SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] Annual report under section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2001.
[ ] Transition report under section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________
to _____________.
Commission file number 00-21143
CONVERGENCE COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Nevada 87-0545056
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 West 500 South, Suite 320
Salt Lake City, Utah 84101
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (801) 328-5618
Securities to be registered under
Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, Par Value $.001 None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the common equity was sold,
or the average bid and asked prices of such common equity, as of a specified
date within 60 days prior to the date of filing. (See definition of affiliate in
Rule 405, 17 CFR 230.405) $3,269,128
Note.If a determination as to whether a particular person or entity is
an affiliate cannot be made without involving unreasonable effort and expense,
the aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form
Applicable only to registrants involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes ___ No ___.
(Applicable only to corporate registrants) Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date.
As of April 8, 2002, 60,592,086 shares of registrant's common stock, par value
$.001 per share, were outstanding.
Documents incorporated by reference. List hereunder the following documents if
incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) Any annual report to security
holders; (2) Any proxy or information statement; and (3) Any prospectus filed
pursuant to Rule 424(b) or (e) under the Securities Act of 1933. The listed
documents should be clearly described for identification purposes (e.g., annual
report to security holders for fiscal year ended December 24, 1980). NONE
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
PART 1.
OUR BUSINESS AND PROPERTIES
Overview of Our Operations
We are a leading facilities-based provider of broadband services operating in
recently deregulated high-growth markets, principally Mexico. We offer
enterprise customers end-to-end communications solutions, including managed
corporate data network services, high-speed data connections, high-speed and
dial-up Internet access, voice, video, e-commerce-enabling services and other
value-added communications services. We had $40,170,949 in revenues in 2001,
compared to $35,027,458 in 2000 and $9,099,054 in 1999.
We believe many underdeveloped countries, particularly countries in Latin
America, are experiencing unparalleled demand for expanded telecommunications
services. The Latin American telecommunications market was approximately $33.2
billion in 1996 and is expected to be approximately $74.2 billion in 2002.
We also believe incumbent telecommunication networks in those markets are unable
to meet that demand, in large part because antiquated circuit-switched networks
are unable to deliver new integrated communication services. We believe this
problem will be solved as service providers enter the market with new,
next-generation networks that provide managed corporate data networking
services, high-speed data connections, Internet access, voice and video
services. We are a first-mover service provider in our chosen markets.
We have decided to focus our business efforts on the Mexican market, which is
one of the fastest growing segments of the Latin American market, and we operate
in 146 cities in that country. We are the leading provider of managed corporate
data networking services there, after the incumbent telephone company, and have,
system-wide, over 846 corporate and institutional customers. Our customers
include such household names as WorldCom, Samsung, Marriott Hotels, Ernst &
Young, Inter-Continental Hotels and Unicef.
In a report dated August 14, 2001, Booz Allen Hamilton estimated that the
Mexican market for business data services in the top five Mexican cities would
increase by a compound annual growth rate of over 30% between 2001 and 2004
(from $1.0 billion in 2001 to $2.2 billion in 2004). During the same period,
they expect the voice and data market in the top five cities in Mexico to grow
from $3.1 billion to $4.8 billion. According to ITTA, Mexico is also leading the
way for Internet-related sales as a percent of company revenue, with an average
of 20% of total sales compared with 17% for the United States. Booz Allen also
estimated that as of 2000, there were approximately 3.1 million large, medium
and small businesses in Mexico.
We service our customers in a number of our market areas over a next generation
IP-based optical technology platform that uses packet switching, Gigabit
Ethernet standards, and state-of-the-art encryption and authentication protocols
to transmit data, carrier-grade voice and video services over the same network
at guaranteed service rates.
Our technology platform is fully scaleable, redundant and multi-pathed to offer
maximum flexibility in traffic management, quality of service and "on demand"
provisioning. We ultimately plan to deploy those networks in each of our target
markets. We believe our use of Gigabit Ethernet networks - which cost 25% of the
next lowest cost network - gives us a significant competitive advantage.
We have grown rapidly since we began our operations in 1995. Our customer base
has increased from 900 residential cable television customers in one country in
1997, the year we acquired our first operating system, to 2,509 high-speed data
customers, 2,948 dial-up Internet customers, and 6,958 cable television
customers as of December 31, 2001. Our customers include large corporations and
businesses, governmental agencies and, to a limited extent, residential
customers. Although we currently maintain operations and assets in Central
America and Venezuela in addition to our operations in Mexico, we have decided
to focus our business efforts on the Mexican market, and anticipate selling our
non-Mexican assets in 2002 if acceptable valuations can be achieved. In June
2001, we sold operations in El Salvador, including 361 high-speed data
customers, 124 high-speed and dial-up Internet customers and 26,039 cable
television customers. The total remaining customers related to our non-Mexico
operations are 1,663 high-speed data customers, 2,948 high-speed and dial-up
Internet customers and 6,958 cable television customers.
Our Corporate Structure
We were formed in 1995 to take advantage of opportunities created by the
deregulation of the Latin American telecommunications markets. We have grown
organically and through acquisitions since then. We currently conduct operations
or have assets in Mexico, Central America and Venezuela through a group of
approximately 35 direct and indirect subsidiaries. Our parent corporation's
assets primarily consist of its direct and indirect interests in those
subsidiaries.
When we discuss our operations in this report, you should assume we are
describing our own and our controlled subsidiaries' operations. We have
structured our corporate ownership interests in our subsidiaries to provide our
parent corporation with the ability to consolidate their operations in its
financial statements under United States generally accepted accounting
principles.
Our principal executive office is located at 102 West 500 South, Suite 320, Salt
Lake City, Utah 84101, where our telephone number is (801) 328-5618. Our
principal operating office is located at 1300 Sawgrass Corporate Parkway, Suite
110, Sunrise, Florida 33323, and our telephone number there is (954) 233-0025.
We also have offices in each of our Latin American country markets.
Our World Wide Web site is located at www.cciglobal.net. The information on that
site is not part of this report. Our logo and certain titles and logos for our
services are our property. Each trademark, tradename or service mark of any
other company appearing in this report belongs to its holder.
We previously reported some of the transactions and operations information set
forth in this report in greater detail in other reports we have filed with the
Securities and Exchange Commission, including in the reports described below in
the section entitled "Reports on Form 8-K" and our quarterly reports on Form
10-QSB for the periods covered by this report. You should read the information
in this report in connection with those other reports and filings, which are
incorporated herein by this reference.
Some of the matters described in this report occurred or are anticipated to
occur after December 31, 2001, the close of the period covered by this report.
We have included descriptions of those matters in this report to provide a more
balanced description of our operations, business and prospects.
Our Market Opportunity
We are focused on the Mexican market. We believe there is a significant
opportunity for telecommunications growth in this market as a result of:
o large, unmet demand for expanded, broadband telecommunications
services, which is growing at a compound annual growth rate of over
30%
o deregulation and privatization of historically government owned and
operated telecommunications systems
o relatively limited competition
o current infrastructure which is inadequate for delivering broadband
applications.
The combined telecommunications market worldwide is believed to be in excess of
$700 billion and is expected to grow to $1.0 trillion by the year 2002. Growth
in the industry is driven by a number of factors, including increased demand for
bandwidth and services such as electronic commerce. Internet access and data
services are arguably one of the fastest growing segments of the
telecommunications market, with an estimated 116 million Internet users
worldwide.
The Latin American telecommunications industry is, in particular, undergoing
dramatic change, including widespread privatization of existing networks. The
countries in Latin America that have or are beginning to deregulate their
telecommunications industries have done so as their governments have recognized
the need to introduce market competition.
The increased demand for telecommunications services is expected to result in a
significant growth in the revenues generated in the Latin American
telecommunications market, which totaled $63.7 billion in 2000 and is expected
to be $74.2 billion in 2002, up from $33.2 billion in 1996. Internet use in
Latin America has more than doubled (from 10.7 million users in 2000 to 25.33
million users in 2001) in the last two years and that growth rate is expected to
continue for the foreseeable future.
In a report dated August 14, 2001, Booz Allen estimated that the Mexican market
for business data services in the top five Mexican cities would increase by a
compounded annual growth rate of over 30% between 2001 and 2004 (from $1.0
billion in 2001 to $2.2 billion in 2004) compared to a compounded growth rate of
approximately 13% in the United States. During the same period, they expect the
voice and data market in the five top cities in Mexico to grow from $3.1 billion
to $4.8 billion. Additionally, Booz Allen estimate that as of 2000 there are
over 3.1 million large, medium and small businesses in Mexico.
This anticipated growth will be influenced by a number of factors, including:
o Increased Competition. As competitors enter the Latin America
telecommunications market, the range of telecommunications services
available to consumers should expand.
o The Entry of Globalized Businesses into Latin America. As corporations
from more developed markets expand their operations into Latin America
and Latin American corporations develop more global operations, the
need for private data networks and broadband capacity should grow.
o Changes in Technology. Latin American markets have historically
depended on legacy telecommunications systems and the infrastructure
of the incumbent operators. These systems have generally been based on
technology and equipment that has limited bandwidth capabilities and
relatively poor transmission quality. We use state-of-the-art Gigabit
Ethernet, IP-based networks.
o Increases in the Use of the Internet. The Latin American Internet
market is generally thought to be several years behind the Internet
market in the United States in terms of overall market penetration of
both use and Internet related services. Actual use varies by country,
but was estimated to be, on average, less than 1% (compared to 18% in
the United States) in 1997, and is projected to increase to 5% by 2002
(compared to over 40% in the United States).
Our Business Strategies
Our vision is to become the premier facilities-based provider of integrated
broadband telecommunications solutions to business and governmental customers in
our markets. Our strategy to reach that goal is based on the following:
o We intend to capitalize on the growth in managed corporate data
network services. We expect the demand for high-speed managed
corporate data network services to grow at a rapid pace as economic
expansion increases and the need for bandwidth intensive data, voice
and other connectivity solutions in the region develops. We intend to
capitalize on the trend of companies that desire to outsource critical
business applications and to integrate Web-based services and products
into their operations by aggressively marketing value-added data,
Internet and e-business enabling services.
o We focus on the business customer. We focus our marketing efforts on
large and medium sized corporate customers that tend to be significant
users of data services and have sophisticated data connectivity needs.
o We focus on "first mile" services. Unlike other telecommunications
companies that provide long-haul services, we focus on the important
"first-mile" service segment. We believe international gateway and
national long-haul services are quickly becoming commoditized, but
that the "first-mile" providers will not be subject to the same
downward pricing pressure.
o We focus on the Mexican market. The Mexican market for communication
services is one of the largest and most rapidly growing markets in
Latin America. In a report dated August 14, 2001, Booz Allen has
estimated the Mexican market for business data services in the top
five Mexcian cities would increase by a compounded annual growth rate
of over 30% between 2001 and 2004 (from $1.0 billion in 2001 to $2.2
billion in 2004). During the same period, they expect the voice and
data market in Mexico to grow from $3.1 billion to $4.8 billion. We
have deployed networks in key metropolitan markets within Mexico and
are the leading provider of managed corporate data networking services
there, second only to the incumbent telephone company.
o We have established an early market presence. We have established an
early and significant presence in all of our target markets. We
believe we are able to secure a significant subscriber base and market
share with minimal turnover as a result of our early market presence.
o We provide state-of-the-art solutions. We are building a
state-of-the-art IP-based network to deliver our bundled
telecommunications services. Our networks incorporate Gigabit Ethernet
architecture and transmission media, scalable optical systems and IETF
approved protocols for providing data security for optimum
"first-mile" connectivity.
o We use our own Metropolitan Area Network infrastructure to increase
margins. We provide a significant portion of our services through our
own next-generation optical-based network.
o We enhance our service offerings to increase margins. As a result of
our solutions-oriented approach and emphasis on high quality customer
service, we believe we will be uniquely positioned to sell additional
services and applications to our clients as their data needs evolve.
We also plan to take advantage of other revenue opportunities that we
expect to develop as a result of deregulation or changes in the
telecommunications industry, including domestic long-distance and
international switched voice telecommunications and data center
services for our corporate and carrier customers.
o We lease intercity and international backbone capacity to increase
margin and capitalize on decreasing prices. We lease backbone capacity
in service areas where we believe building a network is not
economically feasible. This strategy allows us to increase our margin
as the prices for leased capacity continue to drop, while reducing our
capital expense.
Our Network Technology
We employ a next generation IP-based optical technology platform that uses
packet switching and Gigabit Ethernet protocols, to transmit data, carrier-grade
voice and video services over the same network at guaranteed service rates.
Gigabit Ethernet technology costs approximately 25% of asynchronous transfer
mode systems, or ATM networks, the dominant data transmission technology. Our
networks are fully scalable, redundant and multi-homed to offer maximum
flexibility in traffic management, quality of service and "on demand"
provisioning.
Gigabit Ethernet networks incorporate the most advanced principles in network
design, technical standards and optical engineering to provide "first-mile"
network services and capabilities that are significantly greater than those
offered by traditional circuit-switched or non-optical based networks. Our
networks may also incorporate optical transmission devices that use dense
wavelength division multiplexing, or DWDM, when required.
With DWDM technology, a single fiber optic strand is able to carry multiple
signals at the same time through the use of different wavelengths for each
signal. This greatly increases the capacity of each of our fiber strands,
effectively eliminating the need for additional fiber.
A key feature of our network design is its adaptability to changes in service
offerings, network standards and new technologies and protocols. We are able to
efficiently support a wide mix of telecommunications traffic and provide
high-transmission speeds to our customers while providing substantial potential
for expansion in a cost-effective manner. Our network is based on the following
principles:
o Cutting-edge design. Our network incorporates an IP-based architecture
that uses Gigabit Ethernet hardware, IETF approved encryption and
authentication protocols, DWDM and all-optical switching systems to
maximize "first-mile" customer service and network efficiency and
adaptability.
o Scalability. We are able to expand both transmission capacity and
switching capacity rapidly and cost-effectively as traffic volume and
capacity demands increase.
o Reliability. Our networks allow for carrier grade service level
redundancy if there is a network failure. When we connect to other
networks, we also employ multiple routing paths and interconnections
for further redundancy.
o Revenue-driven deployment schedule. We design and deploy our networks
to maximize potential revenue generation while minimizing build-out
costs. We use a "smart build" strategy where we only spend capital
when we have a customer.
o Supplementary local access technologies. Although we eventually intend
to provide our services using the same technology in each of our
markets, where we believe it is cost-effective or appropriate for
customer service, we employ various technologies, such as fiber, fixed
wireless technologies, and coaxial cable in our networks. We believe
this advanced technology architecture allows the most cost and time
efficient delivery of high-speed last mile connectivity with IP-based
service offerings.
Network Architecture
Metropolitan Area Networks (MANs). MANs are generally comprised of single or
several fiber optic rings that provide our customers with a direct connection
within a city or metropolitan area to our network. Our MANs have route diversity
and a self-healing architecture, which allows us to re-route traffic if there is
a network outage. We generally deploy our networks in areas with a high
potential customer density and limited competition.
Although we intend to provide our services over our own fiber optic networks, we
may use leased networks, fixed wireless technology or coaxial cable on a
case-by-case basis to complete or complement our fiber rings or to provide
services to customers who we may not be able to serve on our own network. This
strategy gives us rapid access to customers and allows us to gain market
penetration and take advantage of market opportunities before we have completely
constructed our network. The strategy also allows us to enhance the reach of our
fiber networks.
Points of Presence (POPs). Our POPs provide secured interconnection points with
other carriers, typically with a minimum of one POP per market. We purchase or
lease sites and construct POPs in each market at the location of other carriers,
public Internet peering points and local telehouses.
Network Operations Centers (NOCs). Our NOCs contain central node transmission
and switching equipment and are located in each of our principal market areas.
They ensure that our systems are working as efficiently as possible, and monitor
our various fiber-optic, fixed wireless and coaxial cable networks on a 24
hour-a-day basis and provide our operating personnel with alarm, status and
performance information.
Interconnection Gateways. We have entered into national interconnection
agreements with incumbent public operators in some of our markets and intend to
enter into additional agreements in other markets once regulatory conditions
permit. We have also entered into agreements with national and international
carriers, such as WorldCom and Sprint, and with international satellite
connectivity providers such as Interpacket Group, Inc. We are developing
additional physical interconnections with incumbent public operators at both
their tandem switching centers and end offices in a number of our markets.
Our Networks and Markets
We have grown rapidly since we began our operations in 1995. Our customer base
has increased from 900 cable television customers in one country in 1997, the
year we acquired our first operating system, to 2,509 high-speed data customers,
2,948 dial-up Internet customers, and 6,958 cable television customers in nine
countries as of December 31, 2001. Our customers include large corporations and
businesses, governmental agencies and, to a limited extent, residential
customers. Although we currently maintain operations and assets in Central
America and Venezuela in addition to our operations in Mexico, we have decided
to focus our business efforts on the Mexican market, and anticipate selling our
non-Mexican assets in 2002 if acceptable valuations can be achieved. Pending the
sale of those assets, we intend to maintain our assets and operations in those
markets. In June 2001, we sold operations in El Salvador, including 361
high-speed data customers, 124 high-speed and dial-up Internet customers and
26,039 cable television customers. The total remaining customers related to our
non-Mexico operations are 1,663 high-speed data customers, 2,948 high-speed and
dial-up Internet customers and 6,958 cable television customers.
Our Mexican Network. We first entered the Mexican market in 1999, when we
acquired approximately 17% of the capacity of a fiber optic network in Mexico
City owned by Metronet, S.A. de C.V., or Metronet. The network consists of five
main interconnected rings of optic strands. As of December 31, 2001, the network
had approximately 275 kilometers of fiber in Mexico City and approximately 100
kilometers of fiber in Monterrey.
The network provides us with direct access to several hundred single-tenant and
multi-tenant buildings. As part of the Metronet transaction, we also entered
into an agreement with Metronet to jointly pursue the development of new fiber
networks in five other major Mexican cities. We jointly completed the
construction of a network in Monterrey in 2001 and plan to construct fiber
networks in Guadalajara in 2004, Puebla in 2005 and Leon in 2006.
In December 1999, we expanded our presence in Mexico by acquiring International
Van, S.A. de C.V., or Intervan, the leading independent data networking services
company in Mexico. Through its national state-of-the art leased network, we
provide broadband data connectivity solutions to over 846 corporate customers
throughout Mexico. Intervan has facilities-based POPs in seven Mexican cities
(Mexico City, Guadalajara, Monterrey, Tijuana, Chihuahua, Juarez, and
Villahermosa), as well as four United States cities (Laredo, El Paso and
Houston, Texas, and San Diego, California).
Intervan's operations are enhanced by several strategic relationships or
commercial carrier agreements with other local and international carriers,
through which it serves its clients' connectivity needs, as well as peering
agreements for Internet backbone capacity. Intervan uses a combination ATM/Frame
Relay technology over leased access. We intend to migrate as many as possible of
Intervan's current customers in Mexico to our next-generation IP-based network.
In November 2000, we received a concession to operate our own data networks in
Mexico. The concession allows us to expand our profit margins by selling our own
products, rather than reselling products of other carriers. See our report on
Form 8-K dated filed on March 7, 2001 for a more detailed description of the new
concession. We have also applied for a telephony concession, which we anticipate
we will receive before the end of 2002.
We intend to concentrate our network build out and operations in Mexico in five
major metropolitan areas, Mexico City, Monterrey, Guadalajara, Pueblo and Leon,
where Booz Allen projects the telecommunications market will grow from $3.1
billion in 2001 to approximately $8.0 billion by 2007.
Our Central American Network. Our Central American market region operations are
conducted in seven countries - El Salvador, Guatemala, Panama, Costa Rica,
Nicaragua, Honduras and the Dominican Republic. We began our operations in the
region in 1998, when we acquired a CATV operation in El Salvador. In December
1999, we added to our operations in the region by acquiring the operations of
GBNet Corporation, or GBNet, which provides data networking and Internet access
services.
In connection with the GBNet acquisition, we entered into a commercialization
agreement under which the parties agreed to recommend one another as preferred
providers of services and products, an equipment purchase agreement under which
the seller of the GBNet system (an IBM affiliate) agreed to provide us with
preferred purchasing terms on any IBM equipment we acquire from the seller for
our operations, and a network management agreement, under which we provide the
seller with managed data network services connections.
In April 2000, we added to our operational assets in the area through the
purchase of a Guatemala holding company that conducts high-speed data, dial-up
and high-speed Internet and telephony services in Guatemala, and the assets of
another company that provides CATV services using its own fiber and coaxial
cable network. We provide our services in Guatemala primarily through a six-node
fiber optic/coaxial cable network in Guatemala City.
We have also secured two blocks of frequency in Guatemala's wireless
telecommunications spectrum. That spectrum allows us to provide services through
broadband multi-point wireless systems. We have built two wireless nodes to
support our wireless network operations. Our network in Guatemala covers
approximately 70% of the business community of Guatemala City.
In June 2001, we sold our interest in one of the companies through which we
conduct operations in El Salvador. That sale included the sale of the network we
need to support our other operations in El Salvador, and we have been servicing
our remaining customers in El Salvador through a short-term use arrangement with
the buyer of our El Salvadoran network.
Pending the sale of all of our operations in that country, we intend to service
our customers with a leased third party network. We intend to sell our remaining
Central American operations and assets in 2002 if we can obtain an acceptable
valuation.
Our Venezuela Network. We maintain a number of licenses and authorizations to
provide telecommunications services in Venezuela. In addition to those permits
and licenses, we own a nine-ring fiber optic network in Maracaibo, and have a
strategic relationship with Telematica EDC, C.A., or Telematica, one of our
largest shareholders and an affiliate of the largest electric utility in
Venezuela. Under that strategic relationship, Telematica has agreed to provide
us with rights-of-ways to an existing metropolitan area utility duct network the
utility owns in Caracas, as well as a $26 million credit facility, under which
we have borrowed $7,000,000 (see the section entitled "Certain Relationships and
Related Party Transactions: Telematica Transactions").
Our Customers
We are the largest independent corporate data provider in Mexico, where our
customer base includes 846 multinational corporations, governmental agencies and
other businesses in 146 cities. We intend to expand our marketing efforts in
Mexico to a broader customer base and when we are granted a telephone license,
we intend to initiate telephony services. We have also entered into an
affiliation agreement with Sumitomo, a Japanese firm that has a significant
presence, along with a number of other Japanese enterprises, in Mexico. Under
the terms of the agreement, Sumitomo has agreed to assist us in marketing our
services to other Japanese entities doing business in Mexico.
In our Central American market countries, we focus on providing our services to
large business customers primarily through our GBNet operations and our system
in Guatemala. As of December 31, 2001 we had 1,663 high-speed data customers,
2,948 dial-up and high-speed Internet customers and 6,958 CATV customers in that
market. We also provide limited telephony services to our customers in Guatemala
through an interconnect agreement with the incumbent telephone company.
In June 2001, we sold a portion of our operations in El Salvador, including 361
high-speed data customers, 124 high-speed and dial-up Internet customers and
26,039 cable television customers. Also, until recently, we maintained a dial-up
Internet operation in Venezuela that provided services to 2,323 customers. We
sold that operation in late 2001 and currently maintain only non-operational
assets in that market.
Competition
The amount, financial condition, services, service areas, reputation, and
relative market strength of the competition in each of our market areas varies
depending on the market in question, the state of the deregulation of the
telecommunications industry in that market and other factors.
In Mexico, we are the leading pure data services provider. Our competitors are
primarily incumbent services providers which use circuit-based networks that
focus on voice are not well suited for data and other broadband applications.
Our primary competitors include Telmex and its principal competitors, Avantel
and Alestra, which each provide nationwide telecommunications services.
Telmex provides fixed and mobile telephone, Internet, VPN, long distance
connectivity and web hosting services, while Avantel and Alestra provide long
distance services to large business segments. Alestra also provides some
residential long distance services. We also compete with Bestel, which is a
carrier's carrier that provides leased intercity long distance and data
transmission to other service providers. Other competitors in Mexico include
Infosel, which was recently acquired by Telmex and which is Mexico's largest ISP
service provider, and Telefonica, which provides data transmission services in
major cities throughout Mexico.
The telecommunications industry in our Central American markets is not as
competitive as our other markets. Our primary competitor in those countries
generally is the incumbent telephony provider, such as Telefonica in El Salvador
and Telgua in Guatemala. In some instances, such as Costa Rica, the competition
has been restricted because of the uncertainties related to the
telecommunications laws.
Competition in Venezuela is primarily provided by the incumbent telephony
provider, CANTV. Other competitors include Telcel, VeinfoTel and Genesis.
Our Services
We offer a wide variety of broadband telecommunications services, including
managed corporate network services, high-speed data connections, high-speed and
dial-up Internet access, video, e-commerce-enabling services and other
value-added communications services. We also offer voice services in some of our
markets and plan to offer these services in additional markets as regulatory
conditions permit. We allow subscribers to combine our services into
individually designed packages rather than offering standard telecommunications
service packages designed for a typical customer. We believe this flexible sales
strategy reduces switching barriers for potential and existing subscribers who
may be reluctant to switch all of their telecommunications services and for
subscribers that have existing contracts with their service providers.
We have the capacity to establish deep and interdependent relationships with our
customers by: (i) developing tailored solutions for them, (ii) provisioning
their network needs and (iii) managing and maintaining their network operations.
We believe our outsourced solution is more capital efficient for customers and
provides them with advanced services without the expense of a full IT staff.
As a result of our solutions-oriented approach and high quality customer
service, we believe we are uniquely positioned to sell additional services and
products to customers as their telecommunications needs evolve. In addition, we
believe we are well positioned to retain customer relationships because of the
mission critical nature of our services, our commitment to a high level of
customer service and the value proposition we provide through our bundled
service offerings.
We believe that, by being the first provider of integrated telecommunications
services in our markets we secure access to a broad base of business and
government customers. We also believe that, if we develop our business
operations in accordance with our business plan we will create significant
barriers for our competitors to overcome and that our lowest operating cost
strategy and highly differentiated service offerings will give us competitive
advantages over the other telecommunications providers in our markets.
Our telecommunications solutions typically consist of one or a combination of
the following service categories:
o Managed Corporate Data Network Services. We offer data
communication links over a shared network environment. Because we
operate, manage and monitor our network end-to-end, we are able
to provide our customers with higher performance and greater
reliability than networks that use the public Internet. The
services we offer range from simple connections to customized
private network solutions, including high-speed data transmission
and Virtual Private Networks. As of December 31, 2001, we had
2,509 network service customers, which, in some cases, include
high-speed Internet access customers.
o Full Suite of Internet Access Services. Our services include both
high-speed and dial-up Internet access. We offer Internet access
services primarily to corporate and governmental users. As of
December 31, 2001, we had 2,948 high-speed and dial-up Internet
access customers.
o Telephony Services. We offer private carrier-grade voice services
in some of our markets. We intend to offer national and
international carrier-grade IP voice in all of our markets as
they deregulate and we obtain approvals to provide those
services.
o Other Services. We offer other telecommunications-related
services which we believe enhance our customers'
telecommunications and data services operations. These other
services include web and application hosting and managed network
security.
Our Business and Operating Issues
To operate successfully, we will need to deal with a number of governmental and
operational issues. These issues include the following:
Governmental Regulation. Our services are subject to extensive governmental
regulation. The amount, type and extent of that regulation varies from country
to country. The regulatory structure for any particular market is subject to
change from time to time, and any such regulatory change could have a material
and adverse effect on the particular market in which that change takes place,
and/or upon our business as a whole.
The regulatory environment in each of our major markets can be summarized as
follows:
Mexico. The 1995 Ley Federal de Telecomunicaciones, the 1940 Ley de Vias
Generales de Comunicacion, the 1990 Reglamento de Telecomunicaciones, and the
rules promulgated by Cofetel (such as rules for local and long distance
interconnection), define the regulatory structure applicable to
telecommunications services in Mexico. The objectives of those laws are to
promote the efficient development of the telecommunications industry, to
encourage fair competition in the provision of quality, low-price services, and
to ensure satisfactory coverage of the population based on socioeconomic
factors.
Telecommunications services in Mexico and service providers are regulated and
supervised by the Secretary of Communications and Transportation, or SCT, and
Cofetel. The SCT is the governmental agency principally responsible for
regulating telecommunications services in Mexico.
Under Mexican law, generally no more than 49% of the capital stock of a Mexican
corporation holding a concession to provide local telephone, domestic and
international long distance services may be held by non-Mexican investors. Our
principal operating company in Mexico, Intervan, restructured its ownership in
2000 to comply with these foreign ownership requirements as part of its
application for a Mexican telephony license. See our report on Form 10-QSB for
the quarter ended September 30, 2000 for a more detailed description of the
recapitalization.
Starting in 1997, Telmex was required to permit any other concessionaire to
connect to its network. The SCT issued technical rules for the interconnection
of competing long-distance carriers with the Telmex network in June 1994,
specifying there would be an unlimited number of long-distance concessions and
that Telmex must provide over 200 interconnection points by the year 2000. In
1996, SCT released new rules governing long-distance services, which generally
established the framework for competitive long-distance services.
Each of the countries in our Central American markets has enacted major
legislation for the deregulation of telecommunications services within the last
few years. Nicaragua and Honduras approved new regulatory structures in 1994 and
1995, respectively. In 1996, El Salvador, Guatemala and Panama adopted new
regulatory schemes, followed by the Dominican Republic in 1998 and Costa Rica in
early 2000. In general, each of these new laws establishes a regulatory
environment that calls for the breakup and privatization of government-owned
monopolies on telecommunications services. In some countries, such as Costa
Rica, it is still unclear as to whether new legislation will allow us to provide
the services that we provide in other market areas, and the timing of our entry
into those market segments.
Central America and Venezuela. The Venezuelan telecommunications laws are
regulated and supervised by CONATEL, a governmental agency. CONATEL is also
charged with the responsibility of creating competition in the
telecommunications industry. Currently, the markets for data services, dedicated
network services, dial-up Internet services, value added services, mobile
satellite services, trunking and rural telephony have been privatized.
Risks of Foreign Investment. Governments of many countries in which we operate
have exercised and will continue to exercise substantial influence over many
aspects of private business enterprise. Local governments own or control
companies that are or may become our competitors or companies upon which the
operating companies and network right holders in which we have an interest may
depend for required services or materials. Governmental actions in the future
could have a significant effect on our business operations, financial condition
and operations. Our interests in some or all of our market countries could be
adversely affected by expropriation, confiscatory taxation, nationalization,
political, economic or social instability, changes in laws or other developments
over which we have little or no control.
Network Issues. We rely on the existence of, and continuing ability to use or
exploit, telecommunications licenses, concessions or leases which are typically
granted by governmental agencies on an exclusive or limited basis and for
limited terms. There can be no assurance these governmental agencies will not
attempt to limit, revoke or otherwise adversely modify the terms of those
rights. Those rights may be subject to significant operating restrictions or
conditions, including restrictions relating to the implementation or
construction of network improvements, commercialization, subscriber rates or
royalties or other specified deadlines or conditions which, if not satisfied,
could result in the network rights being revoked or modified.
Our Properties and Facilities
Our Equipment. We have the ability to source key network components from a
number of equipment vendors. Fiber-optic and coaxial cable systems can generally
be constructed using equipment from different manufacturers. This is
particularly true with equipment such as switches, routers and servers, where
there are many manufacturers that distribute their products through a number of
resellers. Fixed local wireless networks can also be constructed using equipment
from different manufacturers, and can use different technologies. We believe
that, by employing standardized equipment, we will be able to make appropriate
decisions based on the price of the equipment, with less emphasis on the
manufacturer.
Our Office Space. As of December 31, 2001, we leased approximately:
o 2,500 square feet of office space in Salt Lake City, Utah under a
lease agreement expiring in September 2003.
o 8,100 square feet of office space in Sunrise, Florida under a
lease expiring in May 2005.
o 3,600 square feet of office space in Pembroke Pines, Florida
under a lease expiring in April 2003.
We have subleased our lease space in Pembroke Pines to a third party. That
sublease expires in April 2003. We believe our office space in Utah and Florida
is adequate for our current needs. We believe all of our leases are on
commercially reasonable terms. We also maintain, through our various
subsidiaries and affiliates, office space in a number of the countries in which
we operate.
Our Network and Other Rights. We hold license rights, either directly or
derivatively, for fiber-optic and coaxial cable networks and microwave
point-to-multipoint telecommunications networks in our markets. We generally
have acquired those rights through:
o the acquisition of direct ownership rights or rights of use
o long-term contracts with third parties
o arrangements where we are the majority or sole owner of the
entity that owns those assets, or
o contractual arrangements which we believe provide us with
substantial managerial and operational control of such assets
The rights for wireless point-to-multipoint microwave communications networks in
a number of the markets that meet our market selection criteria have already
been granted to, or been applied for by, third parties. Therefore, to build and
operate any wireless portions of our networks in new markets where we do not
already control network rights, we will have to purchase, lease or otherwise
acquire sufficient network capacity from or with those third parties or rely on
other transmission facilities, such as fiber-optic or coaxial networks.
EMPLOYEES
As of December 31, 2001, we had 393 full-time employees. Approximately 20 of our
employees work in our United States offices, and the balance work in our
subsidiary operation offices in our various markets. Our employees are not
represented by any unions or collective bargaining entities.
LITIGATION
In March 2000, we were named as a defendant in an action brought in federal
court in California. The suit claimed we had defrauded the plaintiffs in
connection with a merger we concluded in 1997 and that we had further breached
contractual obligations to offer the plaintiffs preemptive rights for securities
we later sold. After preliminary motions in the case, we filed a number of
motions for summary judgment on the issues raised by the plaintiff. The court
granted our motions for summary judgment and disposed of the last substantive
issue in the case in October 2001. We subsequently made a motion to recover our
costs and expenses in the matter, and, in February 2002, the parties negotiated
a settlement, which included a cash payment to us and the return of the stock we
issued to the plaintiff in 1997.
In April 2001, FondElec Group, Inc., an affiliate of one of our principal
shareholders ("FondElec Group"), filed an arbitration action against us in New
York alleging breach of a Services Agreement dated August 1998. The FondElec
Group claimed, among other things, that we failed to pay the FondElec Group
certain commissions and fees in connection with the sale of our securities, and
that we further owed the FondElec Group amounts for other transaction-related
services. We asserted a number of defenses and counterclaims in the proceeding,
including breach of fiduciary duty, duress and violation of federal and state
securities laws. In April 2002, we settled the FondElec Group arbitration
proceeding and each party dismissed its claims with prejudice against the other
party ("FondElec Settlement Agreement"). In connection with the settlement, we
(i) cancelled a $2,750,000 promissory note payable to us by an affiliate of the
FondElec Group; (ii) wrote off 420,000 in related FondElec Group assets; and
(iii) were released of a $1,864,118 recorded obligation payable to the FondElec
Group. Additionally, we agreed to pay the FondElec Group $200,000 on the 60th
day following repayment in full of amounts due under the Internexus revolving
credit agreement and each party executed mutual releases for any and all claims.
As a result of the above settlement, we recorded a $1,505,882 arbitration
settlement expense during the year ended December 31, 2001.
In July 2001, we were named in an arbitration proceeding initiated in Florida by
two of the parties who sold us some of our Guatemala assets and we filed
counterclaims, all relating to contractual obligations and representations made
in the asset purchase. In October 2001, we settled the arbitration with the two
original claimants, and the arbitration proceedings were dismissed with
prejudice. We believe the arbitration proceeding was settled on favorable terms.
In January 2002, we filed an arbitration proceeding against the sellers who were
not parties to the settlement. In the demand for arbitration, we allege that the
representations and warranties they made about the assets we bought were
inaccurate, that they fraudulently induced us into buying the assets and that we
are entitled to indemnification for those misrepresentations.
In November 2001, we were named in a lawsuit brought in the Third District Court
for the State of Utah (which was subsequently removed to the United States
Bankruptcy Court). The suit relates to a 1995 loan commitment from a third party
which is now in bankruptcy. Under the commitment, the third party loaned us
$996,707 and the total amount due, including interest, is now approximately $1.4
million. The commitment documents allowed us to repay the principal and interest
on or before August 1, 2001 or convert the obligation into a 10-year, monthly
amortized loan at any time before August 1, 2001 under certain conditions. In
July 2001, we notified the third party that we had elected to convert the loan
and we have made all required payments under the loan as converted. The third
party claims we were not entitled to convert the loan. We believe it has valid
defenses to the third party's claims, and intend to vigorously defend the suit.
DIVIDENDS DISTRIBUTIONS AND REDEMPTIONS
We have not declared or paid any dividends to the holders of our common shares
or preferred shares.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following information summarizes certain transactions we either engaged in
during the past two years (or which we propose to engage in) involving our
executive officers, directors, 5% stockholders and immediate family members of
those persons:
April 2002 Transactions. In April 2002, we entered into a series of agreements
relating to a commitment by Internexus S.C.A ("Internexus") to provide our
wholly owned subsidiary, Latin American Broadband, Inc., with up to $4 million
under a revolving credit agreement. Internexus is an affiliate of, and successor
to, in interest to Norberto Priu, one of our principal shareholders. See "Our
Principal Stockholders," below. We received an advance of $2 million under the
credit agreement at the closing. The amounts advanced under the agreement accrue
interest at 25% per annum, are senior to all other debt except for amounts due
on our vendor debt facility and are collateralized by a pledge of our common
shares owned by four of our largest shareholders. If we default on our
obligations under the Internexus credit agreement, and Internexus enforces its
rights under the stock pledges, Internexus would obtain control of a majority of
our outstanding voting power and would have the ability, among other things, to
elect our board of directors and effect fundamental corporate transactions.
The maturity date for the facility is the earliest to occur of (i) July 9, 2002,
(ii) a change of control (iii) a liquidation, winding up or dissolution or the
sale of all or substantially all of our assets, or (iv) the issuance of equity
securities to a third party. Additionally, at the maturity date, we agreed to
pay the lender an amount equal to the greater of (A) the amounts then
outstanding hereunder, together with interest thereon, or (B) an amount equal to
two hundred percent (200%) of the committed amount under certain circumstances,
including if the amounts advanced under the facility are repaid as a result of a
change of control, liquidation event or equity investment from a third party
that occurs after September 30, 2002 for a transaction entered into on or before
July 9, 2002. We also agreed to promptly engage an investment banker or
financial advisor reasonably acceptable to the lender for the purpose of
exploring a possible sale of all or substantially all of our business and
operations.
In connection with the execution of the April 2002 facility, we entered into two
additional transactions. The first transaction involved the replacement of two
notes totaling $7 million previously delivered by one of our Venezuelan
subsidiaries in favor of Telematica EDC, C.A. The replacement note, which was
delivered by our parent entity Convergence Communications, Inc., is also in the
principal amount of $7 million, accrues interest at 3% per annum, and is due,
along with accrued interest, in a balloon payment on March 15, 2015 (see
"Telematica Transactions" below). The second transaction involved the execution
of a settlement agreement between us and the FondElec Group (see the section
entitled "Litigation" for additional information regarding the FondElec Group
settlement).
September 2001 Transactions. In September 2001, we entered into a series of
agreements relating to our sale to two accredited investors of shares of our
common stock (the "September Financing"). Both of those parties (or their
affiliates) are the holders of more than 5% of our common stock and are parties
to other agreements with us, as described below. In connection with the stock
sale, we entered into a series of other agreements under which (1) all of our
outstanding preferred stock (consisting of Series C and Series D preferred
stock) was converted into shares of our common stock, (2) the holders of a
number of our outstanding warrants exercised those warrants and acquired shares
of our common stock, and (3) the parties to a shareholders agreement that we and
a number of our principal shareholders executed on October 18, 1999 agreed to
amend and restate that agreement to provide for modified board of director
approval requirements, an increase in the number of the members of our board of
directors from 10 to 12, and modifications to the contractual restrictions on
those parties' ability to transfer their common stock. For more information
regarding these transactions, please see our current report on Form 8-K filed on
October 9, 2001.
February 2001 Transactions. In February, 2001, we entered into a series of
agreements relating to our sale to six accredited investors of shares of our
newly designated series D preferred stock and warrants to acquire additional
shares of our series D preferred stock and common stock (the "February
Financing"). See our report on Form 8-K filed on March 7, 2001 for a more
detailed description of the February Financing and the agreements we entered
into in connection with its closing. The investors in the securities included
certain of our stockholders who, at the time of the transaction, held more than
5% of our stock on a voting basis and are parties to other agreements with us,
as described below.
In connection with our sale of the series D stock, our Board of Directors agreed
to grant to the investors in our series C stock warrants to acquire additional
shares of our common stock. The consideration for those warrants included, in
part, a waiver by a number of our shareholders of certain rights they had under
the terms of the warrants they acquired in October 1999 to an adjustment in the
purchase price in the shares they could acquire under those warrants resulting
from our sale of the warrants involved in the series D stock sale. In addition,
under the terms of our sale of the series D stock, we paid an affiliate of one
of the investors under the terms of the October 1999 series C stock transaction
a fee of $600,000 as compensation for its services in connection with the sale
of the series D stock and warrants.
October 1999 Transactions. In October 1999, we entered into a series of
agreements relating to our sale to six accredited investors of shares of our
newly designated series C preferred stock and warrants to acquire shares of our
common stock. Two of the accredited investors, FondElec Essential Services
Growth Fund, L.P. (together with its affiliates, FondElec) and Internexus S.A.
(together with its affiliates and successors in interest, Internexus) acquired
their securities through the conversion of debt we had issued them, and the four
other investors acquired their securities for cash. For a more detailed
description of this transaction and the agreements we entered into in connection
with it, see our reports of form 8-K dated October 15, 1999 and November 16,
1999. In July and September 2000, those shareholder parties (or certain of their
affiliates) exercised options that we issued them in October 1999 and acquired
additional shares of our series C preferred stock.
Internexus Affiliates Transactions. We have entered into the following
contracts, agreements and arrangements with a group of affiliated persons and
entities, including their successors-in-interest, which we refer to as
Internexus. Those affiliated parties include Norberto Priu, one of our 5%
shareholders, and Pablo Priu, one of our directors (see "Principal Stockholders"
below):
o In April 2002, Internexus committed to loan us up to $4.0 million
under the terms of a revolving loan agreement. See "April 2002
Transactions", above.
o In September 2001, Internexus purchased securities from us in the
September Financing.
o In February 2001, Internexus purchased securities from us in the
February Financing.
o In December 2000, we entered into a loan transaction with
Internexus, pursuant to which we borrowed $3 million on a
short-term basis. For a more detailed description of this loan,
see our report on Form 8-K filed on March 7, 2001.
o Under the terms of shareholders agreements to which we are a
party, our principal shareholders have agreed to vote, at any
election of our board of directors, for persons nominated by the
parties to those agreements. Messrs. Priu, Schiller and
Fucaraccio currently serve on our board as nominees of
Internexus. See "Our Management," below.
Telematica Transactions. We have entered into the following contracts,
agreements and arrangements with Telematica EDC, C.A., also one of our 5%
shareholders, and its affiliates:
o In October 1999, our Venezuelan subsidiary, entered into a $26
million financing arrangement with Telematica. The parties
executed the financing agreement for that arrangement in November
2000. Telematica paid us a portion of that financing commitment,
$7.0 million, in cash, in late 2000 and early 2001. The amounts
under the debt facility were convertible under certain
circumstances into shares of our subsidiary. Assuming the full
funding of the facility, the conversion of the debt amounts into
equity could have resulted in Telematica or its affiliates
acquiring 50% of the stock of our subsidiary. As noted above in
"Business and Properties - Our Networks and Markets", we have
decided to dispose of our Venezuela operations. As a result, we
have not drawn any additional amounts under our financing
agreement with Telematica. In April 2002, in connection with
Internexus' commitment to loan us up to $4.0 million, we replaced
the promissory notes for the $7.0 million that Telematica had
previously advance to us with a promissory note due in 2015. See
"April 2002 Transactions", above.
o Under the terms of shareholders agreements to which we are a
party, our principal shareholders have agreed to vote, at any
election of our board of directors, for persons nominated by the
parties to those agreements. Messrs. Safford, Pacanins, Shenefelt
and Corredor currently serve on our board as nominees of
Telematica. See "Our Management," below.
o Telematica was one of the investors in the February Financing.
o An affiliate of Telematica was one of the investors in the
September Financing.
FondElec Transactions. We have entered into the following contracts, agreements,
and arrangements with FondElec Essential Services Growth Fund, L.P., which is
one of our shareholders, and its affiliates:
o Our subsidiaries have entered into a number of agreements with
FondElec and its affiliates with respect to our business
operations in El Salvador. Those agreements include the purchase
agreements whereby we acquired our interest in our El Salvador
operating companies, the sale by that subsidiary of its capital
stock to a third party, and the documents relating to the
refinancing of the payment obligations for the operating
companies with a commercial lender. When Telematica purchased its
interest in the subsidiary in October 1999, the subsidiary used a
portion of the proceeds from that sale ($3.8 million) to pay
FondElec amounts the subsidiary owed it. In June 2001, we sold
our interest in one of our El Salvador operating companies to
FondElec and, in connection with that sale, refinanced $2.75
million in loans we previously made that operating entity.
o In August 1999, we entered into an advisory services agreement
with FondElec relating to our payment of certain fees to
FondElec, including fees (totaling $1,654,000) relating to the
sale of our series C stock in our October 1999 financing
transactions. In 2001, FondElec filed an arbitration proceeding
against us for additional fees and damages under the service
agreement. That arbitration was settled in April 2002. See the
section entitled "Litigation".
o Under the terms of shareholders agreements to which we are a
party, our principal shareholders have agreed to vote, at any
election of our board of directors, for persons nominated by the
parties to those agreements. Mr. Acosta-Rua currently serves on
our board as the nominee of FondElec. See "Our Management",
below.
Employment Agreements. We have entered into employment agreements with certain
of our senior management. Some of those employees also act as our directors.
Those employment agreements contain "change of control" provisions that provide
those employees with severance benefits under certain conditions.
Under agreements we previously had with two of our senior executives, we granted
those executives 5% non-dilutible interests in certain of our operating
subsidiaries. In 2000, we agreed to acquire those interests in exchange for
shares of our common stock. We issued a total of 366,666 common shares to those
two executives in connection with those purchases and granted them limited
"piggyback" registration rights for those shares.
In 2000, we restructured our operating subsidiary in Mexico to facilitate our
application for a telephony license. Under the terms of that restructuring, we
sold 51% of the voting stock of Intervan to one of our Mexican executives in
order to comply with certain foreign ownership requirements imposed by the
Mexican government on companies that hold such telecommunications licenses. We
retained 80% of Intervan's non-voting shares and 49% of its voting shares in the
transaction, which gives us approximately 92% of the economic rights associated
with Intervan's operations. For a more detailed description of this transaction,
see our report on Form 10-QSB for the quarter ended September 30, 2000.
OUR MANAGEMENT
Our directors, executive officers and key employees, and their respective ages
and the positions they held with us, are set forth below. Biographical
information for each of the senior management members and directors is also
presented below. With the exception of Lance D'Ambrosio and Troy D'Ambrosio, who
are brothers, there are no family relationships between or among any of our
directors or executive officers. Our Board of Directors is currently comprised
of twelve members. Executive officers are chosen by, and serve at the discretion
of, the Board of Directors:
Name Age Position
Lance D'Ambrosio............ 44 Chairman of the Board of Directors
Douglas Jacobs.............. 58 Chief Executive Officer
Brian Reynolds.............. 45 President and Chief Operating Officer
Troy D'Ambrosio............. 41 Senior Vice President, Legal
& Administration, Director
Amaury Rivera............... 40 Managing Director CCI Mexico
Anthony Sansone............. 37 Vice President, Treasurer and
Corporate Secretary
Gary Barlow................. 36 Vice President of Accounting and Taxation
Ron Bouganim................ 30 Vice President of Business Development
Pablo Priu.................. 33 Director
Peter Schiller.............. 67 Director
Jorge Fucaraccio............ 57 Director
Jeffery Safford............. 43 Director
Christopher Shenefelt....... 43 Director
Gonzalo Pacanins............ 38 Director
Norberto Corredor........... 38 Director
Mario L. Baeza.............. 51 Director
Carlos Christensen.......... 51 Director
Gaston Acosta-Rua........... 36 Director
Our Senior Management Team
Lance D'Ambrosio, Chairman of the Board of Directors. Mr. D'Ambrosio has been
involved in the telecommunications business for over ten years and has over 22
years of entrepreneurial business and sales experience. Mr. D'Ambrosio is
responsible for our acquisitions, strategic planning and mergers, and is
responsible for all of our financing plans. Mr. D'Ambrosio was one of our
founders and was our Chief Executive Officer until August 2000. Between 1992 and
1995, Mr. D'Ambrosio served as the President, Chief Executive Officer and a
Director of Transworld Telecommunications, Inc., or TTI, a wireless cable
television company in the United States that had operations in six markets. TTI
was sold to Sprint Corporation in 1999. Prior to entering the telecommunications
industry, Mr. D'Ambrosio was the President of Bridgeport Financial, Inc., a
holding company that acquired a full-service broker/dealer securities operation
and which was primarily involved in raising venture capital for investments in
high-tech companies. Prior to that, Mr. D'Ambrosio held various sales and
management positions with Paine Webber, Savin Corp. and Xerox Corporation.
Douglas Jacobs, Chief Executive Officer. Douglas K. Jacobs is our Chief
Executive Officer. Mr. Jacobs joined us in August 2000. Mr. Jacobs brings more
than 30 years of experience in telecommunications sales and marketing, as well
as hands-on knowledge of today's leading technology. Before joining CCI, Mr.
Jacobs worked for Alcatel, where he served as Senior Vice President and Area 8
President of Alcatel USA, heading an area with annual sales in excess $4 billion
and over 3,000 employees covering the US, Canada, Mexico and Japan. Prior to
joining Alcatel, Mr. Jacobs was Senior Vice President and Chief Operating
Officer of InterWave Communications, a manufacturer of GSM micro-cellular
network systems. Before that, Mr. Jacobs served in various sales and executive
positions with DSC Communications, most recently as Senior Vice President of
Worldwide Sales and Service, and before that as the Executive Vice President and
Chief Operating Officer of DSC's Denmark subsidiary. Mr. Jacobs'
telecommunications career began with Western Electric, a division of AT&T. Mr.
Jacobs spent 23 years with AT&T, rising to the position of AT&T Network Systems,
Southwestern Region Vice President. Mr. Jacobs holds a Bachelor and a Master
Degree in Industrial Engineering from Texas Tech University and Purdue
University respectively.
Brian Reynolds, President and Chief Operating Officer. Mr. Reynolds joined us in
July 1998 as our President and Chief Operating Officer. Mr. Reynolds has over 20
years of telecommunications experience in the United States and international
markets, focusing on major company start-ups. Between late 1997 and the
effective date of his employment with us, Mr. Reynolds acted as a
telecommunications consultant to a number of entities, including our company.
Between 1994 and 1997, Mr. Reynolds served as Chief Operating Officer of
Wireless Holdings, Inc., or WHI, where he was responsible for start-up and
growth of its high-speed data and wireless cable operations. During 1993 and
1994, he was Chief Operating Officer for Australia Media LTD., a combined direct
broadcast and wireless video company. Between 1989 and 1993, Mr. Reynolds was a
founder of Sutter Buttes Cablevision and Pacific West Cable in Northern
California, a wireless cable operation. Between 1984 and 1989, Mr. Reynolds was
responsible for the overall construction and profit and loss operations for
Sacramento Cable, taking the operations from construction and launch to over
150,000 customers. Before working for Sacramento Cable, Mr. Reynolds held
various management positions with Warner Cable. Mr. Reynolds received a Bachelor
of Arts Degree from Rutgers University with an emphasis in Accounting.
Troy D'Ambrosio, Senior Vice President Legal & Administration, Director. Mr.
D'Ambrosio has 21 years of business and government experience, including four
years of telecommunications experience prior to joining us as an officer in
October 1998. Before joining us, he served as Vice President of Administration
and as a Director of TTI and also served in executive positions and as a
director of its subsidiaries. TTI was sold to Sprint Corporation in 1999.
Between September 1996 and October 1998, Mr. D'Ambrosio served as the Manager of
Mutual Fund Operations for Wasatch Advisors, Inc., a registered investment
advisory firm which manages approximately $1 billion dollars in separately
managed accounts and maintains a family of mutual funds. Between July 1992 and
November 1993, Mr. D'Ambrosio was a Vice President and a partner in a public
relations firm specializing in legal, economic and government relations for
business. Between 1985 and 1992, Mr. D'Ambrosio was with American Stores
Company, a food and drug retailer with sales in excess of $20 billion annually,
where he served most recently as Vice President of Corporate Communications and
Government Relations. Mr. D'Ambrosio received a Bachelor of Science Degree in
Political Science from the University of Utah.
Amaury Rivera, Managing Director CCI Mexico. Mr. Rivera joined us in 2000 as our
Vice President of Sales and Marketing. Mr. Rivera has in excess of 17 years of
telecommunications industry experience and joined us from Iusacell/Bell Atlantic
in Mexico, where he was responsible for company-wide strategy in the long
distance, cellular, data and paging services areas. While at Iusacell, Mr.
Rivera was responsible for growing revenues by approximately 200% to $355
million in annual sales. Prior to joining Iusacell in 1999, Mr. Rivera was the
regional vice president and general manager at Centennial/Lambda, a Puerto Rican
based telecommunications start up that became the country's largest
telecommunications company.
Anthony Sansone, Vice President, Treasurer and Corporate Secretary. Mr. Sansone
has been with our company since its inception and, until 1998, acted as our
controller in addition to his duties as our Corporate Secretary and Treasurer.
Mr. Sansone has 14 years of financial, accounting and business experience,
including eight years of telecommunications experience. Between 1994 and 1997,
he was the Treasurer and Controller of TTI and, during 1996, served as a
director of WHI. During 1993 and 1994, Mr. Sansone was the Controller, Secretary
and the Director of Shareholder Relations for Paradigm Medical Industries, Inc.,
a public manufacturer of ophthalmic cataract removal devices. During 1992 and
1993, he was the Assistant Controller of HGM Medical Lasers, Inc., which
manufactures and sells surgical and dental lasers. Between 1988 and 1992, Mr.
Sansone was the Assistant to the Vice President of Public Relations and the
Assistant to the Chairman of the Board of Directors for American Stores Company,
a large retail grocery and drugstore chain. Mr. Sansone received a Bachelor of
Science degree in Accounting from Utah State University and a Master of Business
Administration degree from the University of Utah.
Gary Barlow, Vice President of Accounting and Taxation. Mr. Barlow has 14 years
of accounting and financial experience, including eight years of big-five public
accounting experience and a combined four years with IBM and two other public
accounting firms. Between 1992 and 1996, he was a Senior Auditor with Price
Waterhouse in Northern California, serving SEC registrant clients in the high
technology industry. Between 1997 and 1999, he was an Audit Manager with
Deloitte & Touche in Salt Lake City, Utah, where he served various clients,
including SEC registrants. Mr. Barlow received a Bachelor of Science degree in
Accounting from the University of Utah and is a Certified Public Accountant.
Ron Bouganim, Vice President of Business Development. Mr. Bouganim joined us in
October 1998 as Director of Mergers and Acquisitions. Mr. Bouganim has over
seven years of telecommunications and venture capital experience. From 1996 to
1998, Mr. Bouganim worked in the field of venture capital, advising various
portfolio companies in the telecommunications and media industries. In 1995, Mr.
Bouganim led a bid to acquire a PCS mobile telecommunications license in Canada.
Previously, Mr. Bouganim worked for the Latin American Division of SR Telecom, a
manufacturer of wireless telecommunications infrastructure. Mr. Bouganim
graduated with a Bachelor of Commerce with a major in accounting and
international business from McGill University.
Pablo Priu, Director. Mr. Priu is the President of Fulcrum Financial Services,
LLC. Fulcrum provides asset management and consultation services to private
investment companies and charitable organizations. Between 1995 and 1999, Mr.
Priu was assistant counsel for International Registries, Inc., a service company
providing corporate and maritime services to the international legal community.
Between 1993 and 1995, Mr. Priu was a legal consultant with Pan American/World
Health Organization. Mr. Priu holds a Bachelors of Arts Degree from Duke
University and a Juris Doctorate from Georgetown University Law Center.
Peter Schiller, Director. Mr. Schiller is currently retained by Internexus SCA
as a consultant. Mr. Schiller has been employed by Bolland S.A and its
affiliates, including Petrolera Argentina San Jorge S.A. and OEA Services, all
of which were Argentinean corporations engaged in oil and gas services, from
1990 until mid-2000 as the Director of New Business Development. Between 1976
and 1990, Mr. Schiller held general management positions in the heavy
electromechanical manufacturing, automotive components and non-ferrous metals
industries. Between 1961 and 1975, Mr. Schiller held a number of product design
and quality control management positions in the electrical, automotive and
tractor industries.
Jorge Fucaraccio, Director. Since 1994, Mr. Fucaraccio has been an advisor to
Petrolera Argentina San Jorge S.A. and Bolland S.A., Argentinean corporations,
or their affiliates in software engineering applications related to oil
production and data communications. Between 1989 and 1991, Mr. Fucaraccio worked
as the National Director of Technology at the National Institute of Industrial
Technology in Argentina, where he was responsible for managing all of its
technical departments and research centers, including its communications,
software engineering, energy, mechanics and building technologies research
departments. Between 1982 and 1988, he was a member of the Board of Advisors at
the Ministry of Science and Technology and the Ministry of Energy in Argentina.
During this period, he was responsible for the creation of a number of research
centers and directed several technical governmental missions between the
government of Argentina and countries in Europe and Asia. Between 1978 and 1985,
Mr. Fucaraccio was a director of an energy transmission and solar energy
utilization research program sponsored by the Organization of American States.
Jeffery A. Safford, Director. Mr. Safford is the Vice President and Chief
Financial Officer of AES Americas, a wholly owned subsidiary of The AES
Corporation. From April 1994 until Mr. Safford's appointment to such offices in
September 1998, he served as the Vice President and Chief Financial Officer and
Secretary of the AES China Generating Co., Ltd., and performed the function of
principal account officer. Mr. Safford was Director of Finance and
Administration of AES prior to April 1994. Prior to joining AES, Mr. Safford
worked as a Senior Auditor for Touche Ross & Co., an accounting firm, with
responsibility for several large publicly held clients. Mr. Safford graduated
from Pennsylvania State University with a degree in accounting and is a
Certified Public Accountant.
Christopher Shenefelt, Director. Mr. Shenefelt is Vice President of Telecom
Initiatives for The AES Corporation and has over 20 years of technical, business
and management experience. Prior to joining AES, Mr. Shenefelt was Vice
President of Network Planning at Winstar Communications, where he was
responsible for developing the financial-based network plans for Winstar's
expansion in existing and new markets. Prior to his employment with Winstar, Mr.
Shenefelt led a communications consulting group at SAIC, where they designed,
evaluated, and tested state-of-the-art communications and sensor technologies.
Mr. Shenefelt held various position at Lockheed-Martin and Electron
Communications Incorporated. Mr. Shenefelt holds a BSEE from Michigan Tech, an
MSEE in Wireless Communications from the University of Central Florida and an
MBA from the George Washington University.
Gonzalo Pacanins, Director. Mr. Pacanins is Senior Project Manager/Vice
President of AES Americas. Before joining AES, Mr. Pacanins was Senior Director
of M&A/Strategic Alliances for Atento, Inc., the largest global privately held
CRM/Teleservices company. Mr. Pacanins was responsible for structuring and
developing a corporate venturing program designed to establish an investment and
integration process for mergers and acquisitions activities on a global basis,
developing a market entry strategy in the United States market using
acquisitions, as well as structuring global strategic alliances with leading CRM
entities. Prior to Atento, Mr. Pacanins was Director of International Corporate
Venturing of OneSoft Corp, where he was responsible for designing and
structuring an investment vehicle to incubate and provide seed and first-round
financing to Internet and technology ventures in Latin America. From 1997 to
2000, Mr. Pacanins was Vice President at Darby Overseas Investments Ltd., one of
the leading private equity firms in Latin America, where he was active in
sourcing and evaluating transactions in the Andean Pact countries, as well as
Argentina. From 1991 to 1994, Mr. Pacanins was Vice President of Capital Market
for Confimerca, a Venezuelan investment banking firm, where he worked on
privatization assignments and mergers and acquisitions. Mr. Pacanins holds a BS
in Civil Engineering from Universidad Metropolitana in Caracas, Venezuela, an MS
in Finance from the University of Colorado at Boulder, and an MBA from Harvard
Business School.
Norberto Corredor, Director. Mr. Corredor is the Manager of Telecommunications
and Automation Services for C.A. La Electricidad de Caracas, SACA, a Venezuelan
utility company that is an affiliate of Telematica EDC, one of our shareholders.
In that capacity, he is responsible for acquisition, planning, operation and
maintenance of the company's telecommunications network and automation systems.
He has held different management positions during his 16 years with the company,
including as a manager assigned to work in Montreal, Canada, where he lead a
development team for the electric network control system. Mr. Corredor has also
been involved in the development of the telecommunications networks and
automation systems of several utilities in El Salvador and Colombia.
Mario L. Baeza, Director. Mr. Baeza is the Chairman and Chief Executive officer
of TCW/Latin America Partners, L.L.C., which is the managing general partner of
TCW/Latin America Private Equity Partners, L.P., a $230 million partnership
organized by Baeza & Company and jointly owned by Baeza & Company and TCW
Advisors, Inc. The fund makes privately negotiated equity and equity-related
investments in companies in Latin America. TCW Advisors, Inc. is an affiliate of
Trust Company of the West, a global asset management firm with over $85 billion
of assets under management. Between 1994 and 1996, Mr. Baeza was President of
Wasserstein Perella International Limited and Chief Executive Officer of Grupo
Wasserstein Perella, the Latin America division of the firm. From 1974 to 1994
he was an associate and then, at the age of 29, became a partner, at the law
firm of Debevoise & Plimpton, where he specialized in international mergers and
acquisitions, international finance and leveraged buyout transactions. Mr. Baeza
has been a Herman Phleger Visiting Professor of Law at Stanford Law School and a
Lecturer in Law at Harvard Law School. Mr. Baeza is a member of the board of
directors of Air Products and Chemical Company, an industrial company listed on
the New York Stock Exchange, the Ariel Mutual Funds Complex, Tendtudo Holdings,
L.L.C., Brazil's leading national do-it-yourself home improvement retail chain,
Dekor Internacional S.A. de C.V., one of Mexico's largest home finishings
chains, Camil Alimentos, S.A., one of Brazil's leading branded rice and beans
processors and distributors, Dermet de Mexico, Mexico's leading specialty
chemical distributor, and Marta Harff, a leading Argentine brand and retailer of
feminine personal care products.
Carlos H. Christensen, Director. Mr. Christensen is Managing Director of
TCW/Latin America Partners, LLC (an affiliate of TCW/CCI Holding) where he is
responsible for managing its business operations, including sourcing, analyzing
and monitoring its private equity investments. Prior to joining TCW/Latin
America Partners, Mr. Christensen was a Senior Director of Continental Bank,
where he was responsible for corporate finance and private equity investments in
Brazil and Argentina and, served as a member of the Board of Directors of two of
Continental's portfolio companies in Argentina. Mr. Christensen's professional
experience includes various credit and risk management related positions at
Banco de la Nacion Argentina in New York and Chicago and five years as a Finance
Manager at Witcel S.A., a specialty paper manufacturer in Argentina. Mr.
Christensen has a Business Administration degree from the Catholic University of
Argentina and a Masters in Management from the JL Kellogg Graduate School of
Management, Northwestern University.
Gaston Acosta-Rua, Director. Mr. Acosta-Rua has spent the last eight years in
the private equity investment and management sector in Latin America, primarily
as a Director of FondElec Group, Inc. Before joining FondElec, Mr. Acosta-Rua
worked for and helped create the Latin American Group for Chemical Venture
Partners and was previously an officer with the Chemical Bank Debt/Equity Group,
which was responsible for managing the combined Chemical Bank Manufacturers
Hanover portfolio of Latin American equity investments. Before working for
Chemical Bank, Mr. Acosta-Rua worked as a consultant to the Brookings Institute
in Washington, D.C.
Structure of Our Board of Directors
Our Amended and Restated Certificate of Incorporation provides for a classified
Board of Directors consisting of three classes. The directors in each class
serve staggered three-year terms. As of the date of this report, the Board of
Directors consists of twelve members. The Class 3 directors, consisting of
Messrs. Schiller, Christensen, Shenefelt and Pacanins serve until 2002. The
Class 2 directors, consisting of Messrs. Troy D'Ambrosio, Priu, Baeza and
Corredor, serve until 2003. The Class 1 directors, consisting of Messrs. Lance
D'Ambrosio, Corredor, Acosta-Rua and Fucaraccio, serve until 2004. At each
annual meeting of our shareholders, the successors to the class of directors
whose term expires at that meeting will be elected to hold office for a term
expiring at the annual meeting of shareholders held in the third year following
the year of their election. Our Amended and Restated Certificate of
Incorporation provides that directors may be removed only for cause and only by
the affirmative vote of the holders of two-thirds of the common shares entitled
to vote.
Our Board of Directors Committees
During 2001, our Board of Directors held 10 meetings, and each director in
office during the year attended at least 70% of those meetings. During 2001, the
Board of Directors had three standing committees, the Audit Committee, the
Compensation Committee, and the Executive Committee.
Our Audit Committee assists the Board in overseeing and monitoring the integrity
of our financial reporting process, our compliance with legal and regulatory
requirements and the quality of our internal and external audit processes. Upon
the Audit Committee's review of any of those matters, it is charged with
preparing and submitting periodic reports, summaries and proposals to our Board
of Directors regarding those matters, which may then be acted upon by our full
Board. As of the date of this report, the Audit Committee consists of Messrs.
Christensen, Priu and Pacanins. Mr. Christensen acts as chairman of the
committee. The report of this committee is set forth below.
Our Compensation Committee is charged with the review of the levels, form,
policies and procedures for the compensation of our executives and agents, the
review of our pension and other benefit programs, and such other compensation
matters as may be brought to its attention or as may be delegated to it by our
Board. Upon the Compensation Committee's review of any of those matters, it is
charged with preparing and submitting periodic reports, summaries of proposals
to our Board of Directors regarding those matters for action by the entire
Board. As of the date of this report, the Compensation Committee consists of
Messrs. Christensen, Lance D'Ambrosio, Fucaraccio, and Pacanins. Mr. Fucaraccio
acts as chairman of the committee. The report of this committee is set forth
below.
Our Executive Committee is charged with the performance of the duties of our
Board of Directors between regularly scheduled meetings of the Board and, in
that capacity, is charged with the functions, and has the authority of, the full
Board of Directors with regard to matters addressed by it. The Executive
Committee consisted of Messrs. Baeza, Fucaraccio, Safford, Acosta-Rua and Lance
D'Ambrosio. In March 2002, the Board of Directors dissolved this committee.
The Board does not have a nominating committee. The entire Board performs those
duties.
Our Director Compensation
Our directors do not receive cash compensation for serving on our Board (or any
committee of the Board), or for any other services they provide to us in their
capacity as directors. They are, however, reimbursed for expenses they incur in
connection with attending Board or committee meetings. In addition, directors
who are not employees are awarded options under the terms of our 1998 Director
Stock Plan.
The Board of Directors adopted the director stock plan in June 1998, and our
shareholders approved it at our annual meeting in August 1998. A total of
100,000 common shares are reserved for issuance under the director stock plan.
The director stock plan provides each non-employee director with an aggregate
annual compensation retainer of options to acquire 8,000 common shares. Each
option is granted on the first day after the last day of each calendar year for
services performed during the preceding year. The first options were granted
under the director stock plan in January 1999 for the annual period which
commenced on July 1, 1998. Each non-employee director will continue to receive
annual grants as long as he or she is a non-employee director. If a non-employee
director no longer serves as a director for any reason, he or she is entitled to
all ungranted portions of his or her option (which will accrue on a daily basis
through the date of termination as a director).
Each option vests on the first anniversary of the date of its grant, and the
options expire, if unexercised, five years from the date of grant. The exercise
price of each option is 85% of the fair market value of the common shares on the
date of grant. The number of common shares issuable in connection with the
option and the aggregate number of common shares remaining available for
issuance under the director stock plan are proportionately adjusted to reflect
any subdivision or combination of the outstanding common shares.
The director stock plan will continue until May 30, 2008, unless it is
terminated prior to that time by the Board of Directors. The Board of Directors
may amend, modify or suspend the director stock plan for the purpose of
addressing any changes in legal requirements or for any other purpose permitted
by law, except that (i) no amendment or alteration of the director stock plan
will be effective prior to its approval by the shareholders to the extent that
approval is then required by applicable legal requirements, and (ii) the
director stock plan can not be amended more than once every six months to the
extent the amendment is limited by Rule 16b-3(c)(2)(ii) (or any successor
provision) under the Securities Exchange Act of 1934, as then in effect.
Our Executive Compensation
The following information summarizes the compensation we paid our Chief
Executive Officer and our four other most highly compensated executive officers
whose total salary and bonus exceeded $100,000, (our "named officers") during
the fiscal years ended December 31, 2001, 2000 and 1999. We awarded options
during 2000 to Douglas Jacobs, our Chief Executive Officer, and Amaury Rivera,
our Senior Vice President and Mexico General Director, both of whom joined us as
employees during 2000.
Long Term
Annual Compensation Compensation
------------------- --------------
Securities
Name and Underlying Other
Principal Position Year Salary Bonus Options (#)(5) Compensation(6)
------------------ ---- ------ ----- ------------ -------------
Douglas Jacobs 2001 $350,000 $220,833(2) -0- $13,753
Chief Executive Officer 2000 $350,000(1) $66,667(2) 400,000 $12,136(4)
1999 $-0- $-0- -0- $-0-
Lance D'Ambrosio 2001 $240,000 $40,000 -0- $17,647
Chairman of the Board 2000 $212,500 $-0- -0- $16,400
1999 $165,000 $41,250 -0- $14,950
Amaury Rivera 2001 $210,000 $36,745 -0- $16,422
Senior Vice President 2000 $210,000(3) $-0- 125,000 $9,500(4)
and Mexico General 1999 $-0- $-0- -0- $-0-
Director
Brian Reynolds 2001 $193,725 $28,351 -0- $14,026
President and Chief 2000 $169,500 $-0- -0- $15,700
Operating Officer 1999 $135,000 $33,750 -0- $13,000
Troy D'Ambrosio 2001 $183,475 $21,480 -0- $9,839
Senior Vice President 2000 $157,000 $-0- -0- $8,180
of Legal & 1999 $105,000 $26,250 -0- $6,765
Administration
- -----------------------
(1) Reflects full year base salary. Mr. Jacobs became a salaried employee
on August 3, 2000.
(2) Includes signing bonus of $133,333 in 2001 and $66,667 in 2000.
(3) Reflects full year base salary. Mr. Rivera became a salaried employee
on August 1, 2000.
(4) Person named was our employee during only a part of the year in
question. The amount shown assumes full year premiums on group term
life insurance and medical, dental and disability insurance.
(5) See Fiscal Year-End Option Value table below for the values of
these options.
(6) Other Compensation includes (i) the dollar value of premiums paid by us
for health, life and disability insurance for each named executive
officer, (ii) the dollar value of premiums paid by us to term life
insurance for the benefit of each named executive officer, (iii) in the
case of Lance D'Ambrosio, an annual car allowance of $7,800, and (iv)
in the case of Amaury Rivera, a car allowance of $5,460 in 2001. Does
not include amounts related to rental payments for corporate apartments
used by CCI executives during travel outside their homebase.
Fiscal Year-End Option Value
The following information summarizes the number and value of options to
acquire common shares held by the executive officers described above.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Year-End (#) Options at Fiscal Year-End
----------------------------- ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ----------- ------------- ----------- -------------
Douglas Jacobs 300,000 100,000 $-0- $-0-
Amaury Rivera 87,500 37,500 $-0- $-0-
Brian Reynolds 183,333 166,667 $137,500 $125,000
For purposes of determining the values of the options held by the named
executive officers, we assumed that the common shares underlying the option
granted had a value of $1.75 per share, which is the estimated fair market value
attributed to that stock on November 30, 2001 in connection with the sale of our
common stock to an unrelated party. The option value is based on the difference
between the fair market value of those shares and the option exercise price per
share, multiplied by the number of shares subject to the options.
Our Employment Agreements
We typically enter into an employment agreement with each of our senior
management and key personnel. The employment agreements generally have initial
terms of between one and three years. Under the agreements, the employee is
entitled to a base salary plus incentive bonuses, as determined by the Board of
Directors, standard benefits such as health and life insurance and reimbursement
of reasonable business expenses. The agreements also provide for moving
allowances in some instances. The employment agreements for a number of our
senior executives also provide for the grant of options. The option grants are
generally subject to vesting schedules and require the employee to forfeit
portions of their vested options if he terminates the relationship.
We can terminate the employment contracts for cause, which is defined in the
agreements, or without cause. In addition, the employee can terminate the
contract on notice to us ranging from 90 to 180 days. If the contract is
terminated without cause or as a result of a "change of control," as defined in
the agreements, the employee is entitled to receive severance pay of up to 12
months salary, depending on the particular agreement. The agreements also
contain non-competition, non-solicitation and assignment of inventions
provisions which we believe are consistent with industry practice.
Our employment contract with our Chief Executive Officer, who joined us in
August, 2000, is similar to our employment contracts with our other key
employees, but differs in several significant respects, primarily relating to
the compensation he will receive in the event of the termination of his contract
under certain conditions constituting a "change of control" (as defined in the
agreement) during the first 18 months of the contract. The provisions relating
to the payment of compensation for a "change of control" terminated in February
2002. The contract provides for the grant of two grants of options, the first of
which vested upon the execution of the agreement. The second grant vested 50% on
the first anniversary of the agreement and the other 50% will vest on the second
anniversary of the agreement. If the agreement is terminated under certain
conditions during the first year, the first grant of options also terminates.
Each year after the initial year of the agreement, he is entitled to receive
additional options based on a formula equal to 100% of his cash compensation for
the preceding year, divided by the market price of our common shares on the date
of the grant as determined by the board of directors. The per share exercise
price for those options is the market value of our common stock on the date of
grant, and the option vests over a two-year period after the date of grant,
one-half on the first anniversary of the date of the grant and the balance on
the second anniversary after the date of the grant. In general, the options
granted under the agreement are exercisable until the earlier of the fifth
anniversary of the date of the grant or the termination of the agreement. Any
non-vested portions of any options terminate on the termination of the
agreement. Our Chief Executive Officer is also entitled to receive annual
bonuses under his agreement. These bonuses are discretionary and determined by
our board of directors, with the exception of the bonus for the year 2000, which
was set at an amount equal to 25% of the Chief Executive Officer's base salary.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Overview
The Compensation Committee of the Board of Directors is composed of three
outside directors and Lance D'Ambrosio, our Chairman. The Compensation
Committee, which consists of Mr. Carlos Christensen, Mr. Lance D'Ambrosio, Mr.
Jorge Fucaraccio and Mr. Gonzalo Pacanins, is responsible for establishing and
administering our executive compensation policies. This report addresses the
compensation policies for fiscal year 2001 as they affected Mr. Douglas Jacobs,
in his capacity as Chief Executive Officer, and our other executive officers.
General Compensation Policy
The objectives of the Company's executive compensation program are to:
o Provide a competitive compensation package that will attract and
retain superior talent and reward performance.
o Support the achievement of desired performance.
o Align the interests of executives with the long-term interests of
stockholders through award opportunities that can result in
ownership of common stock, thereby encouraging the achievement of
superior results over an extended period.
Executive Officer Compensation Program
Our executive officer compensation program is comprised of: (i) base salary,
which is set on an annual basis; (ii) annual incentive bonuses, which are
subjective but primarily based on the achievement of predetermined objectives;
and (iii) long-term incentive compensation in the form of periodic stock option
grants, with the objective of aligning the executive officers' long-term
interests with those of the stockholders and encouraging the achievement of
superior results over an extended period.
The Compensation Committee performs reviews of executive compensation to confirm
the competitiveness of the overall executive compensation packages as compared
with companies who compete with us to attract and retain employees.
In considering compensation of our executives, one of the factors the
Compensation Committee takes into account is the anticipated tax treatment to us
of various components of compensation. We do not believe Section 162(m) of the
Internal Revenue Code of 1986, as amended, which generally disallows a tax
deduction for certain compensation in excess of $1 million to any of the
executive officers appearing in the Summary Compensation Table above, will have
an effect on us. The Compensation Committee has considered the requirements of
Section 162(m) of the Code and its related regulations. It is the Compensation
Committee's present policy to take reasonable measures to preserve the full
deductibility of substantially all executive compensation, to the extent
consistent with its other compensation objectives.
Base Salary
The Compensation Committee reviews base salary levels for our executive
officers. Base salaries are set competitively relative to companies in the
telecommunications industry and other comparable companies. In determining
salaries the Compensation Committee also takes into consideration individual
experience and performance. The Compensation Committee seeks to compare the
salaries paid by companies of similar size and stage of development. Within this
comparison group, we seek to make comparisons to executives at a comparable
level of experience, who have a comparable level of responsibility and expected
level of contribution to our performance. In setting base salaries, the
Compensation Committee also takes into account the intense level of competition
among telecommunications companies to attract talented personnel.
Annual Incentive Bonuses
Along with each executive officer, we establish goals related specifically to
that officer's areas of responsibility. The Compensation Committee determines
the amount of each executive officer's bonus based on their contractual
agreement, as well as a subjective assessment by the Compensation Committee of
the executive officer's progress toward achieving the established goals. Bonuses
are awarded on an annual basis.
Long-term Incentive Compensation
Long-term incentive compensation, in the form of stock options, allows the
executive officers to share in any appreciation in the value of our common
stock. The Compensation Committee believes that stock option participation
aligns executive officers' interests with those of the stockholders. The amounts
of the awards are designed to reward past performance and create incentives to
meet long-term objectives. Awards are made at a level calculated to be
competitive within the telecommunications industry as well as a broader group of
companies of comparable size and complexity. In determining the amount of each
grant, the Compensation Committee takes into account the number of shares held
by the executive prior to the grant.
Chief Executive Officer Compensation
Mr. Douglas Jacobs was appointed to the position of Chief Executive Officer in
August 2000. Under the terms of the Employment Agreement, Mr. Jacobs receives an
annual base salary of $350,000. This is consistent with the range of salary
levels received by his counterparts in companies in the telecommunications
industry and other comparable companies. The Compensation Committee believes Mr.
Jacobs has managed us well in a challenging business climate and has continued
to move us towards our long-term objectives.
In fiscal 2000, we granted stock options to Mr. Jacobs to purchase 200,000
shares of common stock at an exercise price of $10.00 and 200,000 common shares
at an exercise price of $12.50 per share. These option awards contain certain
vesting provisions, along with certain forfeit provisions if Mr. Jacobs
voluntarily terminates his employment. This option package is designed to align
the interests of Mr. Jacobs with those of our stockholders with respect to
short-term operating results and long-term increases in the price of our stock.
The grant of these options is consistent with the goals of our stock option
program as a whole.
THE COMPENSATION COMMITTEE
Jorge Fucaraccio, Chairman
Lance D'Ambrosio
Carlos Christensen
Gonzalo Pacanins
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors (the "Audit Committee") has three
members, Carlos Christensen, Pablo Priu, and Gonzalo Pacanins. Each member of
the Audit Committee is an independent director, in that they are not employed by
the Company.
The Audit Committee assists the Board in overseeing and monitoring the integrity
of our financial reporting process, our compliance with legal and regulatory
requirements and the quality of our internal and external audit processes. The
role and responsibilities of the Audit Committee are determined by the Board.
The Audit Committee reviews and reassesses their duties annually and recommends
any changes to the Board for approval. The Audit Committee is responsible for
overseeing our overall financial reporting process. In fulfilling its
responsibilities for the financial statements for Fiscal 2001, the Audit
Committee took the following actions:
o Reviewed and discussed the audited financial statements for the
fiscal year ended December 31, 2001 with management and Deloitte
& Touche, LLP, our independent auditors.
o Discussed with Deloitte & Touche, LLP the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to
the conduct of the audit; and
o Received written disclosures and the letter from Deloitte &
Touche, LLP regarding its independence as required by
Independence Standards Board Standard No. 1. The Audit Committee
further discussed with Deloitte & Touche, LLP their independence.
The Audit Committee also considered the status of pending
litigation, taxation matters and other areas of oversight
relating to the financial reporting and audit process that the
Audit Committee determined appropriate.
The following is a summary of the fees charged by Deloitte & Touche LLP, the
member firms of Deloitte Touche Tohmatsu, and their respective affiliates
(collectively, "Deloitte & Touche"), which includes Deloitte Consulting, for
services rendered to us:
Audit Fees
The aggregate fees for professional services rendered by Deloitte & Touche in
connection with their audit of our consolidated financial statements and reviews
of the consolidated financial statements included in our Quarterly Reports on
Form 10-Q for the year ended December 31, 2001 was $220,941.
Financial Information Systems Design and Implementation Fees
There were no professional services rendered by Deloitte & Touche during the
year ended December 31, 2001 relating to financial information systems design
and implementation.
All Other Fees
The aggregate fees for tax planning and compliance and consultation on
accounting transactions billed by Deloitte & Touche during the year ended
December 31, 2001 was $116,960.
The Audit Committee has considered whether the provision of non-audit services
noted above is compatible with maintaining the independence of Deloitte & Touche
LLP.
Based on the Audit Committee's review of the audited consolidated financial
statements and discussions with management and Deloitte & Touche LLP, the Audit
Committee recommended to the Board that the audited financial statements be
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2001 for filing with the Securities and Exchange Commission.
THE AUDIT COMMITTEE
Carlos Christensen, Chairman
Pablo Priu
Gonzalo Pacanins
Limitations of Liability and Indemnification
Our Amended and Restated Certificate of Incorporation limits the personal
liability of our directors and officers for monetary damages to the maximum
extent permitted by Nevada law. Under Nevada law, such limitations include
monetary damages for any action taken or failed to be taken as an officer or
director except for an act or omission that involves intentional misconduct or a
knowing violation of the law, or payment of improper distributions. Nevada law
also permits a corporation to indemnify any current or former director, officer,
employee or agent if the person acted in good faith and in a manner in which he
reasonably believed to be in or not opposed to the best interest of the
corporation. In the case of a criminal proceeding, the indemnified person must
also have had no reasonable cause to believe that his conduct was unlawful.
Our Bylaws provide that, to the full extent permitted by our Amended and
Restated Certificate of Incorporation and the Nevada Business Corporation Act,
we will indemnify, and advance expenses to, the our officers, directors and
employees in connection with any action, suit or proceeding, civil or criminal,
to which those persons are made party by reason of their being a director,
officer or employee. That indemnification is in addition to the advancement of
expenses.
At present, we are not involved in any litigation or proceeding involving any of
our directors, officers, employees or agents where indemnification by us would
be required or permitted.
Our Employee Benefit Plans
In June 1998, our Board adopted the 1998 Stock Incentive Plan. The Incentive
Plan was approved by our shareholders in August 1998. The Board believes the
availability of stock options and the other incentive compensation that is
permitted to be awarded under the Incentive Plan is an important factor in our
ability to attract and retain qualified employees and to provide incentives for
them to exert their best efforts on our behalf.
All employees, consultants, advisors, officers and directors of our subsidiaries
and our company are eligible to participate in the Incentive Plan. The Incentive
Plan is administered by the Board, which may designate the price and other terms
and conditions of any such award. The Board may also delegate authority for
administration of the Incentive Plan to a committee of the Board. Subject to the
provisions of the Incentive Plan, the Board, or a committee, if any, may adopt
and amend rules and regulations relating to the administration of the Incentive
Plan. Only the Board may amend, modify or terminate the Incentive Plan.
A total of 1,250,000 common shares were originally reserved for issuance under
the Incentive Plan. Our Board increased the number of common shares reserved
under the Incentive Plan to 1,820,229 common shares in December 1998. All of the
shares reserved under the plan have been approved for grant by the Board of
Directors, subject to the grant of such options pursuant to an option agreement
in form approved by the Board of Directors, of which no options have been
exercised as of December 31, 2001.
The Incentive Plan permits the grant of incentive stock options, nonstatutory
stock options, stock awards, stock appreciation rights, cash bonus rights,
dividend equivalent rights, performance-based awards and foreign qualified
grants. Common shares awarded under the Incentive Plan may be authorized and
unissued common shares or common shares acquired in the market. If any award
granted under the Incentive Plan expires, terminates or is cancelled, or if
common shares sold or awarded under the Incentive Plan are forfeited to or
repurchased by us, the common shares again become available for issuance under
the Incentive Plan.
Our Board determines the persons to whom options are granted, the option price,
the number of common shares to be covered by each option, the period of each
option, the times at which options may be exercised and whether the option is an
incentive stock option, which we refer to as an ISO, as defined in Section 422
of the Internal Revenue Code of 1986, as amended, or a non-statutory stock
option, or NSO.
All options granted under the Incentive Plan are exercisable in accordance with
the terms of an option agreement entered into at the time of, and as a condition
to, the grant. If the option is an ISO, the terms must be consistent with the
requirements of the tax code and applicable regulations, including, if
applicable, the requirements that the option price not be less than the fair
market value of the common shares on the date of the grant. If the option is an
NSO, the option price is as determined by our Board, and may be less than the
fair market value of the common shares on the date of the grant.
Our Board may award common shares under the Incentive Plan as stock bonuses,
restricted stock awards, or otherwise. Our Board determines the persons to
receive those awards, the number of common shares to be awarded, the time of the
award and the terms, conditions and restrictions of the stock awards. The
aggregate number of common shares that may be awarded to any one person using
stock awards under the Incentive Plan is determined by our Board. No stock
awards have yet been granted under the Incentive Plan.
We may also grant stock appreciation rights under the Incentive Plan. Stock
appreciation rights may, but need not, be granted in connection with an option
grant or an outstanding option previously granted under the Incentive Plan. A
stock appreciation right is exercisable only at the time or times established by
our Board. If a stock appreciation right is granted in connection with an
option, it is exercisable only to the extent and on the same conditions as the
related option is exercisable. Our Board may withdraw any stock appreciation
rights granted under the Incentive Plan at any time and may impose any condition
upon the exercise of a stock appreciation right or adopt rules and regulations
from time to time affecting the rights of holders of stock appreciation rights.
No stock appreciation rights have yet been granted under the Incentive Plan.
Our Board may also grant cash bonus rights under the Incentive Plan in
connection with options granted or previously granted, stock appreciation rights
granted or previously granted, stock awarded or previously awarded and shares
sold or previously sold under the Incentive Plan. Bonus rights may be used to
provide cash to employees for the payment of taxes in connection with awards
under the Incentive Plan. No cash bonus rights have yet been granted under the
Incentive Plan.
Our Board may also grant awards intended to qualify as performance-based
compensation under Section 162(m) of the Code and the regulations thereunder.
Performance-based awards may be denominated either in common shares or in dollar
amounts. All or part of the awards will be earned if performance goals
established by our Board for the period covered by the awards are met and the
employee satisfies any other restrictions established by our Board. The
performance goals are expressed as one or more targeted levels of performance
for our company or any of our subsidiaries, divisions or other units, including
performance levels relating to earnings, earnings per share, stock price
increase, total stockholder return, which is measured by the stock price
increase plus dividends, return on equity, return on assets, return on capital,
economic value added, revenues, operating income, cash flows or any of the
foregoing. No performance-based awards have been granted under the Incentive
Plan.
Awards under the Incentive Plan may be granted to eligible persons residing in
foreign jurisdictions. The Board may adopt supplements to the Incentive Plan
necessary to comply with the applicable laws of foreign jurisdictions and to
afford participants favorable treatment under those laws, but no award may be
granted under any supplement with terms that are more beneficial to the
participants than the terms permitted by the Incentive Plan. No foreign
qualified grants have been awarded under the Incentive Plan.
The Incentive Plan will continue in effect for ten years from the date it was
adopted by the Board, subject to earlier termination by the Board. The Board may
suspend or terminate the Incentive Plan at any time.
MATTERS SUBMITTED TO THE VOTE OF THE SECURITY HOLDERS
During 2001, our security holders approved two proposals through the use of
written consents, which is authorized under our organizational documents and
Nevada corporate law. The first matter related to an increase in the number of
our authorized preferred shares from 25 million shares to 75 million shares.
That action was approved by written consent in June 2001 and we affected the
change in our corporate structure in November 2001. The second consent
resolution matter related to an amendment of our Amended and Restated Articles
of Incorporation to increase the maximum number of persons who can sit on our
board of directors from 10 persons to 12 persons, and to amend our Restated
Articles to provide that certain types of equity financings require the
affirmative vote of at least 75% of our board. That action was taken by our
shareholders in September 2001, and the amendment was effected in November 2001.
The approval procedures, number of shares of our stock voting in favor of each
of those actions pursuant to the written consents and a description of each of
the transactions so approved are described in more detail in our information
statements on Schedule 14C dated July 16, 2001 and November 1, 2001,
respectively.
OUR PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our outstanding securities as of April 8, 2002 by the following
parties:
o all those persons or entities known by us to be beneficial owners
of 5% or more of each class of our outstanding securities, or "5%
Shareholders"
o each director, and our executive officers
o all directors and our executive officers as a group.
The data presented are based on information provided to us by the parties
specified above.
Name of Number of Percentage of
Beneficial Owner Class Shares Class(1)
---------------- ----- ------ ------
Norberto Priu Common 15,005,523 25.0%
(5% Shareholder)(2)
AES Telecom Americas, Inc. Common 11,764,705 19.6%
(5% Shareholder)(3)
Telematica EDC, C.A. Common 8,599,901 14.3%
(5% Shareholder)(4)
TCW/CCI Holding LLC and TCW/CCI Holding II LLC Common 7,950,657 13.2%
(5% Shareholder)(5)
Lance D'Ambrosio Common 3,652,939 6.1%
(5% Shareholder/ Chairman)(6)
Douglas Jacobs(7) Common 300,000 (*)
(CEO)
Brian Reynolds(8) Common 183,333 (*)
(Pres. and COO)
Amaury Rivera Common 50,000 (*)
(SVP/Mexico General Director)(9)
Troy D'Ambrosio Common 687,292 1.1%
(Sr. V.P./Director)(10)
Anthony Sansone Common 120,555 (*)
(V.P., Treasurer and Secretary)(11)
Gary Barlow(12) Common 50,000 (*)
(V.P., Acct. and Tax)
Ron Bouganim(13) Common 100,000 (*)
(V.P., Bus. Development)
Pablo Priu(14) Common -0- (*)
(Director)
Peter Schiller(15) Common -0- (*)
(Director)
Jorge Fucaraccio(16) Common -0- (*)
(Director)
Jeffery Safford(17) Common -0- (*)
(Director)
Christopher Shenefelt(18) Common -0- (*)
(Director)
Gonzalo Pacanins(19) Common -0- (*)
(Director)
Norberto Corredor(20) Common 9,621 (*)
(Director)
Mario L. Baeza(21) Common 9,621 (*)
(Director)
Carlos Christensen(22) Common -0- (*)
(Director)
Gaston Acosta-Rua(23) Common 20,000 (*)
(Director)
All directors and officers as a group (19 Common 5,183,361 8.5%
persons)(24)
- ----------------------
*Less than 1%
(1) Based on 60,019,618 outstanding shares of common stock, which does not
include 572,468 shares of common stock held by our wholly owned
indirect subsidiary, WCI Cayman Inc. The inclusion of any shares as
"beneficially owned" does not constitute an admission of beneficial
ownership (which has a broad definition under the securities laws) of
those shares. Unless otherwise indicated, each person listed has sole
investment and voting power with respect to the shares listed. Also,
each person is deemed to beneficially own any shares issuable on
exercise of stock options or warrants held by that person that are
currently exercisable or that become exercisable within 60 days after
April 8, 2002.
(2) Does not include 276,581 shares of common stock that may be acquired
under a one-year option we granted the named shareholder on September
11, 2001. Includes options to acquire 38,093 common shares which were
granted to the named stockholder's designees to our Board of Directors
under our Director Stock Plan, but which were assigned to the named
stockholder under the terms of the designees' arrangements with the
named stockholder. We have been informed that in March 2002, the named
shareholder intends to transfer his shares to Internexus S.C.A.
("Internexus").
(3) AES Telecom Americas, Inc. is an affiliate of Telematica EDC, C.A.
These shares are subject to a pledge in favor of Internexus until the
repayment of any amounts advanced under the April 2002 revolving credit
agreement between us and Internexus. See "Related Party Transactions:
April 2002 Transactions."
(4) Telematica EDC, C.A is an affiliate of AES Telecom Americas, Inc. These
shares are subject to a pledge in favor of Internexus until the
repayment of any amounts advanced under the April 2002 revolving credit
agreement between us and Internexus. See "Related Party Transactions."
Does not include 1,626,953 shares of common stock that may be acquired
under a one-year option we granted the named shareholder on September
11, 2001.
(5) Includes 5,228,452 shares of the total 7,950,657 shares noted that are
held by TCW/CCI Holding LLC and 2,722,205 shares of the total 7,950,657
shares noted that are held by TCW/CCI Holding II LLC. TCW/CCI Holding
LLC and TCW/CCI Holding II LLC are holding companies whose sole members
are TCW/Latin America Private Equity Partners, LP and TCW/Latin America
Off-Shore Pool I, LP, respectively. These shares are subject to a
pledge in favor of Internexus until the repayment of any amounts
advanced under the April 2002 revolving credit agreement between us and
Internexus. See "Related Party Transactions." Does not include
1,626,953 shares of common stock that may be acquired under a one-year
option granted TCW/Latin America Partners, LLC, an affiliated of the
named shareholders, on September 11, 2001.
(6) 3,626,689 of these shares are subject to a pledge in favor of
Internexus until the repayment of any amounts advanced under the April
2002 revolving credit agreement between us and Internexus. See "Related
Party Transactions." Includes shares formerly reported as being held by
an entity controlled by the named shareholder and Troy D'Ambrosio. The
jointly controlled entity was dissolved in April 2002 and the named
shareholder now has direct control of those shares.
(7) Includes options to acquire 300,000 common shares.
(8) Includes options to acquire 183,333 common shares.
(9) Includes options to acquire 50,000 common shares.
(10) These shares are subject to a pledge in favor of Internexus until the
repayment of any amounts advanced under the April 2002 revolving credit
agreement between us and Internexus. See "Related Party Transactions."
Does includes shares held by Mr. D'Ambrosio's wife for which he
disclaims beneficial ownership. Included shares formerly reported as
being held by an entity jointly controlled by the named shareholder and
Lance D'Ambrosio. The jointly controlled entity was dissolved in April
2002 and the named shareholder now has direct control of those shares.
(11) 119,170 shares shown are held by a limited liability company for which
the named stockholder acts as the managing member. The named
stockholder does not disclaim beneficial ownership of such shares.
(12) Includes options to acquire 50,000 common shares.
(13) Includes options to acquire 100,000 common shares.
(14) Mr. Priu is the grandson of Norberto Priu.
(15) Mr. Schiller is an officer of one or more affiliates of Norberto Priu
and Raquel Emilse Oddone de Ostry. Mr. Schiller disclaims beneficial
interest in the shares held by messrs. Priu and Ostry and their
affiliates.
(16) Mr. Fucaraccio is an officer of one or more affiliates of Norberto Priu
and Raquel Emilse Oddone de Ostry. Mr. Fucaraccio disclaims beneficial
interest in the shares held by messrs. Priu and Ostry and their
affiliates.
(17) Mr. Safford is an officer of one or more affiliates of AES Telecom
Americas, Inc. Mr. Safford disclaims beneficial interest in the shares
held by AES Telecom Americas, Inc.
(18) Mr. Shenefelt is an officer of one or more affiliates of AES Telecom
Americas, Inc. Mr. Shenefelt disclaims beneficial interest in the
shares held by AES Telecom Americas, Inc.
(19) Mr. Pacanins is an officer of one or more affiliates of AES Telecom
Americas, Inc. Mr. Pacanins disclaims beneficial interest in the shares
held by AES Telecom Americas, Inc.
(20) Mr. Corredor is an officer of Telematica or its affiliates. Mr.
Corredor disclaims beneficial interest in the shares held by Telematica
except to the extent shown. Includes options to acquire 9,621 common
shares.
(21) Mr. Baeza is a principal of TCW/CCI Holding or its affiliates, and is
an officer and sole member of a company that is a member of an entity
that controls TCW/CCI Holding. Mr. Baeza disclaims beneficial interest
in the shares held by TCW/CCI Holding or its affiliates. Includes
options to acquire 9,621 common shares.
(22) Mr. Christensen is a principal of an affiliate of TCW/CCI Holding. Mr.
Christensen disclaims beneficial interest in the shares held by TCW/CCI
Holding or its affiliates.
(23) Mr. Acosta-Rua is a principal of FondElec and certain of its
affiliates. Mr. Acosta-Rua disclaims beneficial interest in the shares
held by FondElec and its affiliates. Also includes options to acquire
20,000 common shares.
(24) Assumes the matters set forth in notes 1 through 23. Includes options
to acquire 722,575 common shares. Includes the shares held by Lance
D'Ambrosio as a "5% Shareholder," Mr. D'Ambrosio also serves as a
director.
PART 2.
MARKET FOR EQUITY AND RELATED SHAREHOLDER MATTERS
There is no established public market for our common shares or preferred shares.
We cannot predict the effect, if any, that future sales of common shares or
preferred shares, or the availability of such shares for sale, will have on any
market price prevailing from time to time on our equity securities. Future sales
of substantial amounts of our stock, whether common or preferred, could
adversely affect any prevailing market prices of our outstanding equity
securities.
In 1995 we issued 1.0 million of our common shares to the former shareholders of
TTI in connection with our business separation from Transworld
Telecommunications, Inc., or TTI. In connection with that transaction, we placed
all of those shares in escrow (where they remain today) and filed a registration
statement on Form 10-SB under the Securities Exchange Act of 1934, as amended.
We issued all of our currently issued and outstanding common shares and
preferred shares since the initial issuance of the 1 million common shares that
are held in escrow in transactions which we believe did not involve unregistered
public offerings. The common shares and preferred shares we issued in those
transactions are "restricted securities." All or a portion of the restricted
shares may in the future become (or, as in the case of common shares currently
held in escrow, are) eligible for sale in the public market place in reliance on
Rule 144, subject to volume, affiliate, timing and manner of sale or other
restrictions contained therein.
We have previously issued warrants and options, which were not registered under
the federal or state securities laws in reliance upon exemptions from
registration contained in those laws. The warrants and options constitute
"restricted securities" and may not be resold unless registered under the
Securities Act of 1933, as amended, or disposed of in connection with an
exemption therefrom.
As of the date of this report, there are approximately 390 holders of our
outstanding common shares.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our consolidated financial data as of and for
each of the years ended December 31, 2001, 2000, 1999, 1998 and 1997. The
selected consolidated financial data as of and for each of the years ended
December 31, 2001, 2000, 1999, 1998 and 1997 have been derived from our
consolidated financial statements. The consolidated financial statements and the
report thereon for the years ended December 31, 2001, 2000 and 1999 are included
elsewhere in this Annual Report of Form 10-K. The consolidated financial
statements and the report thereon for the years ended December 31, 1998 and 1997
are included in our Annual Report on Form 10-KSB for the year ended December 31,
1998 ("1998 Form 10-KSB"). The information below should be read in conjunction
with the consolidated financial statements (and notes thereon) and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included below and in the 1998 Form 10-KSB.
[THIS SPACE INTENTIONALLY LEFT BLANK]
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Years Ended December 31,
-----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- --------------- --------------- -------------- --------------
NET REVENUES FROM SERVICES $ 40,170,949 $ 35,027,458 $ 9,099,054 $ 3,113,482 $ 40,186
--------------- --------------- --------------- -------------- ---------------
COSTS AND EXPENSES:
Variable cost of services 27,376,072 21,400,503 3,202,017 1,876,133 165,048
Salaries, wages and benefits 19,077,085 17,872,673 5,768,580 2,756,212 343,072
Selling, general and administrative 9,306,606 14,938,511 7,114,111 5,485,204 1,866,615
Depreciation and amortization 14,063,613 14,160,812 5,308,489 2,864,789 619,182
Stock option compensation expense 54,505 248,293 1,251,349 753,046 962,738
Business restructuring charges and asset
impairments 21,869,264 - 5,680,101 - -
--------------- --------------- --------------- -------------- ---------------
Total costs and expenses 91,747,145 68,620,792 28,324,647 13,735,384 3,956,655
GAIN ON ASSET SALE (8,001,337) - - - -
--------------- --------------- --------------- -------------- ---------------
OPERATING LOSS (43,574,859) (33,593,334) (19,225,593) (10,621,902) (3,916,469)
OTHER INCOME (EXPENSE):
Interest income 445,293 966,170 427,953 268,996 116,367
Interest expense (6,401,587) (3,693,887) (3,702,770) (677,188) (807,203)
Arbitration settlement (1,505,882) - - - -
Other (195,429) - - - -
Net gain (loss) on foreign exchange (789,286) (102,013) 27,491 - -
--------------- --------------- --------------- -------------- ---------------
Total other expense (8,446,891) (2,829,730) (3,247,326) (408,192) (690,836)
--------------- --------------- --------------- -------------- ---------------
LOSS BEFORE INCOME TAXES, MINORITY INTEREST (52,021,750) (36,423,064) (22,472,919) (11,030,094) (4,607,305)
PROVISION FOR INCOME TAXES (40,843) (30,786) (50,183) - -
--------------- --------------- --------------- -------------- ---------------
LOSS BEFORE MINORITY INTEREST AND
EXTRAORDINARY ITEM (52,062,593) (36,453,850) (22,523,102) (11,030,094) (4,607,305)
MINORITY INTEREST IN LOSS (GAIN) OF
SUBSIDIARIES (3,536,304) 3,480,790 2,245,623 799,298 13,011
--------------- --------------- --------------- -------------- ---------------
NET LOSS (55,598,897) (32,973,060) (20,277,479) (10,230,796) (4,594,294)
NON-CASH REMEASUREMENT OF WARRANTS / OPTIONS (10,386,464) (352,000) - - -
--------------- --------------- --------------- -------------- ---------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (65,985,361) $ (33,325,060) $ (20,277,479) $ (10,230,796) $ (4,594,294)
=============== =============== =============== ============== ===============
NET INCOME PER SHARE OF COMMON STOCK:
Net loss per basic and diluted common share $ (1.79) $ (1.44) $ (1.48) $ (0.87) $ (0.57)
=============== =============== =============== ============== ===============
Weighted-average number of common shares:
Basic and diluted 36,834,387 23,149,752 13,660,881 11,736,927 8,044,827
=============== =============== =============== ============== ===============
As of December 31,
------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- --------------- --------------- -------------- ---------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 4,238,166 $ 4,193,170 $ 26,303,296 $ 4,315,281 $ 6,171,515
Working capital (18,076,902) (32,548,814) 12,807,119 (3,969,421) 4,493,869
Total assets 103,160,625 126,717,902 97,204,523 42,473,044 17,489,106
Notes payable less current portion 11,528,701 12,274,717 11,389,937 3,987,268 -
Long-term debt (payable to related parties) 8,288,118 4,769,497 2,595,634 11,224,504 1,130,660
Stockholders' equity 48,701,970 58,589,045 59,375,280 10,684,526 14,378,966
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following information should be read in conjunction with "Selected
Consolidated Financial Data" and our Consolidated Financial Statements and notes
thereto provided elsewhere in this report. The following discussion and other
parts of this report may contain forward-looking statements that involve risks
and uncertainties. Our actual results may differ significantly from the results
discussed in those forward-looking statements. Factors that might cause such
differences include, but are not limited to, our history of unprofitability and
the continuing uncertainty of our profitability, our ability to develop and
introduce new services, the uncertainty of market acceptance of our new and
existing services, our reliance on collaborative partners, our limited sales and
marketing experience, risks associated with obtaining governmental approvals for
our services, the highly competitive industry in which we operate and the rapid
pace of technological change within that industry, changes in or our failure to
comply with governmental regulations, our dependence on key employees and
general economic and business conditions, some or all of which may be beyond our
control.
Overview
We are a leading facilities-based provider of broadband services operating in
recently deregulated high-growth markets, principally Mexico. We offer
enterprise customers end-to-end communications solutions, including managed
corporate data network services, high-speed data connections, high-speed and
dial-up Internet access, voice, video, e-commerce-enabling services and other
value-added communications services.
Since our inception, we have sustained significant net losses and negative cash
flow. We expect the losses and negative cash flow to continue until we develop a
customer base that will generate sufficient revenues to fund our operating
expenses. We also anticipate that the execution of our business plan will result
in a rapid expansion of our operations, which may place a significant strain on
our management, financial situation and other resources.
Our ability to manage the problems associated with our expansion will depend,
among other things, on our capability to monitor operations, control costs,
maintain effective quality control, secure necessary interconnect and regulatory
approvals, expand internal management, technical information and accounting
systems and attract, assimilate and retain qualified management and professional
personnel.
Our inability or failure to effectively manage these issues could result in
significant subscriber turnover, stagnant or decreasing subscriber growth, our
inability to meet our contractual obligations for continued funding under our
various vendor financing relationships such as with Alcatel, managerial
inefficiencies, missed corporate opportunities and continuing or increased
losses.
The difficulties in managing these various business issues will be compounded by
a number of the unique attributes of our business operations and our strategy
for becoming a premier facilities-based telecommunications provider in our
various markets. For example, our operating network is based on an IP, Gigabit
Ethernet architecture that incorporates a variety of state-of-the-art delivery
platforms, including fiber-optic, fixed wireless technologies and two-way
coaxial cable. Gigabit Ethernet technologies have been commercially used on a
limited basis.
We selected this technology because we believe it allows us to deliver broadband
connectivity to our customers at high, committed information rates more
efficiently than other older technologies current used by some of our
competitors. However, if this technology does not perform as expected or provide
the advantages that we expect, our business, financial condition and the results
of our operations may be materially and adversely affected.
Further, we employ an IP-based technology platform that uses packet switching to
transmit voice, video and data elements over the same network. We believe that
IP-based packet-switched networks have less overhead and greater capacity than
traditionally used technology platforms but, in the past, there have been issues
regarding the quality of service provided by those platforms. We believe that
the quality of services provided by other transport systems has been
incorporated into the newer generations of IP switches and bandwidth managers,
but if our technology platform does not perform as expected or provide the
advantages we expect, our business, financial condition and the results of our
operations could also be materially and adversely affected.
Also, as part of our operations in some of our markets, we rely on network
capacity that we lease from third parties, some of which may be our competitors
in the market. Those parties may not have the same incentive as other,
non-competitive, network owners to maintain those existing relationships with us
on terms which promote our competitive advantage.
Results of Our Operations
2001 Compared to 2000
Revenues. Our revenues for 2001 totaled $40.2 million, compared to $35.0 million
for 2000, representing a $5.2 million increase in revenues. The following table
shows our revenues by region for 2001 and 2000:
TOTAL REVENUES 2001 2000
(in thousands)
Mexico (Intervan) $ 21,519 $ 16,529
Venezuela (Inter@net) 923 1,132
Central America 17,729 17,366
-------- --------
Consolidated total $ 40,171 $ 35,027
========= =========
The increase in our 2001 revenues was primarily attributable to growth of our
operations in Mexico (Intervan), combined with the acquisition of Metrotelecom
(Central America) in April 2000, but was offset by the sale of a portion of our
El Salvadoran operations (Chispa) in June 2001. Intervan contributed $5.0
million of the revenue increase, consisting of an increase of $3.9 million in
high-speed data revenue, with the remainder consisting of other revenue,
including telephony.
Our total revenues in 2002 will be affected by the sale of the Chispa operations
in 2001, which contributed $3.4 and $8.5 million in revenue for 2001 and 2000,
respectively, and our decision to cease operations in Venezuela during 2001,
which contributed $0.9 and $1.1 million in revenue for 2001 and 2000,
respectively. The revenue losses from the Chispa and Venezuela operations are
projected to be offset by revenue growth in 2002 from our Mexican operations,
which grew by 30.2% between 2000 and 2001. Additionally, if we sell our Central
American assets as discussed above, our revenues would be affected further. Our
revenues in Central America, as adjusted for the sale of a portion of our El
Salvador operations, were $14.3 and $8.9 million for 2001 and 2000,
respectively.
Variable Cost of Services. Variable cost of services consists primarily of
high-speed data bandwidth, telephony and cable programming charges. The cost of
these services totaled $27.4 million in 2001, an increase of $6.0 million over
2000. The increase relates primarily to an increase in our customer base,
primarily in Mexico. Of total variable cost of services for 2001, $16.6 million
related to our Intervan operations in Mexico.
Salaries, Wages and Benefits. Our salaries, wages and benefits totaled $19.1
million in 2001, an increase of $1.2 million, from 2000, due primarily to
employee hirings subsequent to June 2000 and the inclusion of Guatemala
employees for a full twelve months in 2001. We maintained a total of 393
employees at December 31, 2001, which compares with 648 employees at December
31, 2000, adjusted for the 123 employees associated with the El Salvador
operations sold in June 2001. This significant decrease in employee headcount
reflects the 255 employees we terminated in connection with our business
restructuring discussed below.
Selling, General and Administrative Expenses. We incurred SG&A expenses of $9.3
million in 2001, a significant decrease of $5.6 million compared to 2000. The
decrease in SG&A expenses reflects the impact of management's cost reduction
program implemented during 2001. The decrease in SG&A reflects:
o Travel, advertising and promotion costs decreased $1.9 million to
a total of $2.5 million in 2001, compared to $4.4 million in
2000.
o Consulting and legal fees decreased $2.3 million to a total of
$1.6 million in 2001, compared to $3.9 million in 2000.
o Other operating expenses decreased $1.4 million in 2001 to a
total of $5.2 million, compared to $6.6 million in 2000.
Stock Compensation Expense. We incurred non-cash stock compensation expense in
2001 of $54,505 compared to
$248,293 in 2000.
Depreciation and Amortization. Our depreciation and amortization expense totaled
$14.1 million in 2001 and 2000.
Business Restructuring Charges and Asset Impairments. In connection with a
restructuring plan to exit certain non-strategic market regions and to
streamline our cost structure in both foreign and corporate operations, we
recorded a pre-tax charge of $21.9 million for the year ended December 31, 2001,
which includes restructuring costs of $5.8 million and asset write-downs of
$16.1 million. These costs include $14.4 million of restructuring costs recorded
for the year ended December 31, 2001 to reflect our approval to cease operations
in Venezuela.
For the year ended December 31, 2001, restructuring costs primarily relate to
involuntary employee separations of $3.7 million for approximately 255 employees
and facility reduction costs of $2.1 million. The employee separation costs
primarily impacted our corporate operations and Venezuela, but also impacted all
of our geographic locations, with the majority pertaining to management
employees. As of December 31, 2001, almost all of the 255 employee separations
were completed.
For the year-ended December 31, 2001, asset write-downs reflect the write-down
of certain long-lived intangible assets, VAT tax receivable and tangible fixed
assets that became impaired as a result of our decision to limit or reduce or
exit certain operations in non-strategic market regions and reduce operations in
Venezuela. Impairment losses were determined based on the write-down of fixed
assets, goodwill and other acquired intangibles to their fair value, which was
estimated by the expected future cash flows.
Interest Income and Interest Expense. Our interest income was $0.5 million in
2001 versus $1.0 million in 2000. The 2000 interest income was higher due to a
higher average cash investment balance during 2000. Interest expense for 2001 of
$6.4 million increased $2.7 million over 2000. The significant increase in
interest expense is primarily associated with the $3.0 million in accelerated
interest amortization for the Venezuela and the non-Mexico debt issue cost
components directly associated with their note components of the Alcatel
equipment financing facility. Also contributing to this increase, were the
Guatemala acquisition debt and Alcatel debt being outstanding during all twelve
months of 2001. The significant increase in 2001 interest expense was offset by
$2.1 million in interest capitalization that was recorded to our networks in
Mexico. The average interest rate recorded on our indebtedness outstanding as of
2001 and 2000 was approximately 11%. All of our debt, with the exception of the
Alcatel debt, is based on fixed interest rates. Our Alcatel debt requires
quarterly interest payments at LIBOR plus 4.5%.
Provision for Income Taxes. We recorded a provision for income taxes of $0.04
million in 2001, compared to $0.03 million for 2000.
Net Loss. We incurred a net loss attributable to common shareholders of $66
million in 2001, an increase of $32.7 million, compared to 2000. The principal
reasons for the increase were:
o $21.9 million in business restructuring charges and asset
impairments.
o $10.4 million in non-cash remeasurement of options and warrants
charge as a result of the induced conversion of preferred stock
on September 11, 2001 and the subsequent modifications of common
stock awards to two accredited investors.
o $1.2 million increase in salary and benefits expense attributable
to the growth in employee headcount subsequent to June 2000 to
support our operations and the inclusion of the Guatemala
employees for the full twelve months in 2001. Since March 31,
2001, salary and benefit costs have significantly decreased in
connection with the restructuring plan implemented during 2001.
o $1.5 million in arbitration settlement from the FondElec Group
arbitration settlement.
o $2.7 million increase in interest expense due to the accelerated
interest amortization on certain components of the Alcatel
equipment financing facility combined with a higher average debt
balance during 2001.
o $7 million increase in minority interest income of which $5
million directly relates to the sale of our interest in Chispa.
o The above increases were offset by the $8 million pre-tax gain on
the Chispa asset sale, a $5.6 million decrease in SG&A expenses
due to the concerted effort by management to reduce such
expenses, and a $0.2 million decrease in non-cash stock
compensation expense.
2000 Compared to 1999
Revenues. Our revenues for 2000 totaled $35 million, compared to $9.1 million
for 1999, representing a $25.9 million increase in revenues. The following table
shows our revenues by region for 2000 and 1999:
TOTAL REVENUES 2000 1999
(in thousands)
Mexico (Intervan) $ 16,529 $ 172
Venezuela (Inter@net) 1,132 1,156
Central America 17,366 7,772
-------- --------
Consolidated total $ 35,027 $ 9,100
======== ========
The increase in our 2000 revenues was primarily attributable to ownership of the
operating entities of Intervan (Mexico) and GBNet (Central America) for all
twelve months of 2000. GBNet operations contributed $4.3 million in 2000
revenues. The Company also acquired Metrotelecom (Central America) in April
2000, which contributed $4.3 million in revenues in 2000.
Variable Cost of Services. Variable cost of services consists primarily of
high-speed data bandwidth, telephony and cable programming charges. The cost of
these services totaled $21.4 million in 2000, an increase of $18.2 million over
1999. Of total variable cost of services for 2000, $12.8 million related to our
Intervan operations in Mexico. The significant increase in variable cost of
services reflects growth in our revenues, including completing significant
acquisitions in December 1999 and April 2000.
Salaries, Wages and Benefits. Our salaries, wages and benefits totaled $17.9
million, an increase of $12.1 million (or 210%), from 1999. We maintained a
total of 471 employees at December 31, 1999, of which 165 employees related to
companies we acquired in December 1999. The adjusted headcount of 306 employees
for December 31, 1999, compared to 773 employees at December 31, 2000 reflects
an employee headcount increase of almost 153%. The increase in employee
headcount reflects significant employee hiring in primarily the sales, marketing
and technical departments to support our planned significant growth in
operations. The increase in employee headcount also reflects normal increases
associated with our growing operations, combined with the employees we acquired
during the month of April 2000 with our purchase of Metrotelecom, which had 154
employees at December 31, 2000. We increased the salaries, wages and benefits of
our personnel to match market rates and increases in cost of living.
Selling, General and Administrative Expenses. We incurred SG&A expenses of $14.9
million in 2000, an increase of $7.9 million (or 110%) compared to 1999. The
increase in SG&A expenses reflects growth in our operations, including
completing three significant acquisitions in April 2000 and December 1999, as
well as the increased development of our networks. The increase in SG&A
reflects:
o Travel, advertising and promotion costs increased $3.4 million to
a total of $4.4 million in 2000, compared to only $1.0 million in
1999. This significant increase in expenses is the result of the
rapid development of our operations into Central America,
Venezuela and Mexico.
o Consulting and legal fees, which totaled $3.9 million, compared
with $2.7 million for 1999.
o Other operating expenses such as rent and lease expenses for
office space and equipment increased to $2 million in 2000,
compared to $0.4 million for 1999.
o On a consolidated basis, we recorded a provision for doubtful
accounts of $1.4 million in 2000, compared to $0.4 million in
1999 as a result of three significant acquisitions and increased
operations.
Stock Compensation Expense. We incurred non-cash stock compensation expense in
2000 of $0.2 million compared to $1.3 million in 1999.
Depreciation and Amortization. Our depreciation and amortization expense totaled
$14.1 million in 2000, representing an increase of $8.8 million over 1999. The
significant increase reflects the amortization of intangible assets relating to
our three significant acquisitions in December 1999 and April 2000.
Additionally, the increase reflects the depreciation expense from network assets
obtained through acquisitions and foreign subsidiary network asset purchases.
Interest Income and Interest Expense. Our interest income increased $0.6 million
for a total of almost $1.0 million, in 2000 due to a higher average cash
investment balance during 2000. Interest expense for 2000 of $3.7 million
remained constant compared to interest expense in 1999. The average interest
rate recorded on our indebtedness outstanding as of 2000 was approximately 11%,
compared to approximately 10.75% for 1999.
Provision for Income Taxes. We recorded a provision for income taxes of $0.03
million in 2000, compared to $0.05 million for 1999.
Net Loss. We incurred a net loss attributable to common shareholders of $33.3
million in 2000, an increase of $13.0 million, compared to 1999. The principal
reasons for the increase were:
o a $12.1 million increase in salary and benefits expense
attributable to acquisitions and as a result of significant
growth in employee headcount to support planned operations.
o an $8.9 million increase in depreciation and amortization expense
on intangible assets as a result of acquisitions and the
build-out of our networks.
o a $7.8 million increase in SG&A expenses due to the growth in our
operations and as a result of
acquisitions.
o the above increases were offset by a $7.7 million increase in net
revenues over variable cost of services, a $1.2 million increase
in minority interest loss and a $1 million decrease in non-cash
stock compensation expense. Additionally, in 1999 there was a
one-time significant asset impairment of $5.7 million which was
not required in 2000.
Liquidity and Capital Resources
Since inception, we have funded our cash requirements at the parent company
level through debt and equity transactions. The proceeds from these transactions
were primarily used to fund our investments in, and acquisitions of, start-up
network operations, to provide working capital, and for general corporate
purposes, including the expenses we incurred in seeking and evaluating new
business opportunities. Our foreign subsidiary interests have been financed by a
combination of equity investments and shareholder loans.
As of December 31, 2001, we had the following cash obligations and commitments
to make future payments under contracts and contingent commitments as follows:
Less than 1 -3 4 -5 After 5
Contractual Obligations Total 1 Year Years Years Years
----------------------- ----- ------ ----- ----- -----
Long-Term Debt $33.6 $13.8 $4.9 $6.1 $8.8
Operating Leases $4.9 $2.0 $2.7 $0.2 $0.0
Unconditional Purchase Obligations $0.7 $0.7 $0.0 $0.0 $0.0
---- ---- ---- ---- ----
Total Contractual Cash Obligations $39.2 $16.5 $7.6 $6.3 $8.8
===== ===== ==== ==== ====
As of the date of this report, we are not in compliance with the operating and
payment covenants of the equipment purchasing provision of the Alcatel
agreements. We are negotiating a waiver of those payment provisions with
Alcatel, but we have not yet received (and there can be no assurance that we
will obtain) Alcatel's agreement to the waiver, or that Alcatel will agree to
modify the payment provisions in a manner which we believe is acceptable. As a
result, Alcatel has the right to accelerate the maturity of the amounts we have
drawn under the facility and pursue its remedies for default.
In March 2002, we requested and Alcatel agreed to reduce the amounts available
under the Alcatel facility from $175.0 million to $9.1 million. This reduction
will decrease the amount of quarterly commitment fees we pay to Alcatel.
As of the date of this report, we have not paid a $3.7 million principal payment
on a note payable due on April 5, 2001 relating to our Guatemala acquisition due
to purchase price adjustment and indemnification claims we made in 2001 and in
our January 2002 demand for arbitration against the holders of that note. We
allege in our arbitration filing that the representations and warranties made by
certain sellers about the assets we bought were inaccurate, that the sellers
fraudulently induced us into buying the assets and that we are entitled to
indemnification for the sellers' misrepresentations. We believe our claims are
greater than the amount due on April 5, 2001. However, we may be required to pay
some or all of this amount and future amounts due if we are unsuccessful in the
arbitration proceeding.
The telecommunications market dropped dramatically beginning in 2000, which has
significantly affected the market value of companies in that industry. The
values of telecommunications companies have also been adversely affected by the
credit experience of the established telecommunications vendors, which have
recently had increasing problems in collecting payments for their equipment. As
a result of these factors, investors and lenders are carefully evaluating
prospective investment opportunities in, and the investment values of,
telecommunications companies that are seeking investments.
During 2001, our operating activities used $32.3 million, compared with $15.7
million during the same period in 2000. The increase was primarily related to
expenses and asset impairments related to our 2001 restructuring and payments on
our accounts payable and accrued liabilities. Our investing activities used $0.3
million in 2001 compared with using $36.3 million during the same period in
2000. The decrease was primarily attributable to the proceeds from the sale of
our cable television and residential data assets in El Salvador and the decrease
in purchases of property and equipment. Financing activities, principally the
issuance of Series D Preferred Stock in February 2001 and issuance of common
stock in September 2001 offset by the payments on notes payable, provided $32.6
million in 2001.
As of December 31, 2001, we had current assets of $14.9 million, compared to
$32.9 million of current liabilities.
The cash flow generated by our foreign operations will not be sufficient to
cover our planned operational growth in the next fiscal year. Our ability to
execute our business plan and continue as a going concern will depend on our
ability to obtain additional sources of funds to finance our business plan.
There can be no assurance that we will be able to obtain funding on terms
acceptable to us, or at all.
We intend to make capital expenditures in the next several years in connection
with building our networks, the further development of our operations in Mexico
and Central America, and new customer accounts (for which we install our
equipment on customer premises). We intend to meet our capital requirements
during 2002 from a combination of the following:
o The draw down of amounts available from the April 2002 facility
with Internexus.
o The sale of equity securities and of selected operations and
assets
o Extending or modifying repayment terms on seller notes
o Senior secured lending
o Reductions in capital expenditures
o Control of operating expense growth
Management believes the April 2002 revolving loan commitment from Internexus
will provide us with sufficient operating capital to fund our operations only
through June 2002, at which point we will either be required to obtain
additional debt and/or equity financing from third parties, sell selected
assets, significantly reduce the scope of our business plan or take a
combination of those actions. Under the terms of the April 2002 loan commitment,
we agreed to retain an investment advisor to assist us in the sale of all or a
portion of our assets or business or obtain additional financing to continue our
operations.
We spent $20 million, $32.6 million and $13.1 million during 2001, 2000 and
1999, respectively, for capital expenditures. We anticipate that we will require
a minimum of $5.0 million during 2002 for capital expenditures related to the
expansion of our existing telecommunications business, and that we will require
additional amounts in periods after 2002.
We have the ability to moderate our capital spending and losses by varying the
number and extent of our market build out activities and the services we offer
in our various markets. If we elect to slow the speed, or narrow the focus, of
our business plan, we will be able to reduce our capital requirements and
losses. The actual costs of building out and launching our markets would depend
on a number of factors, however, including our ability to negotiate favorable
prices for purchases of network equipment, the number of customers and the
services for which they subscribe, the nature and success of the services that
we may offer, regulatory changes and changes in technology. In addition, actual
costs and revenues could vary from the amounts we expect or budget, possibly
materially, and such variations are likely to affect how much additional
financing we will need for our operations. Accordingly, there can be no
assurance that our actual financial needs will not exceed the anticipated
amounts available to us, including from new, third parties, described above.
To the extent we acquire the amounts necessary to fund our business plan through
the issuance of equity securities, our shareholders may experience dilution in
the value per share of their equity securities. The acquisition of funding
through the issuance of debt could result in a substantial portion of our cash
flow from operations being dedicated to the payment of principal and interest on
that indebtedness, and could render us more vulnerable to competitive pressures
and economic downturns. Our subsidiaries or affiliates could also obtain
financing from third parties, but there can be no assurance our subsidiaries or
affiliates will be able to obtain the financing required to make planned capital
expenditures, provide working capital or meet other cash needs on terms which
are economically acceptable to us.
Critical Accounting Policies
Our critical accounting policies are those which we believe require significant
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. A discussion of our critical accounting
policies, the underlying judgments and uncertainties affecting their application
and the likelihood that materially different amounts would be reported under
different conditions or using different assumptions, is as follows:
Property and Equipment
Our telecommunications equipment and network represent 52% of our total assets.
We have several accounting policies dealing with our plant and equipment that
significantly impact our operations. Recording depreciation expense requires us
to estimate the average useful lives of each of our systems components. We
account for network improvement costs, including salary of employees dedicated
to the network construction and improvement, by capitalizing those costs which
we believe will add value to our networks and depreciate those improvements over
their estimated useful lives.
We determine the average useful lives of our telecommunication equipment and
network based primarily on our estimates of the average useful lives of the
major components, such as transmission and switching equipment, operating
systems, cables and underground construction. In addition, we consider, among
other things, the impact of anticipated technological changes.
Given the complex nature of our telecommunications equipment and network, the
above described accounting estimates require considerable judgment and are
inherently uncertain. If we materially changed our assumptions of useful lives
and salvage values, our depreciation expense, and net book value of our
telecommunications equipment and network could be materially different.
We believe that the estimates we made for network accounting purposes are
reasonable, our methods are consistently applied and the resulting depreciation
expense is based on a rational and systematic method to equitably allocate the
costs of our networks to the periods during which services are obtained from
their use.
Asset Impairment
Our review of our long-lived assets, principally goodwill and other intangibles,
which accounts for 27% of our total assets, requires us to initially estimate
the undiscounted future cash flow of our business segments, whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be fully recoverable. If such analysis indicates that a possible impairment
may exist, we are required to then estimate the fair value of the asset. During
the years ended December 31, 2001 and December 31, 1999, we recorded impairment
charges of $16,058,681 and $5,380,101, respectively.
The determination of fair value includes numerous uncertainties. Significant
judgments are made concerning future operating cash flows by segment. We believe
that we have made reasonable estimates and judgments in determining whether our
long-lived assets have been impaired; however, if there is a material change in
the assumptions used in our determination of fair values or if there is a
material change in the conditions or circumstances influencing fair value, we
could be required to recognize a material impairment charge.
Revenue
We recognize revenue when the services are provided to customers in accordance
with contract terms, which range from six months to five years. We also lease
equipment to customers, which is recognized ratably over the lease term. We also
need to estimate the amount of revenues that will not be collected and record an
appropriate allowance for uncollectible accounts. Recording this allowance
requires us to make assumptions using historical results, current trends, and
the credit risk of customers, among other factors.
Recently Issued Financial Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 establishes accounting
and reporting standards for business combinations. SFAS No. 141 is effective for
business combinations initiated after June 30, 2001. SFAS No. 142 establishes
accounting and reporting standards for goodwill and intangible assets, requiring
annual impairment testing for goodwill and intangible assets, and the
elimination of periodic amortization of goodwill and certain intangibles. We
adopted the provisions of SFAS No. 142 effective January 1, 2002. Goodwill that
is no longer subject to amortization is $11,128,342 as of December 31, 2001. We
recorded $1,000,626 of goodwill amortization expense during the year ended
December 31, 2001. We have not completed an analysis of the impact upon adoption
of the impairment test of goodwill. The impairment analysis will be completed by
June 30, 2002 as required by SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which requires asset retirement obligations to be recognized when
they are incurred and displayed as liabilities. SFAS No. 143 is effective for
the year ending December 31, 2003. Management is currently evaluating the impact
of this pronouncement on the consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses accounting and reporting
for the impairment or disposal of long-lived assets, including the disposal of a
segment of business. SFAS No. 144 is effective for the year ending December 31,
2002. Management is currently evaluating the impact of this pronouncement on the
consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our operations are exposed to market risks principally from fluctuations in
foreign currency exchange rates. Our market risks arise from our operations, not
from any trading activities in derivatives. We seek to minimize these risks
through our regular operating and financing activities.
Exposure to Foreign Currency Exchange Rates. Our primary foreign currency
exchange risk relates to our operations in Latin America, where we conduct
business with more than one currency. We do not expect that the impact of
fluctuations in the foreign currency exchange rate on our foreign currency
denominated revenues and expenses to materially affect our results of operations
due primarily to the natural hedges which are expected to exist within our
operations. Management continues to monitor foreign currency risk to determine
if any actions would be warranted to reduce such risk. Management considers its
operations in foreign subsidiaries and affiliates to be long-term in nature.
Accordingly, we do not hedge foreign currency exchange rate risk related to
translation risk.
Exposure to Interest Rates. All of our debt, with the exception of the Alcatel
debt is based on fixed interest rates. Our Alcatel debt requires quarterly
interest payments at LIBOR plus 4.5% with quarterly principal payments beginning
in September 2002 with the final payment maturing in January 2007.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Paragraph 16(a) of the Securities Exchange Act of 1934, or the "Exchange Act",
requires our executive officers and directors, and persons who own 10% or more
of a registered class of our equity securities, which we refer to collectively
as "Reporting Persons", to file reports of ownership and changes in ownership
with the Securities and Exchange Commission if we and our equity securities meet
certain requirements. We received copies of two late-filed Form 3s, dated March
9, 2001, and two timely-filed Form 4s, also dated March 9, 2001, for TCW/CCI
Holding II LLC and its affiliates (including Mario L. Baeza, one of our
directors) relating to the closing of the purchase and sale of our Series D
Convertible Preferred Stock in February 2001. We have not received copies of
filings on Forms 3, 4 or 5 from any other Reporting Person for the year ended
December 31, 2001.
REPORTS ON FORM 8-K
We have filed the following reports on Form 8-K during the period covered by
this report:
o An 8-K, filed March 8, 2001, relating to (i) the February
Financing, (ii) two recently acquired concessions (in Mexico and
Venezuela) and (iii) a debt financing that we closed in December
2000.
o An 8-K, filed July 3, 2001, relating to the sale of our interest
in a portion of our El Salvador operations and the refinancing of
a loan we previously made to our El Salvadoran operation, as well
as the appointment of two new directors.
o An 8-K, filed August 7, 2001, relating to a $1.75 million bridge
loan and our conversion (into a 10-year, monthly amortized loan)
of certain amounts we incurred in 1995 under a loan commitment
agreement with a third party.
o An 8-K, filed October 9, 2001, relating to the September
Financing and the sale of a portion of our non-Mexican operations
in conjunction with our effort to focus our continuing business
operations on Mexico.
PART F/S
The following financial information is provided in accordance with the
requirements of Item 310 of Regulation S-B.
INDEX TO FINANCIAL STATEMENTS
Item Page
---- ----
Independent Auditors' Report 50
Consolidated Balance Sheets 51
Consolidated Statements of Operations 52
Consolidated Statements of Cash Flows 53
Consolidated Statements of Stockholders' Equity 54
Notes to Consolidated Financial Statements 55
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Convergence Communications, Inc.
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheets of Convergence
Communications, Inc. and subsidiaries, (the "Company") as of December 31, 2001
and 2000, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years ended in the period December
31, 2001. Our audits also included the financial statement schedule listed in
the Index at Exhibit 99. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years ended in the period December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements for the year ended December
31, 2001 have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 2 to the consolidated financial statements, the
Company's negative working capital and recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
April 15, 2002
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
- ------------------------------------------------------------------------------------------------------------------
December 31, December 31,
2001 2000
---------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,238,166 $ 4,193,170
Accounts receivable - net 7,585,725 5,244,893
Inventory - net 41,111 910,204
Value added tax receivable 1,176,461 4,048,900
Prepaid expenses and other 1,861,570 1,733,820
---------------- ---------------
Total current assets 14,903,033 16,130,987
PROPERTY AND EQUIPMENT - net 54,939,546 56,652,546
INTANGIBLE ASSETS - net 28,700,844 46,513,030
OTHER ASSETS
Debt issue costs 1,737,733 5,550,687
Equipment lease receivables 1,508,586 395,618
Other 1,370,883 1,475,034
---------------- ---------------
Total other assets 4,617,202 7,421,339
---------------- ---------------
TOTAL ASSETS $ 103,160,625 $ 126,717,902
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt (payable to related party) $ - $ 3,000,000
Notes payable - current portion 13,707,928 22,298,447
Current portion of long-term debt (payable to related party) 99,029 1,436,519
Accounts payable and accrued liabilities 19,172,978 21,944,835
---------------- ---------------
Total current liabilities 32,979,935 48,679,801
LONG-TERM LIABILITIES:
Notes payable - long-term portion 11,528,701 12,274,717
Long-term debt (payable to related parties) 8,288,118 4,769,497
Accrued restructuring costs 748,504 -
Accrued long-term interest 210,000 -
Other long-term liabilities 703,397 392,239
---------------- ---------------
Total long-term liabilities 21,478,720 17,436,453
MINORITY INTEREST IN SUBSIDIARIES - 2,012,603
---------------- ---------------
Total liabilities 54,458,655 68,128,857
COMMITMENTS AND CONTINGENCIES (Notes 14 and 15)
STOCKHOLDERS' EQUITY:
Series "C" Preferred stock; $0.001 par value; 14,250,000 shares authorized:
0 and 13,620,472 shares outstanding in 2001 and 2000, respectively. - 13,620
Common stock; $0.001 par value; 100,000,000 shares authorized:
60,061,284 and 11,921,094 shares outstanding in 2001 and 2000,
respectively 60,634 11,921
Additional paid-in capital 184,136,712 127,897,441
Accumulated deficit (135,074,437) (69,089,076)
Accumulated other comprehensive income (loss) 897,130 (244,861)
Treasury stock, 572,468 common shares in 2001 at cost (1,318,069) -
---------------- ---------------
Total stockholders' equity 48,701,970 58,589,045
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 103,160,625 $ 126,717,902
================ ===============
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- ------------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
--------------- --------------- ---------------
NET REVENUES FROM SERVICES $ 40,170,949 $ 35,027,458 $ 9,099,054
--------------- --------------- ---------------
COSTS AND EXPENSES:
Variable cost of services 27,376,072 21,400,503 3,202,017
Salaries, wages and benefits 19,077,085 17,872,673 5,768,580
Selling, general and administrative 9,306,606 14,938,511 7,114,111
Depreciation and amortization 14,063,613 14,160,812 5,308,489
Stock option compensation expense 54,505 248,293 1,251,349
Business restructuring charges and asset impairments 21,869,264 - 5,680,101
--------------- --------------- ---------------
Total costs and expenses 91,747,145 68,620,792 28,324,647
GAIN ON ASSET SALE (8,001,337) - -
--------------- --------------- ---------------
OPERATING LOSS (43,574,859) (33,593,334) (19,225,593)
OTHER INCOME (EXPENSE):
Interest income 445,293 966,170 427,953
Interest expense (6,401,587) (3,693,887) (3,702,770)
Arbitration settlement (1,505,882) - -
Other (195,429) - -
Net gain (loss) on foreign exchange (789,286) (102,013) 27,491
--------------- --------------- ---------------
Total other income (expense) (8,446,891) (2,829,730) (3,247,326)
--------------- --------------- ---------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (52,021,750) (36,423,064) (22,472,919)
PROVISION FOR INCOME TAXES (40,843) (30,786) (50,183)
--------------- --------------- ---------------
LOSS BEFORE MINORITY INTEREST (52,062,593) (36,453,850) (22,523,102)
MINORITY INTEREST IN LOSS (INCOME) OF SUBSIDIARIES (3,536,304) 3,480,790 2,245,623
--------------- --------------- ---------------
NET LOSS (55,598,897) (32,973,060) (20,277,479)
NON-CASH REMEASUREMENT OF WARRANTS / OPTIONS (10,386,464) (352,000) -
---------------
--------------- --------------- ---------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (65,985,361) $ (33,325,060) $ (20,277,479)
=============== =============== ===============
NET INCOME PER SHARE OF COMMON STOCK:
Net loss per basic and diluted common share $ (1.79) $ (1.44) $ (1.48)
=============== =============== ===============
Weighted-average number of common shares:
Basic and diluted 36,834,387 23,149,752 13,660,881
=============== =============== ===============
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- -----------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2001 2000 1999
------------- ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(55,598,897) $(32,973,060) $(20,277,479)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 14,063,613 14,160,812 5,308,489
Asset impairment 16,058,681 - 5,680,101
Gain on asset sale (8,001,337) - -
Provision for bad debts 1,074,024 1,387,255 363,005
Minority interest in income (loss) of subsidiaries 3,536,304 (3,480,790) (2,245,623)
Stock-based compensation expense 54,505 248,293 1,251,349
Amortization of discount on notes payable 1,062,726 2,136,826 682,440
Issuance of warrants on debt 12,929 13,251 162,191
Change in assets and liabilities, net of effects
of acquisitions:
Accounts receivable (3,814,850) (3,000,749) (573,033)
Due from affiliates - - 5,000,000
Inventory (47,743) (648,027) (81,376)
Prepaid expenses and other 679,804 (4,906,316) (687,897)
Equipment lease receivables (1,112,968) (395,618)
Other assets 1,944,939 (449,342) (561,485)
Accounts payable and accrued liabilities (3,801,828) 12,044,039 1,111,373
Accrued restructuring costs 748,504 - -
Accrued long-term interest 210,000
Other long-term liabilities 594,019 206,553 50,595
------------- ------------ -------------
Net cash used in operating activities (32,337,575) (15,656,873) (4,817,350)
------------- ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in Metrotelecom acquisition, net - (3,417,851) -
Cash paid in GBNet acquisition, net - - (4,000,000)
Cash paid in Intervan acquisition, net - - (13,979,747)
Purchases of wireless licenses and related expenses - (275,000) (512,944)
Purchases of property and equipment (20,059,594) (32,580,126) (13,087,570)
Proceeds from asset sale 19,750,000 - -
------------- ------------ -------------
Net cash used in investing activities (309,594) (36,272,977) (31,580,261)
------------- ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Series "C" Preferred Stock - 27,374,162 53,578,039
Net proceeds from issuance of Series "D" Preferred Stock 22,869,461 - -
Net proceeds from issuance of common stock 18,178,410 - -
Net proceeds from exercise of employee stock options 2,257 241 -
Net proceeds from exercise of shareholder warrants 71,700 - -
Proceeds from related party borrowings 5,980,000 - -
Proceeds from short-term debt - 6,500,000 11,935,422
Payments on related party borrowings (5,038,485) (4,007,547) (15,581,076)
Payments for debt issuance costs - (5,550,687) -
Proceeds from notes payable 565,489 7,587,664 4,335,000
Payments on notes payable (10,037,250) (1,849,263) (383,334)
Purchase of minority interest - (175,000) -
Increase in minority interest from issuance of subsidiary common stock- - 5,725,000
Repurchases of treasury stock prior to retirement - - (1,215,860)
------------- ------------ -------------
Net cash provided by financing activities 32,591,582 29,879,570 58,393,191
------------- ------------ -------------
EFFECT OF EXCHANGE RATES ON CASH 100,583 (59,846) (7,565)
------------- ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 44,996 (22,110,126) 21,988,015
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,193,170 26,303,296 4,315,281
------------- ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,238,166 $ 4,193,170 $ 26,303,296
============= ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,650,729 $ 896,476 $ 1,621,896
============= ============ =============
Cash paid during the year for income taxes (including prepaid) $ 63,528 $ 126,732 $ 113,418
============= ============ =============
See Note 17 to the consolidated financial statements for other non-cash financing and investing activities.
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Stock
----------------------------------------------------
Series "B" Series "C" Series "D" Common Stock
---------------------------------- --------------------- -----------------
Total Shares Amount Shares Amount Shares Amount Shares Amount
--------- ------ ----- --------- ------- ------- --------- ------- ---------
BALANCE, JANAURY 1, 1999 $ 10,684,526 101,374 $ 101 - - - $ - 11,738,277 $ 11,738
Comprehensive loss:
Net loss for the year ended
December 31, 1999 (20,277,479)
Other comprehensive loss consisting of
foreign currency translation
adjustment (9,497)
--------- ------- ------ --------- ------- -------- ------- --------- ---------
Total comprehensive loss (20,286,976) - - - - - - - -
Issuance of Series "C" Preferred S
Stock, net 67,794,198 9,728,909 $ 9,729
Issuance of warrants 750,677
Repurchases and retirements of com
common stock (1,215,860) - - (152,788) (153)
Forgiveness of related party
liability 235,175
Issuance of warrants on debt 162,191
Issuance of options for common
shares below fair value 1,251,349
--------- ------- ------ --------- ------- ------- ------- --------- ---------
BALANCE, DECEMBER 31, 1999 59,375,280 101,374 101 9,728,909 9,729 - - 11,585,489 11,585
Comprehensive loss:
Net loss for year ended
December 31, 2000 (32,973,060)
Other comprehensive loss
consisting of foreign
currency translation
adjustment (214,849)
--------- ------- ------ --------- ------- ------- ------- --------- ---------
Total comprehensive loss (33,187,909) - - - - - - - -
Acquisition of Metrotelecom stock
for CCI common shares 1,000,000 121,212 121
Acquisition and retirement of
stock from former officer - (71,853) (72) (328,510) (328)
Conversion of Series B to common shares - (29,521) (29) 125,237 125
Non-cash remeasurement of options -
Exercise of shareholder stock
options 27,374,162 3,891,563 3,891
Exercise of employee stock
options 241 11,000 11
Issuance of common shares for
minority interest 3,765,727 406,666 407
Issuance of warrants on debt 13,251
Issuance of options for common
shares below fair value 248,293
---------- ------- ------ --------- --------- ------ -------- ------- ---------
BALANCE, DECEMBER 31, 2000 58,589,045 - - 13,620,472 13,620 - - 11,921,094 11,921
Comprehensive income (loss):
Net loss for year ended
December 31, 2001 (55,598,897)
Other comprehensive income (loss)
consisting of foreign
currency translation
adjustment 1,141,991
--------- ------- ------ --------- ------- -------- ------- --------- ---------
Total comprehensive income
(loss) (54,456,906) - - - - - - - -
Issuance of Series D shares 22,869,461 2,643,636 $ 2,644
Acquisition of treasury stock (1,318,069) (572,468)
Issuance of warrants on debt 12,929
Stock-based compensation expense 54,505
Non-cash remeasurement of preferred
stock-warrants -
Exercise of employee stock options 2,257 103,177 103
Exercise of warrants to preferred
stock 64,243 3,973,758 3,974 2,450,523 2,450
Modification of common stock warrants -
Modification of common stock warrants -
Exercise of common stock warrants 7,457 745,650 746
Issuance of common stock for
equipment 2,880,556 1,646,032 1,646
Conversion of Series C stock
into common stock - (17,594,230 (17,594) 17,594,230 17,594
Conversion of Series D stock
into common stock - (5,094,159) (5,094) 5,094,159 5,094
Conversion of promissory note to
common stock 1,818,082 2,138,920 2,139
Issuance of common stock 18,178,410 21,390,490 21,391
--------- ------- ------ --------- ------- -------- ------- --------- ---------
BALANCE, DECEMBER 31, 2001 $ 48,701,970 - $ - - $ - - $ - 60,061,284 $ 60,634
========= ======= ====== ========= ======= ======== ======= ========= =========
See notes to consolidated financial statements.
(CONTINUED ON NEXT PAGE)
CONVERGENCE COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(Continued From Previous Page)
Accumulated
Additional Other Treasury Stock
Paid-in Accumulated Comprehensive ----------------
Capital Deficit Income (Loss) Shares Amount
----------- ---------- --------------- ------ -------
BALANCE, JANAURY 1, 1999 $ 26,179,739 $ (15,486,537) $ ( 20,515)
Comprehensive loss:
Net loss for the year ended
December 31, 1999 (20,277,479)
Other comprehensive loss consisting of
foreign currency translation
adjustment (9,497)
---------- ---------- --------- ------ --------
Total comprehensive loss - (20,277,479) (9,497)
Issuance of Series "C" Preferred
Stock, net 67,784,469
Issuance of warrants 750,677
Repurchases and retirements of
common stock (1,215,707)
Forgiveness of related party
liability 235,175
Issuance of warrants on debt 162,191
Issuance of options for common
shares below fair value 1,251,349
---------- ---------- --------- ------ --------
BALANCE, DECEMBER 31, 1999 95,147,893 (35,764,016) (30,012)
Comprehensive loss:
Net loss for year ended
December 31, 2000 (32,973,060)
Other comprehensive loss
consisting of foreign
currency translation
adjustment (214,849)
---------- ---------- --------- ------ ---------
Total comprehensive loss - (32,973,060) (214,849)
Acquisition of Metrotelecom stock
for CCI common shares 999,879
Acquisition and retirement of
stock from former officer 400
Conversion of Series B to common shares (96)
Non-cash remeasurement of options 352,000 (352,000)
Exercise of shareholder stock
options 27,370,271
Exercise of employee stock
options 230
Issuance of common shares for
minority interest 3,765,320
Issuance of warrants on debt 13,251
Issuance of options for common
shares below fair value 248,293
--------- ---------- ------ -------
BALANCE, DECEMBER 31, 2000 127,897,441 (69,089,076) (244,861)
Comprehensive income (loss):
Net loss for year ended
December 31, 2001 (55,598,897)
Other comprehensive income (loss)
consisting of foreign
currency translation
adjustment 1,141,991
---------- ---------- ---------- ------ ---------
Total comprehensive income
(loss) - (55,598,897) 1,141,991
Issuance of Series D shares 22,866,817
Acquisition of treasury stock 572,468 $ (1,318,069)
Issuance of warrants on debt 12,929
Stock-based compensation expense 54,505
Non-cash remeasurement of preferred
stock-warrants 5,396,396 (5,396,396)
Exercise of employee stock options 2,154
Exercise of warrants to preferred
stock 57,819
Modification of common stock warrants 626,346 (626,346)
Modification of common stock warrants 4,363,722 (4,363,722)
Exercise of common stock warrants 6,711
Issuance of common stock for
equipment 2,878,910
Conversion of Series C stock
into common stock
Conversion of Series D stock
into common stock
Conversion of promissory note to
common stock 1,815,943
Issuance of common stock 18,157,019
---------- ---------- --------- ------ -----------
BALANCE, DECEMBER 31, 2001 $184,136,712$ (135,074,437) $897,130 572,468 $ (1,318,069)
========== ========== ========= ====== ===========
See notes to consolidated financial statements.
CONVERGENCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
Business Description - Convergence Communications, Inc. and
subsidiaries (the "Company"), is a leading facilities-based provider of
broadband services operating in recently deregulated high-growth
markets, principally Mexico. The Company offers enterprise customers
end-to-end communications solutions, including managed corporate data
network services, high-speed data connections, high-speed and dial-up
Internet access, voice, video, e-commerce-enabling services and other
value-added communications services.
From its inception, the Company has focused on providing
telecommunications services using high-speed transmission networks
within and across national borders. The Company intends to capitalize
on the rapidly growing demand for telecommunications services in
countries emerging from developing and state-controlled economies and
where there is growing liberalization of regulations governing the
provision of telecommunications services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The Company's consolidated financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. The consolidated financial statements do not
include any adjustments relating to the recoverability and
classifications of recorded amounts of assets or the amounts and
classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern depends upon its ability to generate
sufficient cash flows to meet its obligations on a timely basis and to
obtain additional financing or refinancing as may be required.
The Company has built high capacity networks and leased additional
capacity from third party providers in the countries in which it
operates and is primarily focused on data-internet services, the
fastest growing segments of the communications market. This strategy
initially increased the Company's level of capital expenditures and
operating losses and required it to make a substantial portion of the
Company's capital investments before the Company realized any revenue
from those expenditures.
These capital expenditures, together with the associated initial
operating expenses, have resulting and will continue to result in
negative cash flows until the Company is able to establish an adequate
customer base, even if individual markets of the Company become
profitable. Now that the Company has completed the initial planned
build-out of its networks, the Company's capital expenditures will
become more elastic with respect to revenue growth. The Company
believes that this long-term strategy will enhance its financial
performance by increasing the capacity of, and traffic flow over, its
networks.
As described in more detail in Note 3 below, the Company recorded a
pre-tax charge of $21,869,264 for the year ended December 31, 2001 in
connection with a restructuring plan.
At December 31, 2001, the Company's current liabilities exceeded
current assets by $18,076,902. In addition, as of December 31, 2001,
the Company was out of compliance with the operating covenants of the
Alcatel equipment financing facility and has not received a waiver of
such noncompliance from the lender. As a result, Alcatel has the right
to accelerate the maturity of the outstanding debt and the Company is
unable to draw upon its facility until such covenants are met. The
outstanding balance under the Alcatel facility of $7,591,555 has been
classified as a current liability.
The Company intends to meet its operational and capital expenditure
requirements during 2002 from a combination of:
o Draw downs on amounts available from the April 2002 Facility (Note 18)
o Additional private equity transactions
o Negotiate extensions of repayment terms on seller notes
o Proceeds from its September 2001 equity financing of $20,000,000
(Note 13)
o Reductions in capital expenditures
o Optimize and control operating expense growth
o Sales of selected businesses
In April 2002, the Company agreed to retain an investment advisor to
assist it in obtaining additional debt and/or equity financing from
third parties and sell selected assets (see Note 18).
Management intends to work with Alcatel to renegotiate the operating
covenants under the Alcatel financing facility, which, if successful,
might allow the Company to extend repayment terms. The Company has no
assurance that it will be able to obtain additional equity and debt
financing, to renegotiate operating covenants or draw upon the Alcatel
facility, or to optimize, control or reduce operating and capital
expenditures in amounts sufficient for the Company to continue as a
going concern.
Principles of Consolidation - The consolidated financial statements
include the accounts of Convergence Communications, Inc., all wholly
and majority-owned subsidiaries and its 49% voting interest in
International Van, S. A. de C.V. ("Intervan") (Note 13). All
significant inter-company accounts and transactions have been
eliminated in consolidation.
Use of Estimates in Preparing Financial Statements - The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents are highly liquid
investments, including short-term investments and time deposits with
original maturities of three months or less at the time of purchase.
Accounts Receivable - The allowance for doubtful accounts was
$1,879,316 and $1,225,627 at December 31, 2001 and 2000, respectively.
Inventory - Inventory of subscriber installation materials and
subscriber converter boxes are stated at the lower of average cost or
market. The inventory balance reflects an approximate inventory reserve
of $3,000 and $215,000 for excess and obsolescence at December 31, 2001
and 2000, respectively.
Property and Equipment - Property and equipment are recorded at cost
and depreciated using the straight-line method over the following
expected useful lives:
Life in years
Buildings and improvements 10 - 20 years
Telecommunications equipment 2 - 10 years
Furniture, fixtures and office equipment 2 - 10 years
Telecommunications network 12 - 15 years
Long-Lived Assets - The carrying amount of all long-lived assets is
evaluated periodically to determine if adjustment to the depreciation
and amortization period or to the unamortized asset balance is
warranted. The Company's policy is to measure long lived asset
impairment by considering a number of factors including (i) current
operating results of the applicable business; (ii) projected future
operating results of the applicable business; (iii) the occurrence of
any significant regulatory changes which may have an impact on the
continuity of the business; and (iv) any other material factors that
affect the continuity of the applicable business (see Note 3).
Revenue Recognition - The Company provides telecommunication services
to its customers pursuant to contracts that range from six months to
five years. The customer generally pays an installation charge and a
monthly fee based on the quantity and type of equipment installed.
Installation revenue is recognized once the installation has been
completed. Service fee revenue is recorded monthly as services are
provided.
Stock Based Compensation - The Company accounts for stock option grants
to employees and directors in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees."
Income Taxes - The Company uses the asset and liability method to
account for income taxes. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their existing tax bases. Provision is made for taxes
on undistributed earnings of foreign subsidiaries to the extent that
such earnings are not considered to be permanently invested.
Foreign Currency Translation - All of the Company's subsidiaries,
except for GBNet Corporation ("GBNet"), operate using the local
currency as the functional currency. GBNet uses the U.S. dollar as the
functional currency. Accordingly, all assets and liabilities of these
subsidiaries, except for GBNet are translated at current exchange rates
at the end of the period and revenues and costs at average exchange
rates in effect during the period. The resulting cumulative translation
adjustment has been recorded as a component of other comprehensive
income (loss), a separate component of stockholders' equity.
Net Loss Per Basic and Diluted Common Shares - Net loss per common
share and common share equivalent amounts are computed by both the
basic method, which uses the weighted average number of common shares
and the common stock equivalents on a voting basis for the Series B
(which was converted to common stock in August 2000), and Series C and
Series D preferred stock (which were converted to common stock in
September 2001), and the diluted method, which includes the dilutive
common shares from stock options and warrants, as calculated using the
treasury stock method. At December 31, 2001, 2000 and 1999 all options
and warrants were anti-dilutive due to the losses of the Company.
Fair Value of Financial Instruments - The Company's financial
instruments include cash and cash equivalents, receivables, payables
and short and long-term debt. The fair value of such financial
instruments has been determined using available market information and
interest rates as of December 31, 2001 and 2000. The recorded value of
each financial instrument approximates its fair value as receivables
and payables are near term and the interest rates on short and
long-term debt approximate current market rates.
Recently Issued Financial Accounting Standards - In June 2001, the
Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141
establishes accounting and reporting standards for business
combinations. SFAS No. 141 is effective for business combinations
initiated after June 30, 2001. SFAS No. 142 establishes accounting and
reporting standards for goodwill and intangible assets, requiring
annual impairment testing for goodwill and intangible assets, and the
elimination of periodic amortization of goodwill and certain
intangibles. The Company adopted the provisions of SFAS No. 142
effective January 1, 2002. Goodwill that is no longer subject to
amortization is $11,128,342 as of December 31, 2001. The Company
recorded $1,000,626 of goodwill amortization expense during the year
ended December 31, 2001. The Company has not completed an analysis of
the impact upon adoption of the impairment test of goodwill. The
impairment analysis will be completed by June 30, 2002 as required by
SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which requires asset retirement obligations to
be recognized when they are incurred and displayed as liabilities. SFAS
No. 143 is effective for the year ending December 31, 2003. Management
is currently evaluating the impact of this pronouncement on the
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses
accounting and reporting for the impairment or disposal of long-lived
assets, including the disposal of a segment of business. SFAS No. 144
is effective for the year ending December 31, 2002. Management is
currently evaluating the impact of this pronouncement on the
consolidated financial statements.
Reclassifications - Certain reclassifications of previously reported
2000 and 1999 amounts have been made to conform to the 2001
classifications.
3. BUSINESS RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS
In connection with a restructuring plan to exit certain non-strategic
market regions and to streamline the Company's cost structure in both
foreign and corporate operations, the Company recorded a pre-tax charge
of $21,869,264 for the year ended December 31, 2001, which includes
restructuring costs of $5,810,583 and asset write-downs of $16,058,681.
These costs include $14,400,982 of restructuring costs recorded for the
year ended December 31, 2001 to reflect the Company's approval to cease
operations in Venezuela.
For the year ended December 31, 2001, restructuring costs relate to
involuntary employee separations of $3,660,653 for approximately 255
employees and facility reduction costs of $2,149,930. The employee
separation costs impact the Company's management employees in corporate
operations and Venezuela, and also impact all geographic locations of
the Company. As of December 31, 2001, almost all of the 255 employee
separations were completed.
For the year-ended December 31, 2001, asset write-downs reflect the
write-down of certain long-lived intangible assets, VAT tax receivable
and tangible fixed assets that became impaired as a result of
management's decision to limit or reduce or exit certain operations in
non-strategic market regions and reduce operations in Venezuela.
Impairment losses were determined based on the write-down of fixed
assets, goodwill and other acquired intangibles to their fair value.
The following table displays the status of the restructuring reserve at
December 31, 2001:
Initial Cash Non-cash 12-31-01
Type of Cost charge charges charges Reserve
------------ ------ ------- -------
Restructuring costs:
Employee separations $3,660,653 $2,697,241 $ 963,412
Facility reductions 2,149,930 320,989 1,828,941
--------------- --------------- --------------
Total 5,810,583 3,018,230 2,792,353
Asset impairments:
Goodwill and other 3,823,508 $3,823,508
intangibles
Fixed assets 10,134,272 10,134,272
VAT receivable 1,557,175 1,557,175
Other assets 543,726 543,726
--------------- --------------- --------------- --------------
Total $21,869,264 $3,018,230 $16,058,681 $2,792,353
=============== =============== =============== ==============
Consolidated revenues of the Venezuelan operations for the years ended
December 31, 2001, 2000 and 1999 were $0.9 million, $1.1 million and
$1.2 million, respectively.
The Company formerly owned 78.14% of the stock of a Venezuelan
corporation, which acted as the operating company for the local
multi-point distribution service license held by another Venezuelan
corporation ("Former Venezuelan Entities"). During the fourth quarter
of fiscal 1999, the Company determined that the recorded assets,
intangible assets and investments in the Former Venezuelan Entities
totaling $5,680,000 as of December 31, 1999 were impaired. As a result,
a recoverability and fair value assessment of the related assets in
accordance with generally accepted accounting principles was completed
by management, which concluded that the assets would not be recovered.
Accordingly, management recorded an impairment of $5,680,000 for the
year ended December 31, 1999.
Effective July 5, 2000, the Company canceled certain Company common
shares, previously issued as part of the purchase price of the Former
Venezuelan Entities, in exchange for returning all outstanding shares
of one of the Former Venezuelan Entities as settlement of litigation
with one of the original sellers of the acquisition (See Note 15). This
exchange of non-monetary assets was recorded through additional paid-in
capital as an acquisition of treasury stock.
4. ACQUISITIONS
Metrotelecom Acquisition - On April 5, 2000, the Company purchased
Grupo Metrotelecom, S.A. and its subsidiaries, Cybernet de Guatemala,
S.A. and Cybercable de Centroamerica, S.A. (collectively
"Metrotelecom"). The purchase price for Metrotelecom was $13,500,000
($12,909,610 effective purchase price including the discount on the
notes of $590,390). The Company paid $3,750,000 of the purchase price
in cash at the closing and issued 121,212 common shares with a fair
value of $1,000,000. The Company also issued four promissory notes
totaling $8,750,000. The notes are due on the first through fourth
anniversaries of the closing, and bear interest at the rate of 7% per
annum. The notes were recorded at the present value of $8,159,610,
which reflects a 10.75% estimated market rate of interest. The note due
on the first anniversary is for $4,750,000, and each of the remaining
three notes is for $1,333,333. The amount of the first note is subject
to adjustment, depending on the cash balance and intercompany debt of
the Metrotelecom companies as of the closing date. The payment terms
and amounts due on a portion of these notes were restructured in
October 2001 (see Note 10).
The purchase price was allocated as follows:
Current assets $ 979,331
Property and equipment 1,302,475
Other assets 38,006
Intangible assets (primarily subscriber rights) 12,749,333
Liabilities assumed (2,159,535)
--------------
12,909,610
==============
Intervan Acquisition - On December 24, 1999, Convergence
Communications, S.A. de C.V. ("CCI Mexico"), a wholly owned subsidiary
of the Company, acquired all of the outstanding stock of Intervan. The
total purchase price for Intervan was approximately $21,000,000
($20,338,705 effective purchase price including the discount on the
notes of $661,295), of which CCI Mexico paid $15,000,000 in cash at the
closing. The balance of the purchase price was paid through CCI
Mexico's delivery of two promissory notes, which are due on the first
and second anniversaries of the closing. The first promissory note due
of $4,500,000 was non-interest bearing and was repaid in February 2001.
The promissory note due on December 24, 2001 was in the original face
amount of $1,500,000 and bore interest during the second year at the
rate of 8% per annum. The notes were recorded at the present value of
$5,265,563, which reflects a 10.75% estimated market rate of interest.
The payment terms of the $1,500,000 note was restructured in December
2001 (see Note 10).
The purchase price was allocated as follows:
Current assets $ 3,749,864
Property and equipment 5,136,584
Other assets 851,128
Intangible assets (primarily subscriber rights) 13,344,581
Liabilities assumed (2,743,452)
--------------
$ 20,338,705
==============
GBNet Acquisition - On December 15, 1999, the Company completed the
acquisition of all of the outstanding capital stock of GBNet from
General Business Machines ("GBM") for a total purchase price of
$13,000,000, of which the Company paid $4,000,000 in cash at the
closing. The balance of the purchase price, or $9,000,000 (after
discount of promissory notes at 10.75%, the imputed and estimated
market interest rate), was paid through the delivery of four promissory
notes, which are due on the first through fourth anniversaries of the
closing. The first note, in the amount of $2,468,000 including interest
was due on December 14, 2000. Fifty percent of the first note was
repaid on December 14, 2000 and the remainder was repaid in February
2001 (Note 13). The Company's obligations to pay the deferred portions
of the purchase price are secured by a pledge of the shares of GBNet,
as well as its operating subsidiaries. A portion of those pledged
shares will be released to the Company as it pays down the promissory
notes. GBM will be entitled to retain at least 51% of the pledged
shares until the Company pays all amounts due under the promissory
notes. The payment terms of the December 14, 2001 through 2003 notes
were restructured during the first quarter of 2002 (see Note 10).
In connection with the acquisition, GBM and GBNet entered into a number
of ancillary agreements, including (1) a commercialization agreement,
pursuant to which each of GBNet and GBM agreed to recommend one another
as preferred providers of services and products, (2) an equipment
purchase agreement, pursuant to which GBM agreed to provide GBNet with
preferred purchasing terms for any IBM equipment it acquires from GBM
for its operations, and (3) a network management agreement pursuant to
which GBNet will provide GBM with managed data network services frame
relay-based connections.
The purchase price was allocated as follows:
Current assets $ 268,161
Property and equipment 2,872,908
Intangible assets (primarily subscriber rights) 9,858,931
--------------
$ 13,000,000
==============
Pro Forma Effect of Acquisitions - The following pro forma information
reflects the results of the Company's operations as if the
Metrotelecom, Intervan and GBNet acquisitions had occurred as of
January 1, 1999.
Years Ended December 31,
2000 1999
----------------- -----------------
Revenues $ 36,473,505 $ 33,470,276
Net loss attributable to common
shareholders $ (34,176,943) $ (26,215,870)
Net loss per common share and common
share equivalent (basic and diluted)
$ (1.47) $ (1.90)
These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what operating results
would have been had the acquisitions actually taken place at the
beginning of the periods presented, nor do they purport to represent
results of future operations of the combined companies.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31:
2001 2000
---------------- ---------------
Land $ - $ 586,400
Buildings and improvements 1,543,695 751,081
Telecommunications equipment and network 38,508,158 35,932,359
Furniture, fixtures and office equipment 4,514,320 5,084,015
---------------- ---------------
Total 44,566,173 42,353,855
Less - accumulated depreciation (9,343,580) (7,949,614)
---------------- ---------------
Total 35,222,593 34,404,241
Telecom network construction in progress 19,716,953 22,248,305
---------------- ---------------
Property and equipment, net $ 54,939,546 $ 56,652,546
================ ===============
Interest capitalized as of December 31, 2001, 2000 and 1999 was
$2,248,894, $498,038, and none, respectively.
6. INTANGIBLE ASSETS
Intangible assets and respective amortization periods consisted of the
following as of December 31:
2001 2000 Amortization
Period
----------------- ----------------- -------------------
License rights $ 846,263 $ 1,273,970 5 - 15
Subscriber rights 25,007,626 33,761,646 6
Franchise rights 2,300,000 6,411,528 11
Goodwill 11,128,342 15,772,877 11
----------------- -----------------
39,282,231 57,220,021
Accumulated amortization (10,581,387) (10,706,991)
----------------- -----------------
$ 28,700,844 $ 46,513,030
================= =================
7.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following as
of December 31:
2001 2000
--------------- ---------------
Accounts payable $ 12,352,565 $ 11,165,503
Accrued liabilities 2,501,972 8,607,087
Accrued interest 1,409,196 1,148,497
Accrued restructuring cost 2,043,849 -
Deferred revenue 865,396 1,023,748
--------------- ---------------
Total $ 19,172,978 $ 21,944,835
=============== ===============
8. RELATED PARTY TRANSACTIONS
Chispa Dos Inc. Disposition - Until June 2001, the Company owned
approximately 33% of Chispa Dos Inc. ("Chispa"). The remaining
interests were owned 28% by FondElec Essential Services Growth Fund,
L.P. ("FondElec"), 33% by Telematica EDC, C.A. ("Telematica") and 6% by
unrelated parties. Telematica and FondElec are also shareholders of the
Company.
On June 11, 2001, the Company sold the cable television and residential
high-speed data operations operated by its subsidiary Chispa for
$19,750,000 in cash and $2,000,000 in notes (the "El Salvador Sale").
The sale of these assets resulted in a gain of $8,001,327. The proceeds
from the sale (net of costs) were used to repay Chispa bank debt of
$3,050,528, repay an outstanding debt and accrued interest of
$1,902,488 and $378,866 to FondElec and Telematica, respectively, and
to repay $8,471,693 of the total $11,221,693 intercompany debt due to
the Company. The remaining $2,750,000 in intercompany debt was
refinanced (together with interest at 10% per annum) and was due on
June 11, 2006. The Company repaid $6,000,000 to Alcatel from the
proceeds received.
The $2,750,000 refinanced amount was secured by FondElec's pledge of
591,398 shares of the Company's common stock and Chispa's pledge of a
promissory note of $1,500,000 received in the El Salvador Sale. In
April 2002, the Company cancelled this note in conjunction with a
settlement agreement between the Company and FondElec (see Note 15).
On June 21, 2001, the Company closed an Exchange Agreement with
FondElec, which transferred the Company's 33% interest in Chispa in
exchange for 572,468 shares of the Company's common stock. The stock
received from FondElec was accounted for as an acquisition of treasury
sock. Simultaneously, Telematica and FondElec closed an Exchange
Agreement, which transferred Telematica's 33% interest in Chispa to
FondElec in exchange for 572,468 shares of the Company's common stock.
As a part of the Exchange Agreements, FondElec has agreed to certain
amendments to the shareholders agreement that the Company and its
principal shareholders executed in October 1999.
Consolidated revenues of Chispa for the years ended December 31, 2001,
2000 and 1999 were $3,447,063, $8,505,539 and $7,561,207, respectively.
FondElec Agreement - In August 1999, the Company entered into an
advisory services agreement with FondElec Group, Inc., an affiliate of
FondElec Essential Services Growth Fund, LP, a shareholder
("FondElec"). During 2000, the Company accrued $1,054,118 relating to
certain consulting services provided to the Company, including fees
related to the exercise of options for Series "C" Preferred Stock in
July 2000 and the cash portions of the long-term credit facility
provided by Telematica. The Company recorded $644,118 as equity
transaction costs and $210,000 as debt issue costs.
FondElec was also entitled to receive $50,000 per quarter for the
services it provides the Company under the advisory agreement. The
Company disputed the amounts due under this agreement, and, in April
2002, settled its disputes (see Note 15).
Interest Expense Payable - The Company recorded interest expense
payable to related parties of $0, $ 557,911 and $660,335 for the years
ended December 31, 2001, 2000 and 1999, respectively.
9. INCOME TAXES
The following table presents the principal reasons for the difference
between the effective tax rate and the United State federal statutory
income tax rate:
2001 2000 1999
--------------- ----------------- --------------
Federal income tax benefit at statutory
rate of 34% $ (18,903,624) $ (11,330,521) $ (6,877,280)
State and local income taxes (2,779,945) (1,666,253) (1,011,365)
Foreign rate differential 3,013,059 1,573,916 769,464
Change in valuation allowance 18,189,457 10,273,732 4,644,076
Losses in certain foreign subsidiaries
with
no tax benefit 353,089 550,347 2,312,935
Other 168,807 629,565 212,353
---------------- ----------------- --------------
Total $ 40,843 $ 30,786 $ 50,183
================ ================= ==============
The following table presents the U.S. and foreign components of the provision for income taxes:
2001 2000 1999
----------------- --------------- --------------
Current:
Federal $ -- $ -- $ --
State -- -- --
Foreign 40,843 30,786 50,183
------ ------ ------
40,843 30,786 50,183
Deferred:
Federal (4,109,920) (3,743,943) (3,128,188)
State (604,400) (549,370) (460,027)
Foreign (18,120,774) (1,219,268) (1,055,861)
Valuation Allowance 22,835,094 5,512,581 4,644,076
----------------- --------------- --------------
Total Provision $ 40,843 $ 30,786 $ 50,183
================= =============== ==============
As of December 31, 2001, the Company has net operating loss
carryforwards of approximately $31,814,563. The net operating loss
carryforwards will begin to expire in 2010. The Company also has
foreign net operating loss carryforwards of approximately $45,986,222.
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which, more likely than not, will not be
realized.
The long-term net deferred tax assets at December 31, 2001 and 2000 are
fully reserved with a valuation allowance due to the uncertainty of
realization and are comprised of the following:
2001 2000
------------------ -----------------
Deferred Tax Assets:
Net operating loss carryforwards
Federal $ 10,816,951 $ 7,931,589
State 1,590,781 1,166,710
Foreign 15,177,907 7,882,181
Basis in intangibles 239,985 498,524
Related party accruals - 144,118
Stock options deferred 1,979,201 1,946,882
Loss impairment deferred 7,485,043 -
Impairment of license rights - 185,319
Inventory reserve - 21,134
Provision for bad debts 476,242 333,464
Accrued severance pay - 38,312
Other 836,456 322,687
------------------ -----------------
Total deferred tax asset 38,602,566 20,470,920
Deferred Tax Liabilities:
Basis in fixed assets (43,009) (100,820)
Valuation allowance (38,559,557) (20,370,100)
------------------ -----------------
Total net deferred tax asset $ -- $ --
================== =================
10. NOTES PAYABLE AND LONG-TERM DEBT
The Company has the following notes payable and long-term debt
outstanding as of December 31:
2001 2000
----------------- ----------------
Notes payable to Alcatel for equipment and professional services
represented by three promissory notes, interest payable quarterly
at LIBOR plus 4.5%, quarterly principal payments begin in September
2002, and maturing in January 2007. $ 7,591,555 $ 7,591,555
Notes payable to Telematica EDC with a face value of $7,000,000 at
December 31, 2001. The notes bear interest at 3% per annum payable
at the maturity date of March 15, 2015 (see Note 18). 7,000,000 3,500,000
Notes payable for the MetroTelecom acquisition represented by four
promissory notes with a combined face value of $6,316,619 and bear
interest at 7% per annum. These four promissory notes were
discounted at 10.75%, which reflects the estimated market rate of
interest. The four notes mature annually on April 5, 2001 through
2004. The amortization of the discount on these notes was $127,376
and $165,194 as of December 31, 2001 and 2000, respectively. 6,201,564 6,055,403
Notes payable for the MetroTelecom acquisition represented by
promissory notes with an original combined face value of $2,433,381
and bear interest at 7% per annum. These four promissory notes were
discounted at 10.75%, which reflects the estimated market rate of
interest. The four notes mature annually on April 5, 2001 through
2004. The amortization of the discount on these notes was $46,638
and $63,343 as of December 31, 2001 and 2000, respectively. The
notes were restructured in October 2001 into new promissory notes
with a combined face value of $1,843,520 and bear interest at 8%
per annum. The new notes require 42 equal monthly principal
payments plus accrued interest. 1,755,732 2,332,744
Notes payable for the GBNet acquisition represented by four
non-interest bearing promissory notes with an original combined
face value of $11,795,000. These four promissory notes were
discounted at 10.75%, which reflects the estimated market rate of
interest. The four notes mature annually on December 14, 2000
through 2003. The amortization of the discount on these notes was
$775,798 and $1,093,443 as of December 31, 2001 and 2000,
respectively (see Note 4). 8,352,048 8,860,250
Notes payable for the Intervan acquisition represented by two
promissory notes with a combined face value of $6,000,000. The
first promissory note of $4,500,000 is non-interest bearing matured
December 24, 2000. The second note of $1,500,000 bears interest at
8% in the second year only maturing December 24, 2001. Both
promissory notes were discounted at 10.75%, which reflects the
estimated market rate of interest. The amortization of the discount
on these notes was $141,795 and $603,955 as of December 31, 2001
and 2000, respectively. In December 2001, $700,000 of the
$1,500,000 note was paid and the remaining balance was restructured
into a new promissory note with a face value of $800,000, with
interest at 12% per annum. The new note requires equal monthly
principal payments and accrued interest from January 2002 through
August 2002. 800,000 5,869,518
Notes payable to a third-party with interest at LIBOR plus 4.75%. The
balance was paid in June 2001. - 3,336,403
Note payable to an affiliate of a shareholder of the Company
represented by a promissory note which bore interest at 15% per
annum payable on the maturity date of February 28, 2001, which
was converted into Series D preferred stock (see Note 13). - 3,000,000
Notes payable to FondElec with original face values of $4,769,497 and
with interest at 12%. The balance was paid in June 2001 (see Note
8). - 1,269,497
Other notes payable (interest rates ranging from 8.0% to 11.5%) 1,922,877 1,963,810
----------------- ----------------
Total notes payable 33,623,776 43,779,180
Less current portion (13,806,957) (26,734,966)
----------------- ----------------
Long-term portion $ 19,816,819 $ 17,044,214
================= ================
The scheduled maturities of notes payable and long-term debt at
December 31, 2001 are as follows:
Year ending December 31:
2002 $ 13,806,957
2003 1,751,741
2004 1,709,202
2005 1,419,530
2006 and thereafter 14,936,346
----------------
Total $ 33,623,776
================
Vendor Equipment Financing - In June 2000, the Company entered into a
series of agreements with Alcatel for financing up to $175,000,000
under which Alcatel agreed to provide the Company with system-wide
network design and build-out services for the telecommunications
network, provide the equipment necessary for that build-out, and
finance the amounts payable for the services and equipment.
At the closing of the facility, the Company paid Alcatel an arrangement
fee in the amount of $4,375,000 by paying $2,187,500 in cash and
financing the remainder with Alcatel. As part of the closing, the
Company also issued a warrant to acquire 60,764 shares of its common
stock. The value of these warrants are being expensed as interest
expense over the loan term and was $12,929 and $13,251 for the years
ended December 31, 2001 and 2000, respectively.
During the fourth quarter of 2000, the Company was not able to meet one
of its quarterly operational covenants. As a result, the Company was
not able to draw down on the Alcatel facility in the fourth quarter. In
January 2001, the Company amended the Alcatel facility to include new
operational and financial milestone covenants. Under the terms of the
January 2001 amendment to the agreements with Alcatel, the Company is
required to obtain additional equity financing (as well as meet
operational milestones) in order to make further draw downs on the
Alcatel facility and obtain reimbursement of certain amounts the
Company has paid or will pay prior to the reimbursement.
In March 2001, the Company was not in compliance with the payment
covenants of the equipment purchasing provisions of the Alcatel
agreements. The Company is negotiating with Alcatel a waiver or
modification of those payment requirements, but there can be no
assurance Alcatel will agree to the waiver, or that it will otherwise
modify the payment terms. Until the Company meets all of the amended
operating covenants, it will not be able to draw down on the Alcatel
facility.
As a result of the above noncompliance, Alcatel has the right to
accelerate the maturity of the outstanding debt and the Company is
unable to draw upon its facility until such covenants are met.
Consequently, the outstanding balance under the Alcatel facility of
$7,591,555 as of December 31, 2001 and 2000 has been classified as a
current liability in the accompanying consolidated balance sheets.
In connection with the closing of the facility, the Company created a
wholly-owned subsidiary, Latin American Broadband, Inc. ("LAB"). The
Company transferred essentially all of its operations and assets to
LAB, and then the Company pledged its shares in LAB to Alcatel as part
of a security package for the Alcatel credit facility. The loans from
Alcatel are also secured by a comprehensive security package that
includes a pledge of all equity interests in Company subsidiaries; a
first and perfected security interest, to the extent permitted by law,
in licenses and permits for the operation of all networks or systems; a
security interest in equipment, supplies, inventory and other personal
property; an assignment, for security purposes, of all material
contracts; and a security interest in all accounts receivable.
Additionally, due to the Company's restructuring described in Note 3
above, the Company has written off Alcatel deferred debt issue costs of
$2,976,013 relating to portions of the facility that the Company will
not use. The expense has been recorded in interest expense in the
accompanying consolidated statement of operations for the year ended
December 31, 2001.
In March 2002, the Company and Alcatel agreed to reduce the outstanding
commitment to $9,109,895. The Company pays a commitment fee of .005%
per year on the amount of undrawn commitment, which was $5,000,000 on
the date of the commitment fee reduction agreement.
2001 Shareholder Loan - On July 30, 2001, the Company borrowed $1.75
million on an unsecured basis from a shareholder of the Company. The
loan was due on August 15, 2001. The unpaid principal amount out of the
loan bore interest at 15% per annum through that date, and bore
interest at a default rate equal to 15% per annum plus 2% per month
after that date. In connection with the loan, the Company paid the
lender a commitment fee of $52,500. The Company's repayment obligations
under the loan were subordinated to its payment obligations under its
vendor financing relationship with Alcatel. The unsecured loan was
converted into common stock in connection with the September 2001
private placement (see Note 13).
TTI Loan - In connection with a reverse acquisition that occurred in
1997, the Company assumed a note payable to Transworld
Telecommunications, Inc. ("TTI"). Interest on the outstanding balance
accrued at 8% per annum until the earlier of August 31, 2001 or the
conversion of the loan into a ten-year obligation under the terms of a
loan commitment agreement between the Company and TTI ("Commitment
Agreement"). Under the terms of the Commitment Agreement, the Company
had the option to convert the amounts it borrowed to a ten-year term
loan (payable in monthly payments of principal and interest) if it met
certain conditions. On July 31, 2001, the Company converted the loan
and accrued interest through July 31, 2001 totaling $1,407,636 into a
ten-year obligation bearing interest at 8% per annum under the terms of
the Conversion Agreement. As a result of the conversion, the Company
will be obligated to pay TTI $17,078 per month, from September 1, 2001
through August 30, 2011. As of December 31, 2001, $1,368,648 was
outstanding on the loan, and is included as other notes payable (see
Note 15).
GBNet and Intervan December 2000 Payments - In December 2000, the
Company was required to make payments under promissory notes delivered
in connection with two acquisitions. The first GBNet note was due on
December 14, 2000. The Intervan promissory note was due December 24,
2000. On the due dates of the notes, the Company notified the note
holders of the Company's intent to pay those notes (together with
interest at 18% per annum from the original due date through the
payment date) upon the closing of the Series D Private Placement. Each
of the notes was paid in full on the closing of the Series D Private
Placement in February 2001.
11. PREFERRED STOCK
At December 31, 2001, the authorized number of shares of the Company's
preferred stock was 75,000,000, $0.001 par value with no shares issued
or outstanding.
Series D Preferred Stock - Effective February 1, 2001, the Company
authorized a newly-designated series of Series D preferred stock. The
Series D preferred stock consisted of 10,000,000 shares of preferred
stock, par value $.001 per share, and had the following general rights
and preferences: (1) it voted with the outstanding shares of common
stock and Series C convertible preferred stock and had one vote per
share; (2) each Series D share was convertible into common stock; (3)
each Series D share had a liquidation preference; and (4) Series D
holders had a preemptive right to purchase their pro rata share of any
new securities issued. Effective September 11, 2001, all outstanding
Series D Preferred shares totaling 2,643,636 were converted into
2,643,636 common shares.
Series C Preferred Stock - In conjunction with the equity financing on
October 18, 1999, the Company authorized a newly-designated series of
Series C preferred stock. The non-redeemable convertible Series C
Preferred Stock consisted of 14,250,000 shares of preferred stock, par
value $0.001 per share, and had the following general rights and
preferences: (1) they voted with the outstanding shares of the
Company's common stock and had one vote per share; (2) they were
convertible into shares of the Company's common stock; and (3) they
carried a liquidation preference. Effective September 11, 2001, all
outstanding Series C Preferred shares totaling 13,620,472 were
converted into 13,620,472 common shares.
Series B Preferred Stock - At December 31, 1999, the Company had
designated 750,000 shares of its preferred stock as Series B Preferred
Stock. The rights and privileges of the Series B Preferred Stock were
as follows: (1) they carried a liquidation preference; (2) they carried
voting rights that entitle the holder to one vote per share; (3) they
were non-redeemable; and (4) they were convertible into shares of the
Company's common stock. In August 2000, the outstanding 29,521 Series B
shares were converted to 125,237 common shares.
12. STOCK PLANS, OPTIONS AND WARRANTS
Stock Incentive Plan - The Company's board of directors and
shareholders approved the 1998 Stock Incentive Plan (the "Incentive
Plan). The Company is authorized to issue a total of 1,820,229 common
shares for issuance under the plan, all of which have been granted. The
Company's Board of Directors administers the plan and determines the
amount of awards and other terms and conditions of the awards. Stock
appreciation rights may be granted under the Incentive Plan. The
Company also has issued outstanding option grants for an additional
568,308 common shares with similar terms and conditions as the
Incentive Plan.
Stock Option Plan for Non-Employee Directors - The Company has reserved
100,000 common shares in a non-employee director stock option plan.
Options for these shares are awarded at 85% of the estimated fair
market value of the stock on the date of award. Compensation expense is
then recognized ratably over the one year vesting period. As of
December 31, 2001 and 2000, the Company had issued option grants for
the purchase of 100,000 and 28,002 common shares, respectively under
the non-employee director stock plan.
Stock Option Awards - The total stock options granted by the Company
under the Incentive Plan and options granted outside of the plan are
summarized in the table below:
Weighted
Number Average
2001: of Options Price Range Exercise Price
--------------- ------------------- -----------------
Outstanding at beginning of year 3,159,853 $0.02 - $12.00 $ 7.24
Granted 84,724 $7.01 - $10.00 $ 8.47
Exercised 103,177 $0.02 $ 0.02
Canceled / Expired 652,863 $0.88 - $10.00 $ 5.90
---------------
Outstanding at end of year 2,488,537 $1.00 - $12.00 $ 7.93
===============
Weighted
Number Average
2000: of Options Price Range Exercise Price
--------------- ------------------- -----------------
Outstanding at beginning of year 2,106,664 $0.02 - $7.50 $4.20
Granted 1,157,280 $10.00 - $12.00 $10.39
Exercised 11,000 $0.35 $0.35
Canceled / Expired 93,091 $7.00 - $10.00 $7.53
---------------
Outstanding at end of year 3,159,853 $0.02 - $12.00 $7.24
===============
Weighted
Average
1999: Options Price Range Exercise Price
--------------- ------------------- -----------------
Outstanding at beginning of year 1,492,842 $0.02 - $7.50 $3.31
Granted 613,822 $0.88 - $7.50 $6.34
Canceled 0
---------------
Outstanding at end of year 2,106,664 $0.02 - $7.50 $4.20
===============
Weighted Weighted
Options Average Average Fair
Granted Exercise Price Value of Options
------------- --------------- -----------------
2001:
Grants with exercise price greater than fair
market value 41,500 $10.00 None
Grants with exercise price less than fair
market value 43,224 $7.01 $1.45
-------------
84,724 $8.01 $0.74
=============
Weighted Weighted
Options Average Average Fair
Granted Exercise Price Value of Options
2000: ------------- --------------- -----------------
Grants with exercise price greater than fair
market value 1,129,278 $10.49 None
Grants with exercise price less than fair
market value 28,002 $6.50 $1.71
-------------
1,157,280 $10.39 $0.04
=============
Weighted Weighted
Options Average Average Fair
Granted Exercise Price Value of Options
1999: ------------- --------------- -----------------
Grants with exercise price equal to fair
market value 200,000 $7.50 $1.10
Grants with exercise price less than fair
market value 413,822 $4.39 $2.16
-------------
613,822 $6.40 $1.89
=============
In general, the option grants vest over a three-year period with
forfeiture provisions if the employee leaves the Company.
Options Outstanding and Exercisable
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------
Weighted
Average Weighted
Remaining Weighted Average
Exercise Options Contractual Average Options Exercise
Prices Outstanding Life Exercise Price Exercisable Price
------ ----------- ---- -------------- ----------- -----
$.35 - $1.00 375,000 1.47 $0.73 208,333 $ 1.00
3.50 - 4.61 390,000 0.32 $4.56 390,000 $ 4.56
6.38 - 7.50 774,500 1.38 $6.59 583,166 $ 7.36
--------------- 949,037 1.63 $9.40 724,703 $10.28
10.00- 12.00 ------------------ ---------------
2,488,537 1,906,202
================== ===============
The Company accounts for stock options granted to employees using APB
No. 25. Accordingly, compensation cost has been recognized for all
stock option grants, which were issued with an exercise price below the
estimated fair value at the date of grant. The total compensation
expense for stock options recognized in 2001, 2000 and 1999 was
$54,505, $248,293 and $1,251,349, respectively. Had compensation cost
for the Company's stock options been determined based on the estimated
fair value at the grant dates for awards consistent with SFAS No. 123
(based on the Black-Scholes option valuation model), the Company's net
loss and net loss per basic and diluted common share would have changed
to the pro forma amounts indicated below:
Years Ended December 31,
------------------------
2001 2000 1999
------------------ ----------------- ------------------
Net loss attributable
to common shareholders:
As reported $ (65,985,361) $ (33,325,060) $ (20,277,479)
Pro forma $ (66,304,139) $ (33,811,413) $ (20,532,818)
Net loss per the weighted
average common share
(basic and diluted):
As reported $ (1.79) $ (1.44) $ (1.48)
Pro forma $ (1.80) $ (1.46) $ (1.50)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected stock price volatility. Because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
The fair value of each option grant is estimated on the date of grant
using the Black Scholes valuation model method prescribed by SFAS No.
123 with the following assumptions: no volatility; no dividend yield,
risk-free interest rates ranging from 4% to 6%, and expected lives
ranging from one to four years.
Warrant Awards - The total warrants outstanding for the purchase of
common stock at December 31, 2001 are summarized in the table below:
Outstanding
Shares in Exercise
Description Warrants Prices Expiration
- ----------- ---------------- ------------ --------------
Financial Advisor Warrants (Note 13) 303,333 $7.50 11/17/2004
Financial Advisor Warrants (Note 13) 130,259 $6.00 6/18/2006
Alcatel Warrants granted in conjunction with
notes (Note 10) 60,764 $7.50 6/29/2005
1997 Warrants granted in conjunction with
promissory notes 155,763 $2.63 1/31/2002
----------------
650,119
================
None of the 1997 warrants were exercised by the expiration date.
13.
STOCK PURCHASE AGREEMENTS
November 2001 Private Placement - On November 30, 2001, the Company
closed a private placement with an accredited investor who is also one
of the Company's equipment vendors. At the closing, the Company issued
that investor 1,646,032 shares of its common stock for $2,880,000 in
cash. In conjunction with the private placement, the Company ordered
$2,880,000 of network equipment from the vendor.
September 2001 Private Placement - On September 11, 2001, the Company
closed a $20,000,000 private placement with two of the Company's
shareholders. At the closing, the Company issued those shareholders
23,529,410 shares of its common stock for $18,178,410 in cash and the
conversion of $1,818,082 due under the promissory note the Company
issued one of the investors in July 2001.
In connection with the private placement, the Company issued one-year
options to a group of six accredited investors who purchased securities
in February 2001. The options provide the right to acquire up to
4,000,000 shares of the Company's common stock at a per share purchase
price equal to 147% of the September 2001 private placement purchase
price. If the options are exercised in full, the Company will receive
$5,000,000 from their exercise.
In connection with the closing of the September 2001 private placement
the Company entered into a series of transactions that were intended to
simplify its capital structure. Under these agreements, (i) the holders
of the Company's 16,264,108 shares of outstanding Series C Convertible
Preferred Stock and Series D Convertible Preferred Stock (collectively,
the "Preferred Stock") converted their Preferred Stock into an equal
number of shares of the Company's common stock (the "Conversion"), (ii)
the holders of warrants the Company issued in connection with certain
of the Company's prior financings exercised those warrants and acquired
7,169,931 shares of its common stock ("Warrant Exercise"), and (iii)
the parties to the October 18, 1999 CCI Shareholders Agreement, as
amended, and the February 7, 2001 Shareholder Joinder Agreement
(collectively, the "Prior Shareholders Agreements") entered into an
amended shareholders agreement (the "Amended Shareholders Agreement").
As a result of the September 2001 financing induced conversion of
preferred stock and modifications of common stock warrants, the Company
recorded $5,396,396 and $626,346, respectively, during 2001 as a
non-cash remeasurement charge to net earnings available to common
stockholders for preferred stock warrants and options.
The Company also issued 60-day options to two other accredited
investors to acquire up to 5,095,658 shares of its common stock. Under
the first of these 60-day options, the optionee had the right to
purchase up to 900,000 shares of the Company's common stock at the same
price as the September 2001 private placement purchase price. Under the
second of the 60-day options, the optionee had the right to purchase up
to 4,195,658 shares of the Company's common stock, but at a purchase
price that increases by 2.5% per month over the private placement
purchase price. If either 60-day optionee exercised its option, the
Company had the right to acquire an equal number of shares from the
private placement investors at a purchase price equal to the per share
purchase price under the 60-day options. As a result, the exercise of
the 60-day options will not have resulted in any further dilution for
the Company's current shareholders, but the Company would also not have
received any net proceeds from their exercise.
In November 2001, these options were extended to December 15 under the
same terms. In December 2001, these options were extended to March 15,
2002 under the same terms, except the option price was set at $.903 per
share. As a result of the modification of the options expiration date,
the Company recorded $4,363,722 during 2001 as non-cash remeasurement
charges to net earnings available to common stockholders for preferred
stock warrants and options. None of these options were exercised by the
expiration date.
The holders of the Preferred Stock had a preemptive right to join in
certain issuances of the Company's stock, including the private
placement. In connection with the closing of the private placement,
they waived that preemptive right. The holders of the Series D
Convertible Preferred Stock also waived, as part of the private
placement, any right to require us to adjust the purchase terms under
which they acquired their Series D Convertible Stock in February 2001
to match the economic terms of the private placement.
In connection with the Warrant Exercise, the parties to the exercise
agreed to amend the terms of any warrants that were not immediately
exercisable to provide for their immediate exercise, and then
immediately exercised the warrants at an exercise price of $.01 per
share. The Company received $71,700 in proceeds from the exercise of
the warrants under the Warrant Exercise, of which $64,243 was recorded
as an exercise of preferred stock warrants and $7,457 was recorded as
an exercise of common stock warrants.
Under the terms of an Amended Shareholders Agreement executed as part
of the September 2001 financing, the shareholder parties agreed to
allow for transfers of their shares of the Company's stock under
certain conditions, including a right of first refusal for the benefit
of the other parties to the agreement to purchase such shares under a
right of co-sale.
Series D Private Placement - On February 7, 2001, the Company closed a
private placement of securities with five of its shareholders and one
additional accredited investor. The Company received $22,869,461 in
cash, net of fees and expenses, from the sale of 2,643,636 shares of
Series D convertible preferred stock and issued warrants to acquire
1,657,435 additional shares of Series D and common stock. Effective
September 11, 2001, all remaining Series D Preferred shares and
warrants were converted into common shares (see Note 11).
Minority Interest Purchases - In October 2000, the Company purchased
minority interests from three parties relating to operations in Mexico,
Venezuela and Panama. The Company acquired the stock from the minority
parties in exchange for a $175,000 cash payment and the issuance of an
aggregate of 406,666 shares of common stock.
Intervan Restructuring - In October 2000, the Company restructured the
Mexican operating subsidiaries in connection with its application for
certain Mexican telecommunications licenses. Under those types of
licenses, the voting control of the licensee must be held by Mexican
citizens or entities. Mexican law provides, however, that licenses may
be organized with both voting and non-voting shares. Therefore, under
the terms of the restructuring, the Company sold 51% of the voting
control (representing approximately 10% of Intervan's stock on an
economic interest basis) of Intervan to one of the Company's executives
who is a Mexican citizen. The Company retained the remaining 49% voting
control (and approximately 90% of the economic interest) in Intervan,
along with the right to veto certain types of fundamental corporate
business transactions. The executive's purchase of the 51% voting
control interest was financed through a loan from the Company which
bears interest on a deferred basis at a rate of 12% per annum and which
is due in one payment in 2010. In October 2001, the Company converted
$20,376,879 of intercompany debt into an equivalent amount of variable
capital in Intervan. This conversion also increased the original price
per share paid by the Company and its executive for the Intervan stock
as described above in conformance with Intervan's organizational
documents and increased the loan amount due from the Company's
executive. The Company will continue to account for the Mexican
operations using the consolidation method.
Series C Option Exercise - In July and September 2000, the Company
received net proceeds of $27,374,162, after fees and expenses, from the
exercise of options to acquire 3,891,563 shares of Series C Preferred
Stock that were granted in the October 1999 Financing. The original
July exercise date was extended to September 2000 for a portion of
those options. The modification of the original option term required
the Company to remeasure the fair value of the options, and
accordingly, the Company recognized $352,000 of non-cash remeasurement
as an increase in the net loss attributable to common shareholders for
the year ended December 31, 2000.
October 1999 Financing - In October and November 1999, the Company
closed certain components of a total $109,500,000 private equity and
credit facility financing package with six accredited investors. As
part of the transaction, the investors acquired options to purchase
3,891,563 additional shares of Series C Preferred Stock and warrants to
purchase 2,432,226 shares of common stock, and two existing
shareholders (Internexus and FondElec) acquired additional warrants to
purchase 520,000 shares of common stock. The preferred stock options
had an exercise price of $7.50 per share and were exercised in 2000 as
discussed above. The warrants were exercised and converted into common
stock in September 2001 as described above. In connection with this
financing, the Company also granted its financial advisor in the
transaction warrants to acquire 433,592 common shares at $7.50 per
share (see Note 12).
Under the terms of the financing agreement, Telematica invested
$5,525,000 in Chispa. Additionally, Telematica entered into a long-term
$26,000,000 credit facility with Inter@net and, in connection with that
transaction, agreed to enter into a fiber-optic lease, pursuant to
which Inter@net will lease a portion of Telematica's existing
fiber-optic network in Caracas, Venezuela, and a commercial services
agreement, under which Telematica's affiliate will provide billing,
collection and other commercial services to Inter@net.
In December 2000 and January 2001, $7,000,000 of the $26,000,000
facility was paid to Inter@net in cash. Given the Company's decision to
cease operations in Venezuela as described in Note 3, the Company has
not drawn any of the remaining $19,000,000 in the facility.
The outstanding principal and unpaid interest amounts under the
facility are convertible to shares of Inter@net at Telematica's
election at any time after the third anniversary of the facility, but
Telematica can convert the amounts due under the facility prior to the
third anniversary if Inter@net defaults under the facility. Upon any
such conversion, the Company would retain operating control of
Inter@net. The credit facility also provides for a corresponding
subscription right in Telematica's favor, pursuant to which it is
allowed to purchase 50% of the outstanding stock of Inter@net for
$26,000,000 through October 31, 2015. As Inter@net draws on the credit
facility, the subscription obligation is proportionately reduced. Any
election by Telematica to convert the amounts due under the facility
into shares of Inter@net must be exercised with the subscription right.
In April 2002, the Company replaced these notes with a new $7,000,000
note accruing interest at 3% per annum with a balloon payment due at
March 15, 2015.
14. LEASES
Metronet Capital Lease - In June 1999, the Company acquired
approximately 17% of the capacity of a fiber-optic network in Mexico
City. The Company paid $4,717,908 for the capacity. This transaction
was recorded as a prepaid capital lease as there are no future
obligations.
The Company financed the purchase through two loans from shareholders.
The loans bore interest at 10% per annum along with a premium interest
payment at a 55% effective annual interest rate and were due (together
with unpaid interest) on the earlier of January 3, 2000 or receipt of
proceeds from any equity or debt financing. The shareholders also
received warrants to acquire 96,870 shares of common stock, which were
exercised in September 2001 (see Note 13). One of the promissory notes
along with accrued interest was paid in the October 1999 Financing. The
other promissory note and accrued interest was converted into Series C
Preferred Stock in connection with the October 1999 Financing (see Note
13).
The Company leases corporate office space and equipment under operating
leases with terms that range between one and five years. Future minimum
annual lease payments under the Company's operating leases are as
follows:
Year ending December 31:
2002 $ 1,959,104
2003 1,134,533
2004 725,977
2005 616,454
2006 and thereafter 414,934
------------------------
Total future lease payments $ 4,851,002
========================
Total rent expense under the operating leases in 2001, 2000 and 1999
was $1,981,219, $2,020,893 and $908,538, respectively.
15. COMMITMENTS AND CONTINGENCIES
Litigation - In March 2000, the Company was named as a defendant in an
action brought in federal court in California. The suit claimed the
Company had defrauded the plaintiffs in connection with a merger the
Company concluded in 1997 and that the Company had further breached
contractual obligations to offer the plaintiffs preemptive rights for
securities later sold by the Company. After preliminary motions in the
case, the Company filed a number of motions for summary judgment on the
issues raised by the plaintiff. The court granted all of the Company's
motions and disposed of the last substantive issue in the case in
October 2001. The Company subsequently made a motion to recover its
costs and expenses in the matter, and, in February 2002, the parties
negotiated a settlement, which included a cash payment to the Company
and the return of the stock the Company issued to the plaintiff in
1997.
In April 2001, FondElec Group, Inc., an affiliate of one of the
Company's principal shareholders ("FondElec Group"), filed an
arbitration action against the Company in New York alleging breach of a
Services Agreement dated August 1998. The FondElec Group claimed, among
other things, that the Company failed to pay the FondElec Group certain
commissions and fees in connection with the Company's sale of its
securities, and that the Company further owes the FondElec Group
amounts for other transaction-related services. The Company asserted a
number of defenses and counterclaims in the proceeding, including
breach of fiduciary duty, duress and violation of federal and state
securities laws. In April 2002, the Company settled the FondElec Group
arbitration proceeding and each party dismissed its claims with
prejudice against the other party ("FondElec Settlement Agreement"). In
connection with the settlement, the Company (i) cancelled a $2,750,000
promissory note payable to the Company by an affiliate of the FondElec
Group; (ii) wrote off 420,000 in related FondElec Group assets; and
(iii) was released of a $1,864,118 recorded obligation payable to the
FondElec Group. Additionally, the Company agreed to pay the FondElec
Group $200,000 on the 60th day following repayment in full of amounts
due under the Internexus revolving credit agreement and each party
executed mutual releases for any and all claims. As a result of the
above settlement, the Company recorded a $1,505,882 arbitration
settlement expense during the year ended December 31, 2001.
In July 2001, the Company was named in an arbitration proceeding
initiated in Florida by two of the parties who sold the Company the
Metrotelecom assets and operations in April 2000. In the arbitration,
the claimants alleged that the Company had defaulted in the payment of
a portion of the deferred purchase price due them in April 2001, in the
aggregate approximate amount of $2,400,000. The Company counterclaimed
in the action for breach of the sellers' representations and warranties
in the sale of the assets and operations, and cross-claimed against the
other sellers of the assets and operations. In October 2001, the
Company and the two claimants settled the arbitration, which was
dismissed with prejudice. The Company believes the arbitration
proceeding was settled on terms favorable to the Company. As a result
of the settlement, the claimants accepted a reduction in the principal
and interest, which was recorded as a reduction of the purchase price
for Metrotelecom.
In November 2001, the Company was named in a lawsuit brought by TTI in
the Third District Court for the State of Utah (which was subsequently
removed to the United States Bankruptcy Court). The suit relates to a
1995 loan commitment between the Company and TTI, which is now in
bankruptcy. Under the commitment, TTI agreed to loan the Company up to
$1 million in working capital, and the Company was required to repay
that amount, together with interest, on August 1, 2001. TTI advanced
$996,707 to the Company under the commitment and the total amount due
under the commitment, including interest, is approximately $1.4
million. The commitment documents allowed the Company to convert the
obligation into a 10-year, monthly amortized loan at any time before
August 1, 2001 under certain conditions. The Company notified TTI of
its conversion of the loan prior to that date and has made all required
payments under the loan as converted. TTI claims the Company was not
entitled to convert the loan. The Company believes it has valid
defenses to TTI's claims, and intends to vigorously defend the suit.
16. OPERATING SEGMENT INFORMATION
The Company makes key financial decisions based on certain operating
results of its operational regions and primary revenue types. Other
revenue as disclosed below consists primarily of equipment rents,
installation and value added services. The Company's operating segment
information is as follows for the years ended December 31, 2001, 2000
and 1999:
2001 Central
Mexico Venezuela America Corporate Totals
- -------------------------------- --------------- --------------- -------------- -------------- ---------------
Revenue:
- - Data $ 15,762,512 $ 880,947 $ 8,899,272 $ - $ 25,542,731
- - CATV - - 3,473,947 - 3,473,947
- - Telephony/other 5,756,133 41,903 5,356,235 - 11,154,271
Depreciation expense 3,367,847 259,894 3,150,093 1,140,671 7,918,505
Amortization expense 2,270,939 99,916 3,574,231 200,022 6,145,108
Segment restructuring costs (1,652,926) (14,400,982) (2,766,013) (3,049,343) (21,869,264)
Segment operating loss (14,489,979) (16,922,711) (1,828,669) (10,333,500) (43,574,859)
Segment total assets 57,735,317 1,542,955 34,893,132 8,989,221 103,160,625
Segment long-lived assets 47,761,418 1,154,098 28,016,555 6,708,319 83,640,390
Capital expenditures 14,335,417 3,226,450 1,847,860 649,867 20,059,594
Central
2000 Mexico Venezuela America Corporate Totals
- -------------------------------- --------------- --------------- ------------- -------------- ---------------
Revenue:
- - Data $ 11,978,291 $ 1,066,225 $ 6,417,167 $ - $ 19,461,683
- - CATV - - 8,100,265 - 8,100,265
- - Other 4,551,541 66,638 2,847,331 - 7,465,510
Depreciation expense 1,780,003 206,047 3,825,299 393,569 6,204,918
Amortization expense 2,641,820 41,091 5,232,294 40,689 7,955,894
Segment operating loss (8,959,484) (2,561,654) (10,523,323) (11,548,873) (33,593,334)
Segment total assets 45,570,764 12,643,197 56,266,131 12,237,810 126,717,902
Segment long-lived assets 36,178,876 8,664,728 49,708,184 8,613,788 103,165,576
Capital expenditures 15,927,905 5,798,647 8,716,986 2,136,588 32,580,126
Central
1999 Mexico Venezuela America Corporate Totals
- -------------------------------- --------------- --------------- -------------- -------------- ---------------
Revenue:
- - Data $ 172,355 $ 1,120,123 $ 432,385 $ - $ 1,724,863
- - CATV - - 7,175,042 - 7,175,042
- - Other - 35,537 163,612 - 199,149
Depreciation expense 18,856 136,313 1,287,613 246,464 1,689,246
Amortization expense 29,983 225,006 3,364,254 - 3,619,243
Segment operating loss (76,576) (880,496) (10,798,760) (7,469,761) (19,225,593)
Segment total assets 22,998,357 5,468,357 42,668,044 26,069,765 97,204,523
Segment long-lived assets 19,068,279 3,040,167 40,071,220 2,927,135 65,106,801
Capital expenditures 4,987,838 357,697 5,795,142 1,946,893 13,087,570
17.
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company had the following non-cash investing and financing
activities in 2001:
Acquisition of treasury stock in exchange for minority interest
in subsidiary $ 1,318,069
Issuance of notes receivable in debt restructuring $ 2,750,000
Conversion of promissory note to common stock $ 1,818,082
Issuance of notes receivable in asset sale $ 2,000,000
In addition, the Company had the following non-cash activities relating
to its acquisitions during 2000 and 1999:
Acquisition of Metrotelecom (April 5, 2000):
Fair value of assets acquired, including intangible assets and
equipment (net of cash acquired) $ 14,736,996
Fair value of liabilities assumed (2,159,535)
Notes payable (8,159,610)
Common stock issued (1,000,000)
-----------------
Cash paid (net of cash acquired) $ 3,417,851
=================
Acquisition of Intervan (December 24, 1999):
Estimated fair value of assets acquired, including intangible
assets and equipment (net of cash acquired) $ 21,980,304
Fair value of liabilities assumed (2,743,452)
Notes payable (5,257,105)
-----------------
Cash paid (net of cash acquired) $ 13,979,747
=================
Acquisition of GBNet (December 15, 1999):
Estimated fair value of assets acquired, including intangible
assets and equipment (no cash was acquired) $ 13,000,000
Fair value of liabilities assumed None
Notes payable (9,000,000)
----------------
Cash paid $ 4,000,000
================
18. SUBSEQUENT EVENTS
April 2002 Revolving Credit Facility - In April 2002, the Company
entered into a series of agreements relating to a commitment by
Internexus S.C.A. to provide the Company's wholly owned subsidiary,
Latin American Broadband, Inc., with up to $4,000,000 under a revolving
credit agreement. Internexus S.C.A. is an affiliate and successor in
interest to Norberto Priu, one of the Company's principal shareholders.
The Company received an advance of $2,000,000 under the credit
agreement at the closing. The amounts advanced under the agreement
accrue interest at 25% per annum, are senior to all other debt except
for amounts due on the Company's vendor debt facility and are
collateralized by a pledge of the Company's common shares owned by four
of its largest shareholders. If the Company defaults on its obligations
under the Internexus credit agreement, and Internexus enforces its
rights under the stock pledges, Internexus would obtain control of a
majority of the outstanding voting shares of the Company and would have
the ability, among other things, to elect the board of directors and
effect fundamental corporate transactions.
The maturity date for the facility is the earliest to occur of (i) July
9, 2002, (ii) a change of control (iii) a liquidation, winding up or
dissolution or the sale of all or substantially all of the Company's
assets, or (iv) the issuance of equity securities to a third party.
Additionally, at the maturity date, the Company shall pay to the lender
an amount equal to the greater of (A) the amounts then outstanding
hereunder, together with interest thereon, or (B) an amount equal to
two hundred percent (200%) of the committed amount under certain
circumstances, including if the amounts advanced under the facility are
repaid as a result of a change of control, liquidation event or equity
invested from a third party that occurs after September 30, 2002 for a
transaction entered into on or before July 9, 2002. The Company also
agreed to promptly engage an investment banker or financial advisor
reasonably acceptable to the lender for the purpose of exploring a
possible sale of all or substantially all of the Company's business and
operations.
In connection with the execution of the April 2002 facility, the
Company entered into two additional transactions. The first transaction
involved the replacement of two notes totaling $7 million previously
delivered by one of the Company's Venezuelan subsidiaries in favor of
Telematica EDC, C.A. The replacement note, which was delivered by the
Company, is also in the principal amount of $7 million, accrues
interest at 3% per annum, and is due, along with accrued interest, in a
balloon payment on March 15, 2015. The second transaction involved the
execution of the FondElec Settlement Agreement (see Note 16).
PART 3.
INDEX TO EXHIBITS
Exhibit
No.
- ---
Exhibit Page
3.1 Articles of Incorporation *
3.2 Bylaws *
3.3 Amended and Restated Articles of Incorporation *
4.1 Statement of Rights and Preferences for the Series A Preferred Stock *
4.2 Statement of Rights and Preferences for the Series B Preferred Stock *
4.3 Statement of Right and Preferences for the Series C Preferred Stock *
4.4 Amendment to Series C Certificate *
4.5 Amendment to Amended and Restated Articles of Incorporation *
4.6 Statement of Rights & Preference for the Series D Preferred Stock *
4.7 Amendment to Statement of Rights & Preference for the Series D Preferred Stock *
10.1 Agreement and Plan of Reorganization *
10.2 Escrow Agreement between Fidelity Transfer Company, TTI and the Company *
10.3 Commitment Agreement between the Company and TTI *
10.4 Letter of Understanding with Decathlon *
10.5 Merger Agreement between the Company and Telecom Investment Corporation *
10.6 Services Agreement between Bridgeport Financial, Inc. and the Company *
10.7 Option and Stock Purchase Agreement between the Company, Caracas Viva Vision, S.A. and its *
Shareholders
10.8 July 24, 1997 Amendment to Option and Stock Purchase Agreement *
10.9 August 13, 1997 Amendment to Option and Stock Purchase Agreement *
10.10 Shareholders Agreement between Petrolera Argentina San Jorge, S.A. and the Company *
10.11 Stock Purchase Agreement between FondElec Essential Services Growth Fund, L.P., Pegasus *
Fund, L.P. and the Company
10.12 Securities Purchase Agreement dated December 23, 1998 among the Company, Internexus, S.A. *
and FondElec Essential Services Growth Fund, L.P.
10.13 Form of Promissory Note issued in connection with the Securities Purchase Agreement dated *
December 23, 1998
10.14 Participation Agreement, dated October 15, 1999, among Telematica EDC, C.A., TCW/CCI *
Holding LLC, Glacier Latin-America Ltd., the International Finance Corporation,
FondElec Essential Services Growth Fund, L.P., Internexus S.A. (collectively, the
"Investors"), the Company and other parties
10.15 Option Agreement, dated October 18, 1999, among the Company and the Investors *
10.16 Form of Series C Warrant, dated October 18, 1999, as issued in favor of each Investor *
10.17 CCI Shareholder's Agreement, dated October 18, 1999, among the Company, the Investors, and *
other parties
10.18 Amended and Restated Registration Rights Agreement, dated October 19, 1999 among the *
investors and other parties
10.19 Stock Purchase Agreement between General Business Machines Corporation and the Company, *
dated December 15, 1999
10.20 Stock Purchase Agreement for the purchase of International Van, S.A. de C.V., dated *
December 24, 1999
10.21 Umbrella Stock Purchase Agreement among Convergence Communications, Inc., TCW/CCI Holding *
II, LLC, Telematica EDC, C.A., Norberto Priu, Raquel Emilse Oddone de Ostry, Glacier
Latin-America Ltd. and Morley Capital Management III, LLC (the "Series D Investors"),
dated as of February 7, 2001
10.22 Representative Stock Purchase Agreement by and among Convergence Communications, Inc. and *
TCW/CCI Holding II, LLC, dated as of February 7, 2001
10.23 Representative Internal Rate of Return Warrant for the purchase of shares of common stock *
of Convergence Communications, Inc., dated as of February 7, 2001
10.24 Representative Performance Warrant for the purchase of shares of Series D Preferred Stock *
of Convergence Communications, Inc., dated as of February 7, 2001
10.25 Financing Warrant for the purchase of shares of common stock of Convergence Communications, *
Inc., dated as of February 7, 2001
10.26 Preemptive Rights and Warrant Adjustment Waiver, dated as of February 7, 2001 *
10.27 Shareholder Joinder Agreement by and among Convergence Communications, Inc. and the Series *
D Investors, dated as of February 7, 2001
10.28 Registration Rights Agreement by and among Convergence Communications, Inc. and the Series *
D investors, dated as of February 7, 2001
10.29 Stock Purchase Agreement by and among Convergence Communications, Inc., Norberto Priu, and 85
AES Telecom, Inc. dated as of September 11, 2001
10.30 Revolving Credit Agreement among Convergence Communications, Inc., Latin American 106
Broadband, Inc. and Internexus S.C.A. dated as of April 8, 2002
21.1 Subsidiaries of the Registrant 119
99 Valuation and Qualifying Accounts 120
* This document was previously filed with the Commission and is incorporated in
this report by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CONVERGENCE COMMUNICATIONS, INC.
4-18-2002 /s/ Douglas Jacobs
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Date Douglas Jacobs
Chief Executive Officer
(Principal Executive Officer)
CONVERGENCE COMMUNICATIONS, INC.
4-18-2002 /s/ Gary Barlow
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Date Gary Barlow
Vice President of Accounting and Taxation
(Principal Accounting Officer)
DIRECTORS
4-18-2002 /s/ Lance D'Ambrosio
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Date Lance D'Ambrosio, Chairman
4-18-2002 /s/ Troy D'Ambrosio
- ---------------------- -----------------------------------------
Date Troy D'Ambrosio
4-18-2002 /s/ Pablo Priu
- ---------------------- -----------------------------------------
Date Pablo Priu
4-18-2002 /s/ Peter Schiller
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Date Peter Schiller
4-18-2002 /s/ Jorge Fucaraccio
- ---------------------- -----------------------------------------
Date Jorge Fucaraccio
4-18-2002 /s/ Jeffery Safford
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Date Jeffery Safford
4-18-2002 /s/ Christopher Shenefelt
- ---------------------- -----------------------------------------
Date Christopher Shenefelt
4-18-2002 /s/ Gonzalo Pacanins
- ---------------------- -----------------------------------------
Date Gonzalo Pacanins
4-18-2002 /s/ Norberto Corredor
- ---------------------- -----------------------------------------
Date Norberto Corredor
4-18-2002 /s/ Mario L. Baeza
- ---------------------- -----------------------------------------
Date Mario L. Baeza
4-18-2002 /s/ Carlos Christensen
- ---------------------- -----------------------------------------
Date Carlos Christensen
4-18-2002 /s/ Gaston Acosta-Rua
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Date Gaston Acosta-Rua