercise price of the stock option granted is less then the fair value
of the underlying common stock. Additionally, the Company provides pro forma
disclosure of net loss and loss per share as if the fair value based method had
been applied in measuring compensation expense for stock options granted in 1998
and 1997.
The policy of the Company has been to grant options at an exercise
price equal to the estimated market value of the Company's common stock at the
date of the grant, except for certain grants made in 1997 for which $882 was
charged to expense. Had compensation costs for the Company's stock option grants
been determined based on the fair value at the grant dates of options granted
consistent with the fair value based method, the Company's loss and loss per
share would have been increased to the pro forma amounts indicated below:
1998 1997
---------- ---------
Net loss ......... As Reported $ (25,322) $ (15,866)
Net loss........... Pro forma (28,031) (21,471)
Net loss per share ... As Reported (1.33) ( 0.95)
Net loss per share ... Pro forma (1.47) (1.29)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions; volatility of 90%, risk-free interest rate of 6.00%, zero dividend
yield and expected lives ranging from 3 to 6 years. The weighted average fair
value of stock options granted during 1997 (i) with a strike price equivalent to
the grant date fair value of the underlying common stock was $2.60, and (ii)
with a strike price less than the grant date fair value of the underlying common
stock was $2.26. The weighted average fair value of stock options granted during
1998 was $0.81.
INCOME TAXES
The Company uses the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on the differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
The Company is subject to federal, state and foreign income taxes but
has not incurred a liability for such taxes due to losses incurred. At December
31, 1998 the Company has net tax operating loss carryforwards of approximately
$32,000 for U.S. income tax purposes and approximately $28,700 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 2018. The foreign net operating loss carryforwards related (1) to Peru,
$4,400 expire in the years 2000 through 2002 and (2) to Chile, $24,300, do not
expire.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset are presented below:
1998 1997
-------- --------
Net operating loss carryforwards ............. $ 16,153 $ 8,953
Accounts receivable .......................... 469 438
Non-cash compensation ........................ 372 309
-------- --------
16,994 9,700
Less: valuation allowance .................... (16,994) (9,700)
======== ========
Net deferred tax asset ....................... $ -- $ --
======== ========
Income tax expense for the years ended December 31, 1998, 1997 and 1996 differed
from the amounts computed by applying the statutory income tax rate applicable
to the countries in which the Company and its subsidiaries operate as a result
of the following:
1998 1997 1996
------- ------- -------
Computed "expected" tax benefit ...... $(7,294) $(4,929) $(1,020)
Increase in valuation allowance ...... 7,294 4,929 1,020
======= ======= =======
$ -- $ -- $ --
======= ======= =======
The domestic and foreign components of net loss are as follows:
1998 1997 1996
-------- -------- --------
Domestic ................. $(18,613) $(12,636) $ (2,157)
Foreign .................. (6,709) (3,230) (2,605)
======== ======== ========
$(25,322) $(15,866) $ (4,762)
======== ======== ========
The deferred tax assets have been fully offset by a valuation allowance
resulting from the uncertainty surrounding the future realization of the net
operating loss carryforwards.
SEGMENT REPORTING
As an integrated communications provider, the Company has one
reportable segment. Currently, the revenue of this segment is primarily derived
from long distance operations. Substantially all of (i) the Company's revenue is
attributable to customers in Chile and (ii) the Company's assets are located in
Chile and Peru. The Company evaluates its performance based on several factors
of which EBITDA (earnings before interest, taxes, depreciation and amortization)
is a principal financial measure. The Company's EBITDA for the year ended
December 31, 1998 in Peru, Chile and Corporate was approximately $(2,900),
$(4,200) and $(1,300) respectively. Total assets for the Company's Peruvian and
Chilean subsidiaries and Corporate were approximately $37,800, $32,600 and
$84,400 respectively, as of December 31, 1998.
COMPREHENSIVE INCOME
The Company did not report any comprehensive income items in any of the
years presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Accounting Standards No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Company
expects to adopt the new Statement effective January 1, 2000. The Statement will
require the recognition of all derivatives on the Company's consolidated balance
sheet at fair value. The Company does not anticipate that the adoption of this
Statement will have a significant effect on its results of operations or
financial position.
3. CAPITALIZATION
The Company has had material transactions impacting its capitalization
during the past three years. The following information, in addition to the
disclosures in Note 4--Related Party Transactions and Note 5--Stock Options and
Warrants, describes the most significant of these transactions.
VENDOR FINANCING
On November 11, 1998 a subsidiary of the Company entered into a
financing arrangement (the "First Vendor Financing") with one of the Company's
significant equipment vendors. The terms of the First Vendor Financing follow:
(i) maximum amount available $10,000 (ii) interest rate of LIBOR plus 5.5%,
(iii) the Company may draw on the facility until December 31, 2000, (iv) draws
under the facility shall be repaid in 20 consecutive quarterly principal and
interest payments and (v) is collateralized by the equipment being financed. As
of December 31, 1998 the Company had $1,591 outstanding under the First Vendor
Financing.
On December 24, 1998 a subsidiary of the Company entered into a
financing arrangement (the "Second Vendor Finanacing") with another one of the
Company's significant equipment vendors. The terms of the Second Vendor
Financing follow: (i) maximum amount available $10,000, (ii) interest rate of
Libor plus 4%, (iii) the Company may draw on the facility until December 31,
2000, (iv) draws under the facility shall be repaid in 20 consecutive quarterly
principal and interest payments beginning on March 31, 2001, (v) interest only
quarterly payments shall be made for each draw from the respective date of
funding through December 31, 2000 and (v) is collateralized by the equipment
being financed. As of December 31, 1998 the Company had no amounts outstanding
under the Second Vendor Financing.
SENIOR NOTE OFFERING
On October 27, 1997, the Company completed a private offering (the
"Senior Note Offering") pursuant to Rule 144A and Regulation S promulgated under
the U.S. Securities Act of 1933 of 150,000 Units, consisting of an aggregate of
$150,000 aggregate principal amount of 14% Senior Notes due October 27, 2007
("Senior Notes") and 5,250,000 warrants (the "Unit Warrants") to purchase
5,250,000 shares of Common Stock of the Company at an exercise price of $4.40
per share. In addition, UBS Securities LLC, the initial purchaser of the Units
in the Senior Note Offering, was granted 2,250,000 warrants (the "Initial
Warrants") to acquire 2,250,000 shares of Common Stock of the Company at an
exercise price of $4.40 per share. The Unit Warrants are and the Initial
Warrants are currently exercisable and both expire on October 27, 2007. Interest
is payable semi-annually beginning on April 1, 1998.
The fair value of the Unit Warrants which is approximately $18,500 is
reflected as an original issue discount on the Senior Notes. Additionally, the
Company incurred direct financing costs of approximately $14,900, including the
fair value of $7,900 of the Initial Warrants, as determined by an investment
bank. The original issue discount and direct financing costs are being amortized
to interest expense over ten years using the level yield method with an
effective interest rate of 18.9 percent. The fair value of the Unit Warrants and
Initial Warrants was determined by an investment banking firm using the
Black-Scholes option pricing model with the following assumptions: volatility of
90%, risk-free interest rate of 6.24%, zero dividend yield and an expected life
of 10 years.
The Senior Notes are redeemable on or after October 27, 2002 at the
option of the Company, in whole or in part from time to time, at specified
redemption prices declining annually to 100% of the principal amount on or after
October 27, 2005, plus accrued and unpaid interest. Upon a change in control,
the Company is required to make an offer to purchase the Senior Notes at a
purchase price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any. The Senior Notes contain certain
restrictive covenants that, among other things, limit the ability of the Company
to incur additional debt or issue preferred stock, pay dividends, enter into
related party transactions or make certain other restricted payments.
The net proceeds to the Company from the Senior Note Offering were
approximately $142,500, after deducting the underwriting discount and offering
expenses. Approximately $57,300 of the proceeds were used to purchase a
portfolio of securities that was deposited in escrow for payment of interest on
the Senior Notes through October 27, 2000 and, under certain circumstances, as
security for repayment of principal of the Senior Notes. During November and
December of 1997, the Company used the net proceeds of the Senior Note Offering
as follows: (i) $5,900 for the acquisition of FirstCom Long Distance, (ii)
$4,300 for the purchase of telecommunications equipment and the repayment of its
subsidiaries liabilities, (iii) $2,600 to settle all of the Company's
outstanding obligations related to convertible debentures and (iv) $975 to repay
certain bridge notes.
In addition to the deposit of a portion of the proceeds from the Senior
Note Offering to fund interest payments on the Senior Notes through October
2000, the Company deposited $62 million of the proceeds from the Senior Note
Offering in a separate account under a trustee's control pending application of
such funds by the Company for the payment of: (a) Permitted Expenditures; (b) in
the event of a Change in Control of the Company, the Change in Control Payment
and (c) in the event of a Special Offer to Purchase, or a Special Mandatory
Redemption, the purchase or redemption price in connection therewith.
During 1998, the Company used approximately $38,000 of the Senior Note
proceeds to expand and operate the Company's telecommunications businesses in
Peru and Chile and approximately $21,000 to make interest payments on the Senior
Notes.
CONVERTIBLE DEBENTURES
On February 3, 1997, the Company issued $1,500 aggregate principal
amount of 7% Convertible Debentures due February 3, 2000 and warrants to
purchase an aggregate 100,000 shares of the Company's Common Stock. Pursuant to
the terms of the 7% Convertible Debentures (i) the conversion price was
equivalent to the lesser of the fair value of the Company's common stock on the
date the debt was issued or 83% of the fair value of the Company's common stock
at the date of conversion, (ii) the Company was obligated to register with the
SEC all shares of common stock underlying the warrants and debentures, and (iii)
the failure to register such shares of common stock by June 30, 1997 would
result in an additional weekly interest charge of 0.1 percent on the outstanding
principal balance. On May 6, 1997 the Company issued $2,000 aggregate principal
amount of 8% Convertible Debentures due April 30, 1998 and warrants to purchase
an aggregate 20,000 shares of the Company's Common Stock (collectively the
"Convertible Debentures"). Pursuant to the terms of the 8% Convertible
Debentures (i) the conversion price was equivalent to the lesser of the fair
value of the Company's common stock on the date the debt was issued or 80% of
the fair value of the Company's common stock on the date of conversion, (ii) the
Company was obligated to register with the SEC all shares of common stock
underlying the warrants and debentures, and (iii) the failure to register such
shares of common stock by August 6, 1997 would result in an additional cash
payment every 30 days thereafter of 3% of the original principal amount.
The Convertible Debentures were issued with beneficial conversion
features due to the fact that the holders could convert the debt at any time
prior to the maturity at a conversion price less than the conversion date fair
value of the Company's common stock. As a result, the Company recorded $810 as
interest cost and additional paid in capital related to the value of the
beneficial conversion feature in 1997.
During 1997, the Company issued 1,101,782 shares of Common Stock in
connection with the conversion of $1,950 aggregate principal amount of the
Convertible Debentures, plus related accrued interest. Effective December 31,
1997 the Company entered into an agreement for early extinguishment of the
Company's remaining financial obligations related to the Convertible Debentures
for $2,600 in cash. The cash payment was made on January 5 and 8, 1998.
Such settlement, including the related loss on extinguishment of $255
classified as interest expense, has been accrued for as of December 31, 1997 and
related to the following items:
Outstanding principal ................ $1,550
Accrued interest ..................... 128
Redemption premiums .................. 335
Penalties ............................ 587
------
$2,600
======
The above redemption premiums and penalties have been included in
interest expense in the accompanying statement of operations. As a result of
such settlement and redemption of outstanding principal, $344 of paid-in capital
related to the beneficial conversion feature was reversed.
PRIVATE ISSUANCES OF COMMON STOCK
In February 1996, the Company commenced a private offering of its
common stock. The Company issued 500,000 shares of common stock and raised
$1,120 through March 31, 1996, net of expenses of $80. In June 1996, the Company
commenced another private offering of its common stock. The Company issued
1,439,000 shares of common stock and raised $6,400 through August 1996, net of
expenses of $520.
During September 1997, the Company's Board of Directors authorized the
issuance of 850,000 shares of common stock to two officers and the Company
recognized related non-cash compensation expense of $2,338.
4. RELATED PARTY TRANSACTIONS
TELECTRONIC S.A. AND MR. HERNAN STREETER
During the three years ended December 31, 1998, the Company entered
into certain transactions with Telectronic S.A. and its founders, Mr. George A.
Cargill and Mr. Eleazar Donoso. Mr. Cargill and Mr. Donoso are both Company
shareholders. Mr. Cargill has been a director of the Company since 1994.
During the two years ended December 31, 1997, the Company entered into
several transactions with Mr. Hernan Streeter. Mr. Streeter formerly served the
Company as its Chief Executive Officer and its Chairman of the Board.
As compensation for his service as a director of the Company, from 1996
to 1998, the Company granted Mr. Cargill 130,000 stock options with a weighted
average exercise price of $1.41. The exercise price of such grants was equal to
the grant date fair value of the underlying Common Stock.
The Company purchased approximately $52, $77 and $172 of certain
telecommunication equipment in 1998, 1997 and 1996, respectively, from
Telectronic, S.A.
On July 24, 1995, Mr. Donoso received 1,425,000 shares of Common Stock (the
"Donoso Shares") from the Company in exchange for his ownership interest in
Hewster Servicios Intermedio S.A., a company which was acquired by the Company,
in a transaction which was exempt from the registration requirements of the
Securities Act pursuant to Regulation S and Section 4(2) thereof. On September
14, 1995, Mr. Donoso loaned the Donoso Shares to Laura Investments, Ltd., a
company owned and controlled by Mr. Streeter.
From September 14, 1995 to March 1996, Laura Investments, Ltd. loaned
the Company an aggregate amount of $1,632. During March 1996, the Company
converted the original principal amount of $1,632 plus accrued interest of $7
into 839,235 shares of Common Stock which were registered in the name of Laura
Investments, Ltd. and issued in a transaction which was exempt from the
registration requirements of the Securities Act pursuant to Regulation S and
Section 4(2) thereof.
During September 1997, Laura Investments Ltd. agreed to transfer
839,235 shares of the Company's Common Stock to Mr. Donoso in an attempt to
satisfy its obligations to Mr. Donoso in connection with the transfer of the
Donoso Shares to Laura Investments, Ltd. which occurred on September 14, 1995.
However, Mr. Donoso claimed that the Company owed him additional shares of
Common Stock in consideration of the initial transaction between Mr. Donoso and
Laura Investments Ltd. on September 14, 1995 (or the equivalent monetary
consideration). The Company issued 300,000 shares of Common Stock to Mr. Donoso
in October 1997 in settlement of all outstanding claims by Mr. Donoso against
the Company. The Company recognized interest expense of $852 related to the
aggregate fair value of such shares of Common Stock issued to Mr. Donoso. This
transaction was exempt from the registration requirements of the Securities Act
pursuant to Sections 4(2) and 4(6) thereof.
During 1997, the Company issued and redeemed $200 of bridge notes from
Mr. Cargill. In connection with such bridge notes Mr. Cargill received 20,000
warrants to purchase the Company's common stock at an exercise price of $2.56
per warrant. The fair value, $21, of such warrants (determined using the
Black-Scholes option pricing model with the following assumptions: volatility of
90% risk free interest rate of 6.7%, zero dividend yield and expected life of
two years) was recorded as original issue discount and subsequently expensed
upon repayment of the bridge notes.
As compensation for his services as a director and Chief Executive
Officer of the Company, during 1996, the Company granted Mr. Streeter 125,000
stock options with an exercise price of $2.25. The exercise price of such grants
was equal to the grant date fair value of the underlying Common Stock. The
Company paid salaries to Mr. Streeter of $110 during 1996.
Mr. Streeter was the founder and Chief Executive Officer of FirstCom
Networks, which was acquired by the Company during 1996. Prior to its
acquisition, FirstCom Networks provided approximately $237 of telecommunication
services to the Company. Mr. Streeter also was the primary shareholder and
General Manager of FirstCom Long Distance, which was acquired by the Company
during 1997. Prior to this acquisition, the Company made sales of $162 to
FirstCom Long Distance. Pursuant to provisions of the FirstCom Long Distance
purchase agreement, the Company paid Mr. Streeter a consulting fee of $120
during 1998.
MAROON BELLS CAPITAL PARTNERS ("MBCP")
During the two years ended December 31, 1997, the Company entered into
certain transactions with MBCP. Two former directors of the Company, Paul Moore
and Phillip Magiera, are principals in MBCP. MBCP has provided certain
consulting and financial advisory services to the Company during the past three
years.
As compensation for their services as directors of the Company, during
1996, the Company granted MBCP and its principals 600,000 stock options with a
weighted average exercise price of $2.25. The exercise price of such grants was
equal to the grant date fair value of the underlying Common Stock.
During 1996, the Company purchased $493 in equipment whereby MBCP acted
as a broker. Additionally, during 1996 and 1997, the Company made expense
reimbursements of $219 and $132, respectively, to MBCP and its principals.
During 1996 and 1997, the Company converted $316, plus accrued interest
of $30, and $240, respectively, of outstanding liabilities to MBCP into 172,506
and 80,000 shares, respectively, of the Company's Common Stock.
During October 1997, the Company entered into an agreement with MBCP
and its principals, Theodore Swindells, Paul Moore and Phillip Magiera, to
compensate them for services rendered to the Company. The services provided by
Messrs. Moore and Magiera related to their functions as directors of the
Company. Pursuant to such agreement, the Company made a cash payment to MBCP of
$500 at the closing of the Senior Note offering and issued to each of Messrs.
Moore and Magiera 250,000 shares of Common Stock and options to acquire 250,000
shares of Common Stock at an exercise price of $2.13 per share. The Company
recognized non-cash consulting expense related to (i) the grant date fair value
of the Common Stock of $1,420 and (ii) the intrinsic value of the stock options
of $355. Messrs. Moore and Magiera resigned from the Company's Board of
Directors effective as of the date of the agreement.
OTHER RELATED PARTY TRANSACTIONS
During April 1998 the Company loaned certain officers $606 related to
federal and state income tax liabilities arising from shares of the Company's
common stock granted to such officers during 1997. The loans (i) bear an annual
interest state of 7%, (ii) are due on April 9, 2018 and (iii) are collateralized
by 336,600 shares of the Company's common stock.
The Company paid approximately $604 and $865 in legal fees in 1998 and
1997, respectively, to a law firm having a senior partner who is also a current
Director of the Company.
5. STOCK OPTIONS AND WARRANTS
Under the terms of the Company's stock option agreements, options have
a maximum term of ten years from the date of the grant. The options vesting
period varies from full vesting upon issuance of options to one forty eighth per
month to the end of the option term. A summary of the Company's stock option
activity is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- ---------------------------- ----------------------------
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 ............... 7,295,000 $2.73 3,625,000 $2.31 1,565,000 $2.03
Granted ................ 1,558,334 1.61 3,670,000 3.15 2,060,000 2.52
Exercised .............. -- -- -- -- -- --
Cancelled .............. (505,750) 1.38 -- -- -- --
------------ ----------- ------------- ----------- ------------ -----------
Outstanding at
end of year ........... 8,347,584 $2.55 7,295,000 $2.73 3,625,000 $2.31
============ =========== ============= =========== ============ ===========
Options exercisable
at year-end ........... 6,335,918 $2.54 4,970,365 $2.50 2,754,734 $2.54
============ =========== ============= =========== ============ ===========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- --------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE EXERCISE
PRICE OUTSTANDING PRICE LIFE EXERCISABLE PRICE PRICE
- ------------------ ---------------- ------------- --------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.01 225,000 $1.01 10 225,000 $1.01 $ 1.01
1.27 to 1.96 2,159,250 1.73 8 1,270,917 1.85 1.27 to 1.96
2.00 to 2.42 3,080,000 2.21 8 2,450,000 2.21 2.00 to 2.42
2.50 to 3.00 1,583,334 2.72 7 1,523,334 2.71 2.50 to 3.00
4.00 to 4.40 1,100,000 4.36 9 766,667 4.35 4.00 to 4.40
6.00 to 8.00 200,000 7.00 9 100,000 6.00 6.00 to 8.00
--------- ---------
8,347,584 6,335,918
========= =========
</TABLE>
Included in the preceding table are 1,350,000 stock options, of which
1,066,667 are exercisable at December 31, 1998, with an exercise price of $2.13
and a weighted average remaining contractual life of 9 years. The exercise price
of such stock options was less than the grant date fair value of the underlying
Common Stock.
During 1997 the Company granted two officers 2,650,000 stock options
that vest over a two year period. The exercise price of such grants was equal to
the grant date fair market value of the underlying Common Stock, except for
850,000 options with an exercise price of $2.13. The Company recognized non-cash
compensation expense of $527 related to the 850,000 options. The terms of
1,000,000 stock options granted during 1996 were modified during 1997 to provide
for immediate vesting.
Including the Initial and Note Warrants described in Capitalization above, the
following is a summary of warrants granted by the Company:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
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 ......... 8,395,171 $4.24 680,171 $2.97 680,171 $2.97
Granted ................................ -- -- 7,715,000 4.35 -- --
Exercised .............................. -- -- -- -- -- --
Cancelled .............................. -- -- -- -- -- --
Outstanding at end of year ............. 8,395,171 $4.24 8,395,171 $4.24 680,171 $2.97
========= ===== ========= ===== ========= =====
Options exercisable at year-end ........ 8,395,171 $4.24 895,171 $2.80 680,171 $2.97
========= ===== ========= ===== ========= =====
</TABLE>
These warrants resulted from the Company's financing activities from
1994 to 1997. The weighted average grant date fair value of warrants granted
during 1997 was $3.52.
6. COMMITMENTS AND CONTINGENCIES
One of the Company's subsidiaries entered into an operating agreement
in 1993 with Metro S.A. to install and operate the Company's optical fiber
telecommunication network in the tunnels, conduits and stations of lines 1 and 2
of the Santiago subway system. The Company has given Metro S.A. a $50
performance bond relating to these leases. The monthly lease rental is
equivalent to 15% of the net monthly invoicing of the company for services
rendered in the metropolitan region of Chile, subject to minimum amounts. The
lease expires in the year 2003. Under the agreement, the Company is obligated to
provide certain telecommunications services to Metro, S.A.
The following summarizes future minimum payments under non-cancelable
operating lease agreements at December 31, 1998:
1999 .............. $1,300
2000............... 1,371
2001 .............. 1,261
2002 .............. 1,256
2003 and 2004 ......... 1,088
------
$6,276
======
Rental expense under operating leases was $1,095, $961and $508 for the
years ended December 31, 1998, 1997 and 1996, respectively.
In September 1997, the Company entered into an employment and severance
agreement (the "Northland Agreement") with Patricio E. Northland, President,
Chief Executive Officer and Chairman of the Board of Directors of the Company,
which replaced his former employment agreement with the Company. The Northland
Agreement has a term of three years unless terminated earlier for cause, death
or disability, and provides for an initial annual base salary of $350,000,
subject to an increase of $50,000 in each of the second and third year of the
agreement. In addition, Mr. Northland was granted non-qualified stock options to
purchase 300,000 shares of the Company's Common Stock in the following manner:
100,000 shares which vest on the date of employment at an exercise price of
$4.00 per share; 100,000 shares which vest one year thereafter at an exercise
price of $6.00 per share; and 100,000 shares which vest two years after the date
of employment at an exercise price of $8.00 per share. In consideration of Mr.
Northland's agreement to terminate his former employment agreement with the
Company, which would have provided for a substantial bonus to Mr. Northland upon
consummation of the Offering, the Company agreed to pay Mr. Northland a
performance bonus of $250,000 and vest all of his existing options to acquire
1,000,000 shares of Common Stock granted under his prior employment agreement.
As a result of this transaction, the Company recognized compensation expense of
$250 related to the performance bonus. The strike price of the vested options
was equivalent to the fair value of the underlying Common Stock on the date of
the Northland Agreement.
During May 1997, the Company entered into an employment and severance
agreement (the "Geib Agreement") with Douglas G. Geib II, Chief Financial
Officer of the Company. The Geib Agreement has a term of three years unless
terminated earlier for cause, death or disability, and provides for an annual
salary of $250,000. In addition to the base salary, the Geib Agreement provides
for a primary performance award based upon business criteria which is designed
to enhance shareholder value during each year up to a maximum of 100 percent of
the base salary payable thereunder. Mr. Geib was also granted non-qualified
stock options to purchase 500,000 shares of the Company's Common Stock at an
exercise price of $2.42 per share. One-third of such options became exercisable
on date of employment, and the remainder vest in equal annual installments over
the first two years of Mr. Geib's three-year employment period.
