<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-27594
----------------
TRESCOM INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 65-0454571
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
200 EAST BROWARD BOULEVARD,
FT. LAUDERDALE, FLORIDA 33301
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 763-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.0419 PAR VALUE PER SHARE
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. [X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 16,1998 was approximately $50,920,685.
As of March 16, 1998, 12,150,844 shares of the registrant's common stock,
$0.0419 par value per share, were outstanding.
Documents incorporated by reference: None.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In February 1998, TresCom International, Inc. (together with its
subsidiaries and Predecessors (as defined herein), referred to collectively
herein as "TresCom" or the "Company") entered into a definitive Agreement and
Plan of Merger with Primus Telecommunications Group, Inc. ("Primus") and
Taurus Acquisition Corporation, a wholly-owned subsidiary of Primus
("Taurus"). Pursuant to the terms of the Agreement and Plan of Merger, it is
contemplated that Taurus will merge with and into TresCom (the "Merger"), that
TresCom will be the surviving corporation and that Primus will acquire 100% of
the issued and outstanding shares of TresCom Common Stock (as hereinafter
defined). The transaction is expected to be completed during the second
quarter of 1998 and is subject to, among other things, the approval of both
Primus's and the Company's shareholders and certain regulatory authorities.
The prospective effects of the Merger on the Company have not been taken into
account with regard to the statements made in this Annual Report on Form 10-K.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Certain Factors Which May Affect the Company's Future
Results--Proposed Merger."
Certain statements contained in this Annual Report on Form 10-K which
express "belief," "anticipation," "expectation" or "intention" and statements
regarding the consummation of the proposed Merger and the expansion of
TresCom's business, including the negotiation of agreements with PTTs and TAs
(each as hereinafter defined), capital expenditures, the effects of regulatory
changes and product offerings insofar as they may apply prospectively and are
not historical facts, are "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Because such statements include
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially from those expressed or implied by
such forward-looking statements include, but are not limited to, the factors
set forth in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Factors Which May Affect the
Company's Future Results."
PART I
ITEM 1. BUSINESS.
GENERAL
TresCom is a facilities-based long distance telecommunications carrier
focused on international long distance traffic. The Company offers a broad
array of competitively priced services, including long distance, calling
cards, prepaid debit cards, domestic and international toll-free calling,
frame relay and bilingual operator services. The Company provides long
distance service to approximately 230 countries and territories through an
international network consisting of: (i) owned facilities, concentrated in a
Caribbean hub linking the United States, the Caribbean and South and Central
America; (ii) direct operating and transit agreements with various post,
telegraph and telephone organizations ("PTTs") and foreign telecommunications
administrations ("TAs"); and (iii) leased capacity.
The Company markets its services on a wholesale basis to other
telecommunications carriers and resellers and on a retail basis to residential
and commercial customers, ranging in size from small businesses to Fortune 500
companies. To take advantage of the benefits associated with its network, the
Company targets its United States mainland sales and marketing efforts towards
customers with significant southbound international long distance traffic.
These customers include businesses with sales or operations in the Caribbean,
South and Central America and Mexico (referred to collectively herein as
"Latin America") as well as the rapidly growing Hispanic population in the
United States. During 1997, the Company further increased its sales and
marketing efforts directed towards residential and commercial customers, while
maintaining its carrier and reseller customer base. In emerging markets in
Central and South America, the Company has teamed up with local agents and
expects to generate international traffic originating from those markets. As
part of the Company's marketing activities, the Company has entered into joint
marketing and promotional arrangements with certain other
<PAGE>
companies, including Coca-Cola, Shell Oil Company, Seagrams, Walgreens Drug
Stores, Papa John's Pizza and Spec's Music pursuant to which such companies
have agreed to market their products or services with those of TresCom.
TresCom was formed in December 1993 and acquired The St. Thomas and San Juan
Telephone Company, Inc. ("STSJ"), a United States Virgin Islands ("U.S.V.I.")
and Puerto Rico based long distance carrier, in February 1994. TresCom has
experienced significant growth through a combination of internal growth and
acquisitions, including the November 1994 acquisition of Total
Telecommunications, Inc. ("TTI"), which was a Ft. Lauderdale based inter-
exchange carrier. STSJ and TTI are referred to collectively herein as the
"Predecessors."
SERVICES
TresCom offers a broad array of services to its customers, both through its
owned facilities and through contractual arrangements with other carriers. The
Company's service offerings include direct dial "1 plus" and toll-free long
distance, calling and debit cards, international toll-free service, 24-hour
bilingual operator services, intra-island local service in Puerto Rico,
private lines, frame relay, international inbound service and international
callthrough services from selected markets. The Company markets its products
under a number of registered and common law service marks including
TresCom SM, Terafon SM, Express USA SM, as well as various registered logos.
TresCom has the capability to route calls over multiple alternative paths,
thus offering full redundancy. The Company also offers customized country
calling plans that help customers manage their long distance costs for high
volume destinations.
In addition to direct dial "1 plus" and toll-free long distance services,
the Company's service offerings include:
. Calling and Debit Cards. The Company's international calling cards
provide access to more than 230 countries and territories and
international origination and termination. The Company's debit cards
provide payment convenience and are rechargeable.
. International Toll-Free Service. Also known as "International 800," this
service permits customers to place calls terminating in the United States
(including the U.S.V.I. and Puerto Rico) from a foreign country on a
toll-free basis. As of December 31, 1997, the Company's international
toll-free service was available for origination from over 40 countries.
. 24-hour Bilingual Operator Services. The Company offers a full range of
operator services to residential and commercial customers. A staff of
operators fluent in English and Spanish can be accessed to complete
collect, third party, person-to-person, station-to-station and credit
card validation calls.
. Intra-Island Local Service. The Company offers local calling services in
Puerto Rico, pursuant to which customers can make local calls on the
island at very competitive rates.
. Private Lines. The Company leases to customers dedicated private lines
that provide high capacity between predetermined locations for voice and
data services.
. Frame Relay. The Company offers frame relay, a transmission standard
which utilizes multiplex technology. Frame relay enables multiple users
to share communications bandwidth for enhanced data transmission. The
Company's frame relay capabilities are compatible with frame relay
networks around the world.
. International Inbound Services. The Company offers international inbound
calling services which provide collect calling to the United States and
calling card services with United States terminations. In 1997, the
Company expanded its marketing programs in Honduras, Nicaragua and Panama
and intends to launch new programs in the Dominican Republic. Planning is
underway for similar services in key South American countries. There can
be no assurance, however, that the Company will be able to launch such
services or that, if launched, such services will be successful.
2
<PAGE>
. International Callthrough Services. In 1997, the Company began providing
international callthrough services from selected markets, which enables
offshore customers to place international calls at significantly reduced
rates.
. Wholesale and Retail Billing Services. The Company offers the capability
for wholesale and retail traffic repricing for international and domestic
traffic as well as advanced personal computer billing services.
New services the Company expects to introduce in 1998 include:
. International Call-Center Services. The Company intends to offer products
supporting U.S.-based international call centers with prepaid long
distance.
. International Marketlink. The Company intends to provide products
enabling off-shore businesses to offer toll-free access for customers in
the United States.
There can be no assurance that the Company will be able to launch any of the
proposed services in 1998 or thereafter, or that, if launched, such services
will be successful.
MARKETING AND SALES
The Company markets its services on a wholesale basis to other
telecommunications carriers and resellers and on a retail basis to residential
and commercial customers ranging in size from small businesses to Fortune 500
companies. Through its direct sales force and through independent sales and
telemarketing agents, the Company targets customers in the United States, the
U.S.V.I. and Puerto Rico with significant international telephone usage,
particularly southbound calls to Latin America.
Wholesale. The Company's wholesale customers include both facilities-based
carriers and switched and switchless resellers who purchase the Company's
services for resale to their own customers. The Company uses its direct sales
force to market its services to wholesale customers and participates in and
advertises at key carrier industry trade shows. During 1997, the Company was
not dependent on any one customer to provide more than 5% of its total annual
revenues.
Retail. The Company's retail customer base is comprised of residential and
commercial customers. The Company markets its services to retail customers
primarily through direct sales representatives and through independent sales
representatives and telemarketing agents. Sales techniques such as joint
marketing arrangements, direct mail, promotions and advertising are employed
by the Company as well.
Direct Sales. The Company's direct sales force targets major accounts and
small to medium size businesses with significant southbound traffic to Latin
America. The sales representatives receive commissions based upon the revenues
received by the Company from new customers. As of December 31, 1997, the
Company had approximately 100 direct sales and marketing employees. The
Company intends to expand its direct sales force as a part of its growth
strategy by adding sales representatives to its sales offices located in New
York, Florida, Georgia, southern California, the U.S.V.I and Puerto Rico.
During 1997, the Company began performing a portion of its telemarketing
activities in house.
U.S. Independent Sales Representatives and Telemarketing Agents. The Company
supplements its direct sales efforts by marketing through a network of
independent sales representatives and telemarketing agents. As of December 31,
1997, the Company had approximately 150 independent sales representatives and
telemarketing agents. Independent sales representatives generally enter into
sales agreements with the Company providing for commissions to be paid based
on revenues generated for the Company. Telemarketing agents are generally paid
on an hourly basis or on a per sale basis and receive no commission. The
Company typically grants a nonexclusive right to solicit customers and
requires that its agents maintain a minimum quota.
International/Offshore Sales and Marketing Agents. The Company has entered
into agreements with independent sales representatives in non-U.S. locations
to sell its international calling services from that country
3
<PAGE>
to the United States and beyond. Offshore sales and marketing support programs
continue to increase revenues from the Company's offshore phonebooths,
international calling cards and in-country access networks.
Joint Marketing Arrangements. The Company enters into joint marketing
arrangements with other companies to increase name recognition and customer
awareness and to generate referrals of potential customers who can then be
contacted by the Company's sales representatives and telemarketing agents.
Promotions and Advertising. The Company engages in various promotional
activities, such as sponsorship of the Shell Air and Sea Show and various
civic and charity events. The Company engages in such promotional
opportunities to target specific customer groups. In addition, the Company has
continued utilizing print advertising which targets heavy users of
international telecommunications services. The Company advertises in
publications such as World Trade Magazine, Latin Trade Magazine and Global
Sites Magazine. In the residential market, the Company has targeted Spanish
speaking consumers by advertising in Spanish language newspapers, direct mail
campaigns and Spanish radio and television advertising. The Company believes
that continued focus on the growing domestic Hispanic market will attract
customers with heavy long distance usage to Latin America.
CUSTOMER SERVICE
The Company strives to provide superior customer care and believes that the
quality of its customer service is one of its competitive advantages. The
Company has a fully staffed multilingual Customer Care Department available
through "toll-free" access, as well as a Trouble Reporting Center with
extensive industry and technical expertise to cater to the Company's wholesale
customers. In order to facilitate quality customer service, the Company has
designed and implemented computerized customer profiles and billing
information to permit rapid access by its customer service professionals to
billing records, thus enabling a prompt response to inquiries.
The Company direct bills certain wholesale customers, its larger business
accounts, and a small percentage of its small business and residential
customers. In many cases, these customers and accounts have customized billing
arrangements, including bilingual billing, to help them achieve better
management of their long distance telecommunications needs. The Company has
multiple billing and delivery methods including billing files delivered via
bulletin board system, software to allow commercial customers to better manage
their long distance bills through various sorting and classification
functions, magnetic media, bill image or diskette. The Company believes that
flexible customized billing is an important value-added service that is a key
factor in attracting and retaining commercial customers. The Company's small
business and residential customers are generally billed by their respective
local exchange carriers ("LECs"), which charge for the Company's services in a
monthly, all-inclusive invoice sent to the customer.
NETWORK
Under direct operating and transit agreements with PTTs and TAs, TresCom
transmits customer calls through an international network consisting of
ownership interests in undersea digital fiber optic transmission cables and
leased capacity from other carriers. Through its owned switching facilities
and network infrastructure, the Company continuously monitors its network to
optimize routing of calls over the least cost route available on its
international network.
OWNED FACILITIES
The Company's international network utilizes digital fiber optic circuits to
transmit long distance calls. TresCom's transmission facilities include
ownership interests in international undersea digital fiber optic transmission
cables linking the United States, Europe, the Caribbean and South and Central
America. TresCom's owned network also includes wholly owned microwave relay
and satellite earth station equipment linking the mainland United States,
Puerto Rico and the U.S.V.I. that provide redundancy and diversity to its
ownership interests in digital fiber optic transmission cables.
4
<PAGE>
The international undersea digital fiber optic cables in which the Company
has an investment are owned and operated through consortium arrangements
between various international telecommunications service providers, which
include United States carriers, foreign PTTs and foreign TAs. Typically,
participation in a consortium includes those carriers which have the operating
authority to provide direct international service and have direct operating
agreements with the PTTs or TAs in the countries served by the cables. In most
cases, ownership in cables is acquired solely through the purchase of minimum
increments of capacity or Minimum Investment Units ("MIUs"). In instances
where a carrier has not purchased ownership interests in the cable prior to
the time it was placed in service, the carrier is only permitted to acquire
capacity on that cable through the purchase, by way of a lump sum payment, of
an Indefeasible Right of Use ("IRUs"). The fundamental difference between an
IRU holder and an owner of MIUs is that the IRU holder is not entitled to
participate in management decisions relating to the cable system. The Company
currently owns MIUs in the Americas 1 Cable System, the Americas II Cable
System, the Columbus II Cable System, the Columbus III Cable System, the
Eastern Caribbean Fiber Cable System, the Taino-Carib Cable System, the
Antillas I Cable System, the Bahamas II Cable System and the Pan American
Cable System. The Company obtained MIUs in the Americas II Cable System and
the Columbus III Cable System during 1997. The Company's investments in the
TCS-1 Cable System, the Bahamas 1 Cable System, the PTAT-1, the CARAC Cable
Systems, the CANUS Cable System, the CANTAT 3 Cable System, the ODIN Cable
System and the RIOJA Cable System are in the form of IRUs. The various
consortium arrangements to which the Company is a party contain restrictions
on the transfer of use, provide for the acquisition of additional capacity,
designate maintenance responsibility and contain arrangements regarding system
design modifications. The Company's investment in certain cables is currently
limited to the portion of the cable in which the Company is routing traffic.
The Company has a right to acquire capacity on the remaining portions of the
system through the payment of additional amounts.
The Company's network infrastructure and digital switches provide the means
to maximize its owned and leased international facilities. Digital switches
located in Ft. Lauderdale, Florida; New York, New York; and Guaynabo, Puerto
Rico; provide the entry and exit gateways for the Company's international
network. An enhanced services switch located in Miami, Florida, allows the
Company to offer value-added services such as calling and debit cards and
international callthrough services.
During 1997, the Company completed several strategic projects that enable it
to utilize its international network more efficiently. Advanced C7, or
international signaling, enhancements were implemented on several key
international routes; compression equipment technology, both traditional DCME
based and advanced voice over frame relay and secured domestic facilities was
implemented; and construction of a Network Management Center in Ft. Lauderdale
was begun to effectively control the Company's network from one centralized
location.
The Company's owned switching systems and network infrastructure permit the
Company to maximize the portion of its call traffic that is carried on the
Company's own network rather than by other carriers, and therefore to realize
economies of scale. Switches are digital computerized routing facilities that
receive calls, route calls through transmission lines to their destination and
record information about the source, destination and duration of calls. The
Company also uses its computerized network switching equipment to continuously
monitor its network to optimize the routing of calls over the least cost route
available on its international network. To maintain effectiveness and minimize
its costs, TresCom continuously evaluates the addition of new switches, points
of presence and other facilities as its customer base expands.
LEASED CAPACITY AND DIRECT OPERATING AND TRANSIT AGREEMENTS
TresCom's international network is composed of leased capacity from other
carriers and direct operating and transit agreements with PTTs and TAs. These
arrangements permit the Company to transmit and terminate calls over networks
of other carriers. The Company's contracts with these entities typically have
terms ranging from one to five years, with clauses providing for negotiated
renewals. Contracts with PTTs and TAs typically have longer terms than those
with domestic United States carriers.
5
<PAGE>
The Company uses leased capacity to provide long distance services in areas
where it does not own transmission facilities and to provide redundancy where
it does own such facilities. The Company's ability to operate profitably
depends, in part, on planning the mix of circuits and transmission capacity to
be leased or used for each switching center, so that calls are completed on a
cost effective basis without compromising service, transmission quality or
reliability. As the Company expands its services into a new area, services are
provided via leased capacity from other carriers on a variable cost, usage-
sensitive basis. When the volume of traffic in a market is sufficient to
justify additional investment, the Company will enter into long-term fixed-
price arrangements such as fiber optic cable or satellite transmission
capacity.
For international traffic, the Company can terminate traffic via leased
capacity from other carriers or through direct operating agreements with
foreign PTTs and TAs. Direct operating agreements provide for the termination
of traffic in, and return of traffic to, the parties' respective countries for
mutual compensation through negotiated settlement rates. Direct operating
agreements between a United States based international carrier and a foreign
carrier provide that a foreign carrier will return the same percentage of
total United States terminating traffic as it receives from the United States
based carrier and also provide for network coordination and accounting and
settlement procedures. In addition to specifying the terms for accounting and
settlement procedures, certain of the direct operating agreements to which the
Company is a party also specify the services to be provided (e.g., switched
services, operator-assisted calls or debit card services), the currency to be
used to determine payment, the time of payment and the duration of the
arrangement. These agreements help to reduce costs on the Company's network by
allowing for the termination of calls at rates lower than those available in
some cases and create opportunities for revenue enhancement through the
receipt of return traffic as well as the transmission of traffic on a
wholesale basis for other carriers and resellers which do not have similar
agreements.
As of December 31, 1997, the Company had 26 direct operating and transit
agreements with PTTs and TAs. Currently, the Company is negotiating direct
operating and transit agreements with PTTs and TAs in certain other countries,
although there can be no assurance that the Company will be able to enter into
such agreements.
Included in the group of carriers providing leased capacity to TresCom's
network are AT&T, MCI, WorldCom, Sprint, niche carriers with direct operating
agreements to specific countries and resellers with large volume and long-term
contracts for international capacity on AT&T, MCI, WorldCom and Sprint
facilities.
COMPETITION
The telecommunications industry is highly competitive and affected by rapid
regulatory and technological change, as well as corporate consolidation. The
Company believes that the principal competitive factors in its business
include customer service, pricing, network quality, service offerings and the
flexibility to adapt to changing market conditions. The Company's future
success will depend upon its ability to compete with AT&T, MCI, Sprint,
WorldCom and other United States-based and foreign carriers, many of which
have considerably greater financial and other resources than the Company.
Certain of the larger United States-based carriers have entered into joint
ventures with foreign carriers to provide international services. In addition,
certain foreign carriers have entered into joint ventures with other foreign
carriers to provide international services and have begun to compete or invest
in the United States market, creating greater competitive pressures on the
Company. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Factors Which May Affect the
Company's Future Results--Competition."
The Company believes it competes favorably in its targeted markets, due to
its bilingual operator and billing services, competitive pricing, high network
quality and broad array of service offerings. The Company also believes that
its success will increasingly depend on its ability to offer, on a timely
basis, new services based on evolving technologies and industry standards.
There can be no assurance that new technologies or services will be available
to the Company on favorable terms.
Regulatory trends have had, and may have in the future, significant effects
on competition in the industry. See "--Regulatory Environment."
6
<PAGE>
REGULATORY ENVIRONMENT
The Company's business operations are subject to extensive federal and state
regulation. Federal laws and regulations of the Federal Communications
Commission (the "FCC") apply to interstate telecommunications (including
international telecommunications that originate or terminate in the United
States), while particular state regulatory authorities have jurisdiction over
telecommunications originating and terminating within the same state. The laws
of other countries only directly apply to carriers doing business in those
countries. Thus, when the Company conducts business with its foreign
correspondent, it is affected indirectly by such laws insofar as they affect
the foreign carrier. There can be no assurance that future regulatory,
judicial and legislative changes will not have a material adverse effect on
the Company, that domestic or international regulators or third parties will
not raise material issues with regard to the Company's compliance with
applicable regulations or that regulatory activities will not have a material
adverse effect on the Company. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Factors
Which May Affect the Company's Future Results--Regulatory and Legislative
Risks."
FEDERAL
The FCC has classified the Company as a non-dominant interexchange carrier.
Generally, the FCC has chosen not to exercise its statutory power to closely
regulate the charges, practices or classifications of non-dominant carriers.
Nevertheless, the FCC acts upon complaints against such carriers for failure
to comply with statutory obligations or with the FCC's rules, regulations and
policies. To date, there have been no such complaints against the Company. The
FCC also has the power to impose more stringent regulatory requirements on the
Company and to change its regulatory classification. In the current regulatory
atmosphere, the Company believes that the FCC is unlikely to do so.
Among domestic carriers, only the LECs are currently classified as dominant
carriers. Thus, the FCC regulates many of the LECs' rates, charges and
services to a greater degree than the Company's. Until October 1995, AT&T was
classified as a dominant carrier but AT&T successfully petitioned the FCC for
non-dominant status in the domestic interstate and inter-exchange market.
Therefore, certain pricing restrictions that once applied to AT&T have been
eliminated, likely making AT&T's prices more competitive with the Company's.
The Company has the authority to provide domestic, interstate
telecommunications services. The Company has also been granted authority by
the FCC to provide switched international telecommunications services through
the resale of switched services of United States facilities based carriers and
to provide certain international telecommunications services by acquiring
circuits on various undersea cables or leasing certain satellite facilities.
The FCC reserves the right to condition, modify or revoke such domestic and
international authority for violations of the Communications Act of 1934, as
amended (the "Communications Act"), or the FCC's regulations, rules or
policies promulgated thereunder. Although the Company believes the probability
to be remote, a rescission by the FCC of the Company's domestic or
international authority or a refusal by the FCC to grant additional
international authority would have a material adverse effect on the Company.
Both domestic and international non-dominant carriers must maintain tariffs
on file with the FCC. The Company is required to file tariffs containing
detailed actual rate schedules for both its domestic and international
tariffs. In 1995, the FCC adopted new rules which have required the Company to
cancel and withdraw its tariffs covering interstate domestic services by
September 22, 1997. The FCC's order was appealed and effectively has been
stayed pending resolution of the appeal.
As a non-dominant carrier, the Company is also subject to a variety of
miscellaneous regulations that, among other things, govern the documentation
and verifications necessary to change a consumer's long distance carrier;
limit the use of toll-free long distance; require certain disclosures
regarding operator services; in some cases, limit foreign ownership and
control; and require prior approval of transfers of control. For instance, the
7
<PAGE>
Company could not continue to hold certain radio licenses it now holds if its
foreign ownership level reaches 20%.
To date, the FCC has exercised its regulatory authority to supervise closely
the rates only of dominant carriers. However, the FCC has increasingly relaxed
its control in this area. As an example, the FCC is in the process of
repricing local access charges (the fee for the use of the LECs' transmission
facilities connecting the LECs' central offices and the inter-exchange
carrier's access point). In addition, the LECs have been afforded a degree of
pricing flexibility in setting access charges where adequate competition
exists, and the FCC is considering certain proposals which would relax further
LEC access regulation. The impact of such repricing and pricing flexibility on
facilities based inter-exchange carriers, such as the Company, cannot be
determined at this time.
On February 1, 1996, the United States Congress enacted comprehensive
telecommunications reform legislation, which the President signed into law as
the Telecommunications Act of 1996 on February 8, 1996. The Telecommunications
Act of 1996 amended the Communications Act to impose a legal duty on all
telecommunications carriers (i) not to prohibit or unduly restrict resale of
their services; (ii) to provide dialing parity and nondiscriminatory access to
telephone numbers, operator services, directory assistance and directory
listings; (iii) to afford access to poles, ducts, conduits and rights-of-way;
and (iv) to establish reciprocal compensation arrangements for the transport
and termination of telecommunications.
In addition, under the terms of the Telecommunications Act of 1996, the
Regional Bell Operating Companies (the "RBOCs") were released from the
constraints of the Modification of Final Judgment, the judicial consent decree
resulting from the Bell System divestiture. On February 28, 1996, the
Department of Justice recommended that the presiding judge terminate the
decree.
The Telecommunications Act of 1996 transferred enforcement of the
obligations of the Modification of Final Judgment from the District Court to
the FCC, eliminated some of the restrictions immediately and created
requirements and timetables for the removal of others. As a consequence, the
RBOCs may offer long distance services outside their local telephone service
territories almost immediately, including international services which compete
with the Company. Subject to the FCC finding that the necessary prerequisites
have been met, the RBOCs will be authorized to provide such services within
their local telephone service areas at some future point. As a result, the
Company will likely face additional competition from RBOCs.
The FCC has determined that call-back services using uncompleted call-
signaling violates neither United States domestic nor international law. Call-
back services involve calls originating in a foreign country directed in such
a manner as to give the foreign caller the advantage of the lower charges for
outbound United States calls. However, United States call-back providers are
not authorized to provide service to customers in countries which expressly
have declared such call-back services to be illegal. The FCC will receive
documentation from any government which seeks to place United States carriers
on notice that call-back services using uncompleted call signaling has been
expressly declared illegal in its country. The Company provides services to
resellers and other carriers that provide such call-back services. In the
event that call-back services are determined to be illegal in a given country,
the Company may lose revenues that are derived from call-back services to that
country.
The microwave and satellite communications licenses held by the Company are
subject to FCC regulations. Such licenses were granted for fixed terms. The
majority of these licenses expire within five years, and the remainder will
expire within nine years. The Company intends to seek renewal of its licenses
and anticipates that they will be renewed in the ordinary course. Failure to
obtain renewal of its licenses could have a material adverse effect on the
Company.
Authorizations held under Section 214 of the Communications Act (such as
those held by the Company) for international services traditionally have been
granted for the provision of services or use of facilities between the United
States and countries specified in the authorizations and may now be granted,
in appropriate circumstances, on a global basis. The Company holds all
necessary Section 214 authorizations for conducting its
8
<PAGE>
present business but may need additional authority in the future. In some
cases, carriers may not be able to lease lines between the United States and
an international point for the purpose of offering switched services, unless
the FCC first determines that the foreign country affords opportunities to
United States carriers equivalent to those available under United States law.
In addition, if the Company is acting as a reseller, it cannot provide a
service interconnected with the public switched network at only one end to a
country that has not been found equivalent. Facilities-based carriers can do
so however. The FCC adopted an Order on February 29, 1996, that reduced the
regulatory burdens imposed on international carriers, making it easier for the
Company to provide and expand its international services but also making it
easier for competitive entry by other carriers.
The FCC has promulgated certain rules governing the offering of
international switched telecommunications. Such calls typically involve a
bilateral, correspondent relationship between a carrier in the United States
and a carrier in the foreign country. Until recently, the United States was
one of a few countries to allow multiple carriers to handle international
calls; almost all foreign countries authorized only a single carrier, often a
state-owned monopoly, to provide telecommunications services. In light of the
disparate bargaining positions of the United States carriers, the FCC imposed
certain requirements to try to minimize the opportunities that dominant
foreign telecommunications providers would have to counterpose one United
States carrier against another. These policies include the International
Settlement Policy, which requires that the accounting or settlement rate for
all carriers be uniform on parallel routes and traffic received by a United
States carrier from a foreign carrier must be proportional to the traffic that
the United States carrier terminates to a foreign carrier. The FCC has adopted
a policy to consider proposals for deviation from uniform settlements in the
case of countries with competitive multi-carrier markets. The Company has
numerous agreements with foreign carriers providing for the handling of
switched calls.
The FCC also has adopted new rules that set the maximum rate that United
States carriers should pay foreign carriers for terminating switched voice
traffic in their country. A number of foreign carriers and government entities
have appealed this ruling. Even if upheld on appeal, it is impossible at this
time to predict how the new rules would affect TresCom's business.
Additionally, the FCC enforces certain requirements which derive from the
regulations of the International Telecommunications Union. These regulations
may further circumscribe the correspondent relationships described above. In
addition to settlement rates, these regulations govern certain aspects of
transit arrangements, wherein the originating carrier may contract with an
interim carrier in a second country to terminate service in a third country.
The Company has transit agreements with foreign carriers. Such agreements may
allow the Company to pay less than the full accounting rate it would have to
pay if it had a direct operating agreement with the terminating country.
However, the Company is unaware of any instance in which a terminating country
has objected with respect to any of the Company's traffic. If a terminating
country objects in the future to such transit arrangements, the Company may be
required to secure alternative arrangements.
The trade agreement reached on February 15, 1997 among the 69 countries in
the World Trade Organization Group on Basic Telecommunications Services ("WTO
Agreement") also may have an impact on worldwide competitive market
conditions. Pursuant to the WTO Agreement, which went into effect on February
5, 1998, the United States has made certain commitments to permit access to
the U.S. market by foreign telecommunications service providers. In November
1997, the FCC completed its proceeding to review and modify its international
telecommunications policies and regulations in light of U.S. obligations under
the WTO Agreement. As a result of this proceeding, the FCC eliminated its
reciprocity requirements and in general eased its entry and other regulatory
requirements applicable to carriers from WTO member countries.
Correspondingly, telecommunications markets in many foreign countries are
expected to be significantly liberalized, creating additional competitive
market opportunities for U.S. telecommunications operators such as the
Company.
STATE
The intrastate, long distance telecommunications operations of the Company
are also subject to various state laws, regulations, rules and policies.
Currently, the Company is certified, tariffed or otherwise qualified to
provide service in 48 states and Puerto Rico. Additionally, the Company
provides service in certain states that
9
<PAGE>
do not require certification or registration of any form. The Company intends
to obtain any necessary authorization in all states that require certification
or registration.
The vast majority of states require the Company to apply for certification
to provide telecommunications services before commencing intrastate service
and to file and maintain detailed tariffs listing the rates for intrastate
service. Many states also impose various reporting requirements and require
prior approval for all transfers of control of certified carriers, assignments
of carrier assets, carrier stock offerings and the incurrence by carriers of
certain debt obligations. In some states, prior regulatory approval may be
required for acquisitions of telecommunications operations.
FOREIGN
The Company provides international services by either reselling the services
of other carriers or by entering into direct operating or transit agreements
with PTTs and TAs. Generally, PTTs are state-owned and operated monopolies and
TAs are former PTTs which have been privatized. Although the services
currently provided by the Company are not directly subject to the laws of
other countries, the foreign carriers with whom the Company conducts business
are subject to those laws. Consequently, any changes to the laws of a country
served by the Company could have a material adverse effect on the Company.
EMPLOYEES
As of March 16, 1998, the Company had approximately 330 employees. None of
the Company's employees are members of a labor union or are covered by a
collective bargaining agreement. Management believes that the Company's
relationship with its employees is good.
ITEM 2. PROPERTIES.
The Company's headquarters in Ft. Lauderdale, Florida consist of
approximately 20,600 square feet of office space under leases that expire
through April 2003. In addition, the Company leases an aggregate of
approximately 70,000 square feet where it maintains its sales offices or
switches. The Company's sales offices are located in Ft. Lauderdale, Florida;
Hollywood, Florida; Tampa, Florida; New York, New York; Los Angeles,
California; Atlanta, Georgia; Guaynabo, Puerto Rico; St. Thomas, U.S.V.I.; and
its switches are located in Ft. Lauderdale, Florida; Miami, Florida; New York,
New York; and Guaynabo, Puerto Rico.
Management believes that the Company's present office facilities, together
with additional space available under expansion options, are adequate for its
operations for the foreseeable future and that similar additional space can
readily be obtained as needed.
ITEM 3. LEGAL PROCEEDINGS.
The Company is from time to time involved in litigation incidental to the
conduct of its business. There is no pending legal proceeding to which the
Company is a party which, in the opinion of the Company's management, is
likely to have a material adverse effect on the Company's financial condition
or results of operations; however, due to the inherent uncertainty of
litigation, there can be no assurance that the resolution of any particular
claim or proceeding would not have a material adverse effect on the Company's
results of operations for the fiscal period in which such resolution occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock, $0.0419 par value per share ("Common Stock"),
commenced trading on February 8, 1996, on the NASDAQ National Market ("NNM")
under the symbol "TRES." On March 16, 1998, there were approximately 60
shareholders of record of the Common Stock. The Company believes that it has
in excess of 400 beneficial owners. The high and low sales prices for the
Common Stock as reported by the NNM are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
First quarter.......................... $ 9 1/4 $4 3/4 $16 5/8(1) $13 1/4(1)
Second quarter......................... 8 3/4 4 7/16 20 1/4 9
Third quarter.......................... 11 7/8 6 5/8 13 1/4 7 1/2
Fourth quarter......................... 11 1/2 7 14 7
</TABLE>
- --------
(1) The first quarter of 1996 is the period from February 8, 1996 (the date
the Common Stock commenced trading) to March 31, 1996.
The Company has not declared or paid any cash dividends on its Common Stock
since its formation and does not presently anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The Company currently
intends to retain any future earnings to finance the expansion and continued
development of its business. The Company has a $25.0 million Revolving Credit
and Security Agreement with a commercial bank (the "Revolving Credit
Agreement") which contains certain restrictions on its ability to declare or
pay dividends, except stock dividends, during the term of the agreement. In
addition to restrictions under the Revolving Credit Agreement, the Company's
ability to declare and pay cash dividends may, in the future, be affected by
the ability of the Company's present and future subsidiaries to declare and
pay dividends or otherwise transfer funds to the Company because the Company
conducts substantially all of its operations through its subsidiaries. Subject
to the restrictions contained in the Revolving Credit Agreement and any future
limitations, the payment of cash dividends on the Common Stock will be within
the sole discretion of the Company's Board of Directors and will depend upon
the earnings, capital requirements and financial position of the Company,
applicable requirements of the Florida Business Corporation Act, general
economic conditions and other factors considered relevant by the Company's
Board of Directors.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data for the Company and the
Predecessors should be read in conjunction with the financial statements and
notes thereto and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Report. The
selected consolidated financial data of the Combined Predecessors, the
Combined Predecessors and Company and the Company presented below under
"Statement of Operations Data" for the year ended December 31, 1993, the
period from January 1, 1994 to November 30, 1994, the year ended December 31,
1994 for both the Combined Predecessors and Company and the Company and the
years ended December 31, 1995, 1996 and 1997 for the Company and "Balance
Sheet Data" as of December 31, 1994, 1995, 1996 and 1997, have been derived
from the audited consolidated financial statements of the Company and the
Predecessors. The selected consolidated financial data as of December 31, 1993
has been derived from the unaudited financial statements of the Company and
the Predecessors, which include all adjustments the Company considers
necessary for a fair presentation of the financial information set forth
therein.
<TABLE>
<CAPTION>
COMBINED
PREDECESSORS
COMBINED PREDECESSORS AND COMPANY COMPANY
------------------------- ------------ --------------------------------------
PERIOD FROM
YEAR JANUARY 1, YEAR
ENDED 1994 TO ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, --------------------------------------
1993(1) 1994(2) 1994(3) 1994(4) 1995 1996 1997
------------ ------------ ------------ -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND REVENUE PER MINUTE OF USE)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $27,900 $18,871 $ 50,290 $ 31,419 $102,641 $139,621 $157,641(5)
Cost of services........ 15,994 11,802 32,603 20,801 74,679 106,928 124,365
------- ------- -------- -------- -------- -------- --------
Gross profit............ 11,906 7,069 17,687 10,618 27,962 32,693 33,276
Selling, general and
administrative......... 11,078 7,222 29,432 22,210 32,437 30,808 36,386
Depreciation and
amortization........... 602 252 2,156 1,904 3,961 4,928 6,599
------- ------- -------- -------- -------- -------- --------
Operating income (loss). 226 (405) (13,901) (13,496) (8,436) (3,043) (9,709)
Interest and other
(income) expense, net.. 130 134 693 559 3,191 578 1,146
------- ------- -------- -------- -------- -------- --------
Net income (loss) before
taxes and extraordinary
item................... 96 (539) (14,594) (14,055) (11,627) (3,621) (10,855)
Provision for income
taxes.................. 99 13 13 -- -- -- --
------- ------- -------- -------- -------- -------- --------
Loss before
extraordinary item..... (3) (552) (14,607) (14,055) (11,627) (3,621) (10,855)
Extraordinary item...... -- -- -- -- -- 1,956 --
Net loss................ $ (3) $ (552) $(14,607) $(14,055) $(11,627) $ (5,577) $(10,855)
======= ======= ======== ======== ======== ======== ========
Weighted average number
of shares of common
stock outstanding(6)... 3,120 10,671 11,890
Basic and Diluted net
loss per share of
Common Stock(6)........ $ (5.29) $ (.59) $ (.91)
OPERATING DATA:
Minutes of use.......... 81,724 175,568 93,843 330,296 455,481 537,867
Revenue per minute of
use.................... $ .23 $ .29 $ .33 $ .31 $ .31 $ .29
EBITDA(7)............... $ 828 $ (153) $ (6,299) $ (6,146) $ (4,336) $ 3,149 $ (2,853)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
COMBINED
COMBINED PREDECESSORS AND
PREDECESSORS COMPANY COMPANY
------------ ---------------- ------------------------------------
DECEMBER 31,
DECEMBER 31, DECEMBER 31, ------------------------------------
1993(1) 1994(3) 1994(4) 1995 1996 1997
------------ ---------------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 1,786 $ -- $ -- $ 2,052 $ 6,020 $ 1,481
Working capital
(deficiency)........... 122 (8,674) (8,674) (30,012) 8,201 5,744
Total assets............ 13,718 61,565 61,565 72,630 101,610 108,429
Long-term obligations
due within one year.... 1,408 174 174 25,290 817 1,098
Long-term obligations... 8,817 26,114 26,114 702 3,965 19,593
Stockholders' (deficit)
equity ................ (2,147) 14,875 14,875 21,508 67,322 58,950
</TABLE>
- --------
(1) Includes approximately $25 of start-up costs incurred by the Company from
its formation on December 8, 1993 through December 31, 1993.
(2) Includes operations for STSJ from January 1, 1994 through February 22,
1994 and operations for TTI from January 1, 1994 through November 30,
1994.
(3) Includes results of operations or period-end amounts, as applicable, for
each of the Company and the Predecessors, as if the acquisition of each of
the Predecessors had occurred on January 1, 1994.
(4) Includes results of operations for STSJ from February 23, 1994 through
December 31, 1994 and results of operations for TTI from December 1, 1994
through December 31, 1994.
(5) In 1997, the Company recognized $543 of revenue from the sale of excess
IRU capacity on undersea digital fiber optic transmission cables.
(6) The earnings per share amounts prior to 1997 have been restated as
required to comply with Statement of Financial Accounting Standards
No. 128, Earnings Per Share. For a further discussion of earnings per
share and the impact of Statement No. 128 see Notes 2, 5 and 13 to the
consolidated financial statements.
(7) As used herein, "EBITDA" is defined as net income or loss plus
depreciation expense, amortization expense, interest and other expense,
income taxes and other non-cash charges, minus extraordinary income and
gains and non-cash income, if any, and plus extraordinary losses, if any.
EBITDA also includes an adjustment of $5,446 associated with the
revaluation of an acquired customer base for the Combined Predecessors and
Company and the Company during 1994. While EBITDA should not be construed
as a substitute for operating income or a better measure of liquidity than
cash flow from operating activities, which are determined in accordance
with generally accepted accounting principles, it is included herein to
provide additional information regarding the ability of the Company to
meet its future debt service, capital expenditures and working capital
requirements. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs and is not necessarily comparable to similarly
titled measures of other companies.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SUMMARY
TresCom is a facilities-based long distance telecommunications carrier
focused on international long distance traffic originating in the United
States. The Company offers a broad array of competitively priced services,
including long distance, calling cards, prepaid debit cards, domestic and
international toll-free calling, frame relay and bilingual operator services.
The Company derives its revenues by providing international and domestic long
distance services on a wholesale basis to other telecommunications carriers
and resellers and on a retail basis to residential and commercial customers,
ranging in size from small businesses to Fortune 500 companies. Service
revenues are based on minutes of use and charged at a rate per minute which
varies according to the termination point of the traffic and time of day. All
revenues are billed in United States dollars.
Since its formation, the Company has expanded its revenues, customer base
and network through internal growth and acquisitions. The Company seeks to
continue to expand its revenues from internal growth through four distinct
sales channels: (i) direct sales efforts; (ii) an agent sales network; (iii)
ethnic focused telemarketing programs; and (iv) wholesale sales activities. In
addition, the Company is constantly evaluating potential acquisition
opportunities. The Company believes that it has established the network,
operations, customer service, infrastructure and systems necessary to support
its expanding sales and customer base for the foreseeable future.
A portion of the Company's revenues are derived from wholesale sales.
Increased worldwide competition has continued to drive down wholesale prices.
Because of these changing market conditions, the Company has carefully managed
its rate of growth to ensure continued profitability in the wholesale
division. The Company intends to continue to pursue a growth strategy designed
to leverage its network capabilities and further expand its retail sales
distribution channels. The Company also intends to continue to pursue its
strategy of increasing revenues derived from retail customers by increasing
the focus on its sales and marketing efforts to customers with significant
southbound long distance traffic. These customers include businesses with
sales or operations in Latin America and the rapidly growing Hispanic
population in the United States.
Cost of services includes those costs associated with the transmission and
termination of services over the Company's international network. Transmission
and termination costs are the Company's most significant expense, and the
Company seeks to lower these costs through: (i) increasing volume on its owned
facilities, thereby spreading the allocation of fixed costs over a larger
number of minutes; (ii) negotiating lower cost direct operating and transit
agreements with PTTs and TAs; and (iii) optimizing the routing of calls over
the least cost route on its international network. Consistent with its
strategy of maximizing traffic carried on the Company's own network, the
Company significantly expanded its network switch capacity in 1997.
The majority of the Company's cost of services is variable and consists of
payments for leased capacity from other carriers and payments to PTTs and TAs
with which the Company has direct operating and transit agreements. See "Item
1. Business--Network--Leased Capacity and Direct Operating and Transit
Agreements." Under its direct operating agreements, the Company agrees to send
United States originated traffic to the PTTs or TAs and the PTTs or TAs agree
to send a proportionate amount of return traffic at agreed upon accounting
rates. If there is an imbalance in the volume of traffic sent and received in
return, the carrier that originates more traffic pays for the difference to
compensate the other carrier. The difference is the settlement payment. Under
the Company's direct operating agreements, the Company's net settlement
revenues and payments are denominated in United States dollars.
The Company's profitability is driven by the difference between net revenues
and the cost of leased capacity and settlement payments to PTTs and TAs. In
order to minimize the costs of leased capacity and settlement payments, the
Company utilizes a Least Cost Routing System designed to transmit the
Company's traffic over the least cost route choice on its network. Based on
FCC data for the period from 1989 through 1996, per minute
14
<PAGE>
settlement payments from United States carriers to PTTs and TAs have declined
at a significantly faster rate than per minute billed revenues. Due to the WTO
Agreement, the Company expects this trend to continue. See "Item 1. Business--
Regulatory Environment--Federal."
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased 12.9%, or $18.0 million, from $139.6 million in
1996 to $157.6 million in 1997 due to an increase in the volume of traffic
carried, offset, in part, by a decrease in average revenue per minute. Minutes
of use increased 18.1%, or 82.4 million, from 455.5 million in 1996 to 537.9
million in 1997. Although international traffic accounted for approximately
80.0% of the Company's revenue in both 1997 and 1996, the overall revenue per
minute decreased to approximately $0.29 in 1997 from approximately $0.31 in
1996 as a result of continued international wholesale price pressures and a
change in the mix of international terminations. Historically, international
traffic has commanded a higher per minute rate than domestic traffic, however,
this gap has continued to decrease due to increased international competition.
Costs of Services. Costs of services increased 16.4%, or $17.5 million, from
$106.9 million in 1996 to $124.4 million in 1997. The increased costs are a
factor of increased minutes of use, the costs of which are variable in nature,
partially offset by a fractional decrease in the overall cost per minute
resulting from changes in the mix of international terminations and lower
termination costs derived from certain direct operating agreements.
Gross Profit. Gross profit increased 1.8%, or $0.6 million, from $32.7
million in 1996 to $33.3 million in 1997. As a percentage of revenues, gross
profit decreased from 23.4% in 1996 to 21.1% in 1997 reflecting the impact of
the international wholesale price pressures referred to above.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 18.2%, or $5.6 million, from $30.8 million in
1996 to $36.4 million in 1997. After giving effect to a one-time $1.5 million
promotional credit for services rendered by a vendor in 1996, selling, general
and administrative expense, as a percentage of revenues, was approximately
23.1% for both 1997 and 1996. On an absolute basis, the increase was primarily
due to variable costs associated with growth in the retail business, such as
advertising, commissions and billing costs.
Depreciation and Amortization. Depreciation and amortization expense
increased 34.7%, or $1.7 million, from $4.9 million in 1996 to $6.6 million in
1997. The increased expense is due to depreciation of assets acquired to
support continued expansion of the Company's network and amortization related
to acquired businesses and customer bases.
Interest and other expenses, net. Interest and other expenses, net,
increased 83.3%, or $0.5 million, from $0.6 million in 1996 to $1.1 million in
1997. The increase is primarily due to additional borrowings under the
Revolving Credit Agreement.
Extraordinary Item. Extraordinary expense decreased 100%, or $2.0 million,
from 1996 to 1997. The extraordinary expense in 1996 of $2.0 million was a
result of the early extinguishment of $35.8 million of indebtedness in
February of such year. Approximately $1.5 million was attributable to debt and
warrants payable to a major shareholder of the Company and approximately $0.5
million was related to the write-off of deferred financing costs associated
with the Bank Facility (as hereinafter defined).
Net Loss. Net loss increased 94.6%, or $5.3 million, from $5.6 million in
1996 to $10.9 million in 1997 due to the above factors.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased 36.1%, or $37.0 million, from $102.6 million in
1995 to $139.6 million in 1996 due to a 37.9% increase in minutes of use from
330.3 million in 1995 to 455.5 million in 1996, offset in
15
<PAGE>
part by a fractional decrease in average revenue per minute resulting from
pricing pressures and a change in the mix of international terminations. In
1996, approximately 80.0% of the Company's revenue was derived from
international traffic compared with approximately 75.0% in 1995. Historically,
international traffic has commanded a higher per minute rate than domestic
traffic, however this gap is decreasing due to increased international
competition.
Costs of Services. Costs of services increased 43.1%, or $32.2 million, from
$74.7 million in 1995 to $106.9 million in 1996. This increase resulted from a
greater percentage of international traffic in 1996 (approximately 80.0%)
compared to 1995 (approximately 75.0%) as discussed above. The cost per minute
also increased in absolute terms due to higher cost countries within the
international mix.
Gross Profit. Gross profit increased 16.8%, or $4.7 million, from $28.0
million in 1995 to $32.7 million in 1996. As a percentage of revenues, gross
profit decreased from 27.3% in 1995 to 23.4% in 1996. The primary factors
contributing to the increase in gross profit are the Company's mix of business
and continued international competitive pressures as described above in
"Revenues" and "Costs of Services."
Selling, General and Administrative Expense. Selling, general and
administrative expense decreased 4.9%, or $1.6 million, from $32.4 million in
1995 to $30.8 million in 1996. The 1995 selling, general and administrative
expense reflects a $4.1 million charge for a settlement with a major customer,
and a $1.7 million charge for expenses relating to Hurricane Marilyn (which
hit St. Thomas, a significant base of operations for the Company, in September
1995). The 1996 expense reflects a $1.5 million promotional credit for
services rendered by a vendor and $0.6 million associated with a one-time cash
compensation charge relating to changes in executive management during the
year. After giving effect to these items, selling, general and administrative
expense, as a percentage of revenues, decreased from 26.0% in 1995 to 22.7% in
1996.
Depreciation and Amortization. Depreciation and amortization expense
increased 22.5%, or $0.9 million, from $4.0 million in 1995 to $4.9 million in
1996. The increased expense is due to depreciation of assets acquired during
1996 to support continued expansion of the Company's network and corporate
infrastructure.
Interest and other expenses, net. Interest and other expense, net, decreased
81.3%, or $2.6 million, from $3.2 million in 1995 to $0.6 million in 1996. The
decrease is primarily due to the repayment of borrowings under a Bank Facility
between TresCom Network Services, Inc., a wholly-owned subsidiary of the
Company, and a commercial bank (the "Bank Facility") and due to the repayment
of borrowings from a major shareholder, each in February 1996.
Extraordinary Item. The extraordinary expense in 1996 of $2.0 million was a
result of the early extinguishment of $35.8 million of indebtedness in
February. Approximately $1.5 million was attributable to debt and warrants
payable to a major shareholder of the Company and approximately $0.5 million
was related to the write-off of deferred financing costs associated with the
Bank Facility.
Net Loss. Net loss decreased 51.7%, or $6.0 million, from $11.6 million in
1995 to $5.6 million in 1996 due to the above factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from working capital needs,
primarily the costs of services, selling, general and administrative expenses,
debt service and capital costs associated with the expansion of switching and
network capacity. The Company is a holding company, the principal assets of
which are the capital stock of its direct subsidiaries and has no independent
means of generating revenues. As a holding company, the Company's internal
sources of funds to meet its cash needs, including payment of expenses, are
dividends and other permitted payments from its direct and indirect
subsidiaries. Historically, the Company's working capital requirements have
been funded primarily from the sale of equity securities, bank borrowings and
loans from shareholders.
16
<PAGE>
During the fourth quarter of 1996, the Company established a $5.0 million
line of credit with a commercial bank secured by certain accounts receivable
(the "Credit Facility"). The Credit Facility, as amended on March 27, 1997,
contained standard debt covenants relating to financial position and
performance, as well as restrictions on the declaration and payment of
dividends. Through July 31, 1997, the Company was either in compliance with or
received waivers with respect to all covenants under the Credit Facility.
On July 31, 1997, the Company entered into the Revolving Credit Agreement.
On such date, all borrowings under the Credit Facility were repaid in full
with borrowings under the Revolving Credit Agreement and the Credit Facility
was terminated. As of March 16, 1998, availability under the Revolving Credit
Agreement was $21.1 million, of which $17.0 million (including $0.7 million of
letters of credit) had been utilized. The Company is currently in compliance
with all covenants contained in the Revolving Credit Agreement.
During the third quarter of 1996, the Company established a relationship
with a commercial bank to provide asset financing. The Company utilized
approximately $4.3 million in the fourth quarter of 1996 for capital projects.
An additional $1.1 million was utilized in the second quarter of 1997 and an
additional $0.6 million was utilized in the first quarter of 1998.
Approximately $1.5 million remains available for future capital expenditures.
The Company currently has capital commitments of approximately $1.4 million.
Pending available financing, the Company has identified approximately $9.0
million of additional capital expenditures designed to expand the Company's
operations. The Company is currently reviewing various alternative financing
arrangements. There can be no assurance, however, that such alternative
financing arrangements will be available, or if available, on terms acceptable
to the Company.
Based on management's projections, the Company anticipates having sufficient
funds for its needs. If additional funds are needed and sources are not
available, the Company's business and results of operations could be
materially adversely affected.
From time to time, the Company evaluates acquisitions of businesses and
customer bases which complement the business of the Company. Depending on the
cash requirements of potential transactions, the Company may finance
transactions with cash flow from operations, or the Company may raise
additional funds by pursuing various financing vehicles such as new bank
financing or one or more public offerings, or private placements of the
Company's securities. The Company, however, has no present understanding,
commitment or agreement with respect to any material acquisition, and there
can be no assurance that any such acquisition will occur, or that the funds to
finance any such acquisition will be available on reasonable terms or at all.
Inflation is not a material factor affecting the Company's results of
operations and financial condition. General operating expenses such as
salaries, employee benefits and occupancy costs are, however, subject to
normal inflationary pressures.
YEAR 2000
The Company has determined that it will need to modify or replace
significant portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and beyond. The
majority of the software which needs to be replaced is under license from
third party software manufacturers who have indicated that they will provide
the necessary upgrades. The Company also has initiated discussions with its
significant suppliers, large customers and financial institutions to ensure
that those parties have appropriate plans to remediate Year 2000 issues where
their systems interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to remediate properly their
computer systems.
The Company's comprehensive Year 2000 initiative is being managed by a team
of internal staff and outside consultants. The team's activities are designed
to ensure that there is no adverse effect on the Company's core business
operations and that transactions with suppliers, customers and financial
institutions are fully supported.
17
<PAGE>
The Company is well under way with these efforts, which are scheduled to be
completed in early 1999. While the Company believes its planning efforts are
adequate to address its Year 2000 concerns, there can be no assurance that the
systems of other companies on which the Company's systems and operations rely
will be converted on a timely basis and that such conversion will not have a
material effect on the Company. The cost of the Year 2000 initiatives is not
expected to be material to the Company's results of operations or financial
position.
RECENT DEVELOPMENTS
In February 1998, the Company entered into a definitive Agreement and Plan
of Merger with Primus and Taurus. Pursuant to the terms of the Agreement and
Plan of Merger, it is contemplated that Taurus will merge with and into
TresCom (the "Merger"), that TresCom will be the surviving corporation and
that Primus will acquire 100% of the issued and outstanding shares of TresCom
Common Stock. The transaction is expected to be completed during the second
quarter of 1998 and is subject to, among other things, the approval of both
Primus's and the Company's shareholders and certain regulatory authorities.
INCOME TAXES
The Company has generated significant net operating losses ("NOLs") both in
Puerto Rico and in the United States. These NOLs may be available to offset
future taxable income, subject to the limitations discussed below. STSJ
generated NOL carryforwards totaling $3.4 million in Puerto Rico before the
date on which it was acquired by the Company ("Puerto Rico preacquisition
NOLs"). The Company has generated NOLs totaling $4.2 million in Puerto Rico
("Puerto Rico postacquisition NOLS"), $4.9 million in the U.S.V.I. ("U.S.V.I.
post acquisition NOLS") and $24.3 million in the United States ("United States
post acquisition NOLs") since February 22, 1994. The Puerto Rico
preacquisition NOLs expire in the years 1998 through 2000; the Puerto Rico
post acquisition NOLs expire in the years 2001 through 2004; the U.S.V.I. post
acquisition NOLs expire in the years 2010 through 2012; and the United States
post acquisition NOLs expire in the years 2009 through 2012. The availability
of the NOL carryforwards is subject to certain factual and legal uncertainties
relating to the reporting positions of the Company, and there can be no
assurance that the Internal Revenue Service will not require the NOL
carryforwards to be reduced.
Upon certain changes in the ownership of the Company's stock occurring over
a three-year measuring period, the Company's ability to use its United States
post acquisition NOLs would become subject to an annual limitation under
Section 382 of the Internal Revenue Code of 1986, as amended (the "Code").
Under Section 382 of the Code, if an ownership change occurs, the Company's
United States post acquisition NOLs would be subject to an annual limitation,
subject to adjustment for certain recognized built-in gains, in an amount
equal to the total value of the Company on the day preceding the ownership
change times the highest adjusted Federal long-term rate for the three months
preceding the ownership change. The Puerto Rico preacquisition NOLs are not
subject to limitations imposed under Section 382 of the Code.
On July 17, 1989, the Industrial Development Commission of the U.S.V.I.
granted STSJ tax benefits to cover long distance telecommunications services
in the U.S.V.I. These benefits include a 100% exemption from gross receipts
taxes, a 100% exemption from real property taxes, a 90% exemption from income
taxes and a 100% exemption from various excise taxes. These tax benefits are
for a ten-year period effective January 1, 1989. There are various conditions
to such grant, including the employment of a minimum of six employees. In
addition, at least 80% of all employees of STSJ must be U.S.V.I. residents.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE RESULTS
Proposed Merger. On February 3, 1998, the Company entered into a definitive
Agreement and Plan of Merger (the "Purchase Agreement") with Primus and
Taurus, a wholly-owned subsidiary of Primus. Pursuant to the terms of the
Purchase Agreement, Taurus will merge with and into Trescom (the "Merger"),
and each issued and outstanding share of Trescom Common Stock, at the time of
the Merger, will be converted into the
18
<PAGE>
right to receive, subject to certain potential adjustments, $10.00 worth of
Primus Common Stock, $.01 par value per share, for each share of TresCom
Common Stock held by TresCom's shareholders. The transaction is anticipated to
be tax-free to the Company's shareholders. The transaction is expected to be
completed during the second quarter of 1998 and is subject to, among other
things, the approval of both the Company's and Primus's shareholders and
certain regulatory authorities. A special meeting of TresCom's shareholders
will be scheduled for the purpose of considering and voting upon the Merger.
There can be no assurances that the conditions to closing provided for in the
Purchase Agreement will be met or waived in order to permit the consummation
of the Merger. At this time, the effect of the completion of the Merger on
forward-looking statements contained in this Annual Report on Form 10-K is not
determinable.
Limited Operating History; Ability to Manage Growth. The Company has a
limited operating history and has incurred significant losses from operations
since its inception. There can be no assurance that the Company will become
profitable. Since its formation, the Company has required substantial capital.
The Company's growth has placed, and will continue to place, significant
demands on the Company's financial and other resources. If the Company's
management is unable to manage growth effectively or new employees are unable
to achieve anticipated performance levels, the Company's results of operations
could be adversely affected.
Competition. The telecommunications industry is highly competitive and
affected by rapid regulatory and technological change, as well as corporate
consolidation. The Company's future success will depend upon its ability to
compete with AT&T, MCI, Sprint, WorldCom and other United States based and
foreign carriers, many of which have considerably greater financial and other
resources than the Company. Certain of the larger United States based carriers
have entered into joint ventures with foreign carriers to provide
international services. In addition, certain foreign carriers have entered
into joint ventures with other foreign carriers to provide international
services and have begun to compete or invest in the United States market,
creating greater competitive pressures on the Company. The ability of the
Company to compete effectively will depend on its ability to provide high-
quality service at competitive prices.
Regulatory and Legislative Risks. Federal regulations, regulatory actions
and court decisions have had, and may have in the future, negative effects on
the Company and its ability to compete. The Company is subject to regulation
by the FCC, and the regulations promulgated by the FCC are subject to change
in the future. There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on the Company,
that regulators or third parties will not raise material issues with regard to
the Company's compliance with applicable regulations or that regulatory
activities will not have a material adverse effect on the Company. The Company
is also subject to state regulation that varies by jurisdiction and is subject
to change. For example, the Company must obtain and maintain Certificates of
Public Convenience and Necessity from most state regulatory authorities where
it offers intrastate long distance services. In most cases, it must also file
tariffs for its intrastate offerings. There can be no assurance that the
Company will not experience difficulties or delays in obtaining necessary
state authorizations in the future or that such difficulties or delays will
not adversely affect the Company's business. The multiplicity of state
regulations makes full compliance with all such regulations a challenge for
companies such as the Company which have certain business activities in
numerous states. There can be no assurance that regulators or third parties
will not raise material issues with regard to the Company's compliance with
applicable regulations or that regulatory activities will not have a material
adverse effect on the Company. Additionally, many states are relaxing the
regulatory restrictions currently imposed on the LECs. There can be no
assurance that future regulatory, judicial and legislative changes will not
have a material adverse effect on the Company.
The services currently provided by the Company are not directly subject to
laws of other countries, but the foreign carriers with which the Company
conducts business are subject to those laws. For instance, the Company's use
of transit agreements may be affected by regulations in either the transmitted
or the terminating foreign jurisdiction. Certain countries are considering
opening up their markets to competition. In the process, they may impose
regulatory requirements that could have a material adverse effect on the
Company.
19
<PAGE>
Effects of Natural Disasters. Areas in which the Company conducts its
business may be affected by natural disasters (including hurricanes and
tropical storms) as evidenced by Hurricane Marilyn, which struck certain
Caribbean islands, including St. Thomas and Puerto Rico, in September 1995.
The occurrence of future hurricanes, tropical storms and other natural
disasters could have a material adverse effect on the Company's business
resulting from damage to the Company's network facilities or from curtailed
telephone traffic resulting from effects of such events, such as destruction
of homes and businesses.
Unavailability of Leased Capacity; Changes in Technology. The Company's
profitability will depend, in part, on its ability to obtain and utilize
leased capacity on a cost-effective basis, on its ability to anticipate and
adapt to rapid technological changes occurring in the telecommunications
industry and on its ability to offer, on a timely basis, services that meet
evolving industry standards. There can be no assurance that leased capacity
will be available at cost-effective rates in the future or that the Company
will be able to adapt to such technological changes or offer such products on
a timely basis.
Dependence on Effective Information Systems. The Company's management
information systems must grow as the Company's business expands and are
expected to change as new technological developments occur. There can be no
assurance that the Company will not encounter delays or cost-overruns or
suffer adverse consequences in implementing new systems when required. Any of
the Company's programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000 and are vulnerable to
the Year 2000 problem which could result in a major system failure or
miscalculations. There can be no assurance that the Company will be able to
successfully implement upgrades to its systems to correct any year 2000
problem. A failure of the Company's computer systems, or the failure of the
Company's vendors or customers to effectively upgrade their software and
systems for transition to the year 2000, could have a material adverse effect
on the Company's business and financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This requirement is not currently applicable to the Company.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following statements are filed as part of this Annual Report on Form 10-
K:
<TABLE>
<CAPTION>
FORM 10-K
PAGE NO.
---------
<S> <C>
Financial Statements:
TresCom International, Inc.:
Report of Independent Auditors................................... 22
Consolidated Balance Sheets as of December 31, 1997 and 1996..... 23
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995................................ 24
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995.......................... 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................................ 26
Notes to Consolidated Financial Statements....................... 27
Consolidated Financial Statement Schedule:
Report of Independent Auditors................................... 38
Schedule II--Valuation and Qualifying Accounts................... 39
</TABLE>
All other schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements or
related notes.
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
TresCom International, Inc.
We have audited the accompanying consolidated balance sheets of TresCom
International, Inc. and its subsidiaries (the "Company") as of December 31,
1997 and 1996 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TresCom
International, Inc. and subsidiaries at December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Atlanta, Georgia
February 27, 1998
22
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 1,481 $ 6,020
Accounts receivable, net of allowance for doubtful
accounts of $8,149 and $7,588, respectively............. 31,743 29,063
Other current assets..................................... 2,406 3,441
-------- --------
Total current assets....................................... 35,630 38,524
Property and equipment, at cost:
Transmission and communications equipment................ 29,720 24,691
Furniture, fixtures and other............................ 9,620 5,600
-------- --------
39,340 30,291
Less accumulated depreciation and amortization............. (9,668) (5,755)
-------- --------
29,672 24,536
Other assets:
Customer bases, net of accumulated amortization of $2,385
and $1,358, respectively................................ 3,274 3,806
Excess of cost over net assets of businesses acquired,
net of accumulated amortization of $3,508 and $2,368,
respectively............................................ 38,826 34,260
Other.................................................... 1,027 484
-------- --------
Total assets............................................... $108,429 $101,610
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 1,237 $ 2,758
Accrued network costs.................................... 19,497 19,546
Other accrued expenses................................... 6,365 5,395
Long-term obligations due within one year................ 1,098 817
Deferred revenue and other current liabilities........... 1,689 1,807
-------- --------
Total current liabilities.................................. 29,886 30,323
Long-term obligations (Notes 3 and 4)...................... 19,593 3,965
Shareholders' equity:
Preferred stock, $.01 par value per share; 1,000,000
shares
authorized, no shares issued and outstanding............ -- --
Common stock, $.0419 par value per share; 50,000,000
shares authorized; 12,104,960 and 11,804,675 shares
issued and outstanding, respectively.................... 505 493
Deferred compensation.................................... (551) (808)
Additional paid-in capital............................... 108,354 106,140
Accumulated deficit...................................... (49,358) (38,503)
-------- --------
Total shareholders' equity................................. 58,950 67,322
-------- --------
Total liabilities and shareholders' equity................. $108,429 $101,610
======== ========
</TABLE>
See accompanying notes.
23
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Revenues.................................... $ 157,641 $ 139,621 $ 102,641
Cost of services............................ 124,365 106,928 74,679
---------- ---------- ---------
Gross profit................................ 33,276 32,693 27,962
Selling, general and administrative (Notes
2, 9 and 12)............................... 36,386 30,808 32,437
Depreciation and amortization............... 6,599 4,928 3,961
---------- ---------- ---------
Operating loss.............................. (9,709) (3,043) (8,436)
Interest and other expenses, net............ 1,146 578 3,191
---------- ---------- ---------
Loss before extraordinary item.............. (10,855) (3,621) (11,627)
Extraordinary loss on early extinguishment
of debt.................................... -- 1,956 --
---------- ---------- ---------
Net loss.................................... $ (10,855) $ (5,577) $ (11,627)
========== ========== =========
Net loss applicable to common stock......... $ (10,855) $ (6,267) $ (16,504)
========== ========== =========
Basic and diluted per share data:
Loss before extraordinary item............ $ (.91) $ (.41) $ (5.29)
Extraordinary item........................ -- (.18) --
---------- ---------- ---------
Net loss per share of common stock.......... $ (.91) $ (.59) $ (5.29)
========== ========== =========
Weighted average number of shares of common
stock outstanding.......................... 11,890,047 10,671,096 3,119,590
========== ========== =========
</TABLE>
See accompanying notes.
24
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------------------------------- ----------------------------
ACCRUED ADDITIONAL
UNDECLARED STOCK PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT DIVIDENDS SUBSCRIPTIONS SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
-------- -------- ---------- ------------- ---------- ------ ---------- ------------ -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1994............. 283,594 $ 28,359 $ 1,652 $ 511 202,864 $ 9 $ 76 $ -- $(15,732)
Issuance of
Common Stock..... -- -- -- -- 2,183,799 91 824 -- --
Issuance of
Preferred Stock:
Series A........ 1,467 147 -- -- -- -- -- -- --
Series C........ 151,421 15,142 -- (511) -- -- -- -- --
Accrued dividends
on Preferred
Stock............ -- -- 4,877 -- -- -- -- -- (4,877)
Grant of stock
options.......... -- -- -- -- -- -- 796 (796) --
Non-cash
compensation..... -- -- -- -- -- -- -- 139 --
Issuance of
Common Stock
Warrants......... -- -- -- -- -- -- 2,428 -- --
Net loss......... -- -- -- -- -- -- -- -- (11,627)
-------- -------- ------- ----- ---------- ---- -------- ------- --------
Balance at
December 31,
1995............. 436,482 43,648 6,529 -- 2,386,663 100 4,124 (657) (32,236)
Conversion of
Preferred Stock
to Common Stock
and accrued
dividends........ (436,482) (43,648) (7,219) -- 4,558,155 191 50,676 -- --
Accrued dividends
on Preferred
Stock............ -- -- 690 -- -- -- -- -- (690)
Initial public
offering of
Common Stock..... -- -- -- -- 4,545,455 190 50,537 -- --
Costs associated
with initial
public offering
of Common Stock.. -- -- -- -- -- -- (2,160) -- --
Grant of stock
options.......... -- -- -- -- -- -- 1,701 (1,701) --
Non-cash
compensation
expense.......... -- -- -- -- -- -- -- 1,264 --
Exercise of stock
options.......... -- -- -- -- 141,988 6 54 -- --
Forfeiture of
stock options.... -- -- -- -- -- -- (286) 286 --
Net loss......... -- -- -- -- -- -- -- -- (5,577)
Common Stock
issued in
connection with
acquisitions..... -- -- -- -- 172,414 6 1,494 -- --
-------- -------- ------- ----- ---------- ---- -------- ------- --------
Balance at
December 31,
1996............. -- -- -- -- 11,804,675 493 106,140 (808) (38,503)
Non-cash
compensation
expense.......... -- -- -- -- -- -- -- 257 --
Exercise of stock
options.......... -- -- -- -- 16,769 1 6 -- --
Common stock
issued in
connection with
acquisitions..... -- -- -- -- 283,516 11 2,208 -- --
Net loss......... -- -- -- -- -- -- -- -- (10,855)
-------- -------- ------- ----- ---------- ---- -------- ------- --------
Balance at
December 31,
1997............. -- $ -- $ -- $ -- 12,104,960 $505 $108,354 $ (551) $(49,358)
======== ======== ======= ===== ========== ==== ======== ======= ========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at
December 31,
1994............. $ 14,875
Issuance of
Common Stock..... 915
Issuance of
Preferred Stock:
Series A........ 147
Series C........ 14,631
Accrued dividends
on Preferred
Stock............ --
Grant of stock
options.......... --
Non-cash
compensation..... 139
Issuance of
Common Stock
Warrants......... 2,428
Net loss......... (11,627)
-------------
Balance at
December 31,
1995............. 21,508
Conversion of
Preferred Stock
to Common Stock
and accrued
dividends........ --
Accrued dividends
on Preferred
Stock............ --
Initial public
offering of
Common Stock..... 50,727
Costs associated
with initial
public offering
of Common Stock.. (2,160)
Grant of stock
options.......... --
Non-cash
compensation
expense.......... 1,264
Exercise of stock
options.......... 60
Forfeiture of
stock options.... --
Net loss......... (5,577)
Common Stock
issued in
connection with
acquisitions..... 1,500
-------------
Balance at
December 31,
1996............. 67,322
Non-cash
compensation
expense.......... 257
Exercise of stock
options.......... 7
Common stock
issued in
connection with
acquisitions..... 2,219
Net loss......... (10,855)
-------------
Balance at
December 31,
1997............. $ 58,950
=============
</TABLE>
See accompanying notes.
25
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss before extraordinary item................... $(10,855) $ (3,621) $(11,627)
Extraordinary loss on early extinguishment of
debt............................................ -- (1,956) --
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 6,599 4,928 3,961
Non-cash interest expense...................... -- 431 607
Non-cash interest expense on note to
shareholder................................... -- 297 --
Non-cash compensation.......................... 257 1,264 139
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable.......................... (2,118) (11,770) (5,511)
Other current assets......................... 1,045 (2,139) (943)
Accounts payable............................. (2,805) 564 (2,307)
Accrued network costs........................ (49) 7,911 1,180
Other accrued expenses....................... (772) 754 (1,942)
Deferred revenue and other current
liabilities................................. (1,427) 1,513 --
-------- -------- --------
Net cash used in operating activities............ (10,125) (1,824) (16,443)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (6,914) (8,086) (5,637)
Expenditures for line installations.............. (577) (144) (418)
Cash paid for purchases of businesses, net....... (1,201) (522) --
-------- -------- --------
Net cash used in investing activities............ (8,692) (8,752) (6,055)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock....... -- 50,727 915
Costs relating to initial public offering........ -- (2,160) --
Proceeds from the issuance of preferred stock.... -- -- 14,778
Proceeds from debt............................... -- -- 7,572
Proceeds from issuance of warrants associated
with debt....................................... -- -- 2,428
Proceeds from revolving credit agreement, net.... 15,645 -- --
Payment of loan acquisition costs................ (482) (86) (533)
Repayment of cash overdraft...................... -- -- (382)
Repayment of revolving credit facility........... -- (24,173) --
Repayment of sellers' note....................... -- (1,000) --
Repayment of notes payable to stockholder........ -- (8,476) --
Repayment of debt................................ (15) (18) (27)
Proceeds from stock option exercise.............. 7 60 --
Principal payments on capital lease obligations.. (877) (330) (201)
-------- -------- --------
Net cash provided by financing activities........ 14,278 14,544 24,550
-------- -------- --------
Net change in cash and cash equivalents.......... (4,539) 3,968 2,052
Cash and cash equivalents at beginning of period. 6,020 2,052 --
-------- -------- --------
Cash and cash equivalents at end of period....... $ 1,481 $ 6,020 $ 2,052
======== ======== ========
Interest paid.................................... $ 806 $ 1,352 $ 2,257
======== ======== ========
Capital lease obligations incurred............... $ 1,156 $ 4,310 $ --
======== ======== ========
</TABLE>
See accompanying notes.
26
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BUSINESS
Organization and Basis of Presentation
TresCom International, Inc. (the "Company") was incorporated in Florida on
December 8, 1993 as TeraCom Communications, Inc. Effective June 30, 1994, the
Company changed its name to TresCom International, Inc.
TresCom is a facilities based long distance telecommunications carrier
focused on international long distance traffic. The Company offers
telecommunications services, including direct dial "1 plus" and toll-free long
distance, calling and debit cards, international toll-free service, 24-hour
bilingual operator services, intra-island local service in Puerto Rico,
private lines, frame relay, international inbound service, international
country to country calling services and international callthrough from
selected markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash equivalents are recorded
at cost, which approximates fair market value.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization is
provided for financial reporting purposes using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Transmission and communications equipment.................... 3 to 20 years
Furniture, fixtures and other................................ 3 to 7 years
</TABLE>
The costs of software and software upgrades purchased for internal use are
capitalized. Significant capital projects are constantly being initiated as
the Company continues to expand its network. Beginning in 1996, a substantial
amount of employee time was required to properly plan, install, test and
certify the equipment associated with these projects. In connection with these
projects, the Company capitalized $1,229 and $1,450 in direct and indirect
employee costs during 1997 and 1996, respectively.
Change in Accounting Estimate
During the first quarter of 1997, the Company changed the estimated useful
life of fiber optic undersea cables from 10 to 20 years to conform to the
predominant industry standard. The change in depreciation expense associated
with the revised estimated useful life of fiber optic undersea cables was
approximately $120 for 1997.
Advertising
Pursuant to American Institute of Certified Public Accountants (AICPA)
Statement of Position No. 93-7, "Reporting on Advertising Costs," the Company
expenses advertising costs as incurred except for direct-
27
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
response advertising costs, which are capitalized and amortized over the
expected period of future benefit. Direct-response advertising programs were
implemented during 1996 and consist of fees paid to various telemarketing
entities and internal costs of performing telemarketing activities. The
capitalized costs are amortized over a nine month period beginning in the
month revenues associated with those costs are first generated.
At December 31, 1997 and 1996, advertising costs totaling $770 and $1,390,
respectively, were recorded as other current assets. Advertising expense for
the years ended December 31, 1997, 1996 and 1995 were $4,865, $2,047 and
$1,359, respectively.
Other Assets
The excess of cost over net assets of businesses acquired represents the
excess of the consideration paid over the fair value of the net assets
acquired and is amortized on a straight-line basis over 35 years. Customer
bases are recorded based on the estimated value of the customer bases acquired
in the acquisition of businesses and are amortized on a straight-line basis
over periods ranging from three to seven years.
Other assets are periodically reviewed by the Company for impairments where
the fair value is less than the carrying value.
Legal expenses and other direct costs incurred in connection with obtaining
financing agreements are deferred and amortized over the life of the financing
agreements. Such capitalized costs amounted to $482 and $86 during the years
ended December 31, 1997 and 1996, respectively. Accumulated amortization of
deferred financing costs was $133 and $10 at December 31, 1997 and 1996,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenues
Revenues are derived primarily from the provision of long distance
telecommunications services and are recognized when the services are provided.
In 1997, the Company recognized $543 of revenue from the sale of excess
Indefeasible Rights of Use ("IRU") on undersea digital fiber optic
transmission cables.
Cost of Services
Cost of services include payments to local exchange carriers ("LECs"),
interexchange carriers, post, telegraph and telephone organizations ("PTTs")
and telecommunications administrations ("TAs") primarily for access and
transport charges.
Concentrations of Credit Risk and Major Customers
The Company derives a majority of its operating revenues from wholesale
customers as well as commercial customers in Florida, New York, St. Thomas and
Puerto Rico. Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable. The
Company's allowance for doubtful accounts is based upon management's estimates
and historical experience. In situations
28
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
where the Company deems appropriate, prepayment and/or cash deposits or
letters of credit are required for the provision of services.
Income Taxes
The Company accounts for income taxes under the liability method. Under the
liability method, deferred income taxes are recorded to reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and the amounts used for income tax
purposes.
New Accounting Pronouncements
In 1996, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). The adoption of SFAS 121 did not have
any effect on the financial statements. In 1996, the Company also adopted the
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") (See Note 5).
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share (see Note 13). Statement No. 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the Statement No. 128 requirements.
Comparative net loss per share data have been restated for prior periods. In
connection therewith, common stock, options and warrants issued within one
year prior to the original filing of the Company's initial public offering
(the "IPO") at prices below the IPO price, which had previously been
considered outstanding for all periods presented even though antidilutive,
have been reflected in the computations of basic and diluted net loss per
share in accordance with Statement of Financial Accounting Standards No. 128
and Securities and Exchange Commission Staff Accounting Bulletin No. 98,
issued February 3, 1998. Such common stock has been treated as outstanding
only since issuance, and options and warrants have been excluded from the
computations as they are considered antidilutive.
In June of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information" which are both effective for fiscal years beginning after
December 15, 1997. Management believes that the adoption of SFAS 130 and SFAS
131 will not have a material adverse effect on the Company's consolidated
financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
29
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. LONG-TERM OBLIGATIONS
A summary of long-term obligations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------- ------
<S> <C> <C>
Revolving Credit Agreement
Interest payable monthly at rates based upon the lender's
commercial lending rate plus .50% (8.75% at December 31,
1997), maturing in July 2002................................ $15,645 $ --
Loans payable to the Small Business Administration,
bearing interest at 4%, due in monthly principal and
interest payments of $3 through February 2015,
collateralized by a security agreement covering certain
assets ..................................................... 401 416
Capital leases bearing interest at rates ranging from 9% to
11% and payable in monthly installments totaling $129....... 4,645 4,366
------- ------
20,691 4,782
Less amounts due within one year............................. 1,098 817
------- ------
$19,593 $3,965
======= ======
</TABLE>
In November 1994, a wholly-owned subsidiary of the Company obtained from a
bank a revolving credit facility (the "Bank Facility") with an aggregate
commitment of $27,000, which expired on June 30, 1996. On February 16, 1996,
the Company repaid all outstanding amounts borrowed under the Bank Facility.
Extraordinary expense of $432 was recognized to write-off the remaining
deferred financing costs associated with the Bank Facility.
Under the terms of the Bank Facility, the Company was required to maintain
at least 50% of its debt on a fixed rate basis and, as a result, entered into
an interest rate swap agreement and interest rate cap agreement (the
"Instruments") with the lending bank to convert variable interest rate
payments to fixed payments. The estimated fair value (i.e., the net present
value of the amount the Company was required to pay the counterpart over the
remaining term of the agreement) of the Instruments, based upon the quoted
market price provided by the financial institution was $562 at December 31,
1995. On September 18, 1996, when the net settlement value was $302, the
Instruments were paid off in full.
In October and November 1995, the Company borrowed $7,000 and $3,000,
respectively, under one-year notes bearing interest at 12% compounded
quarterly from a major shareholder of the Company. In connection with these
notes, the Company issued warrants to purchase 358,034 shares of Common Stock
at an exercise price of $0.42 per share. The warrants are exercisable
immediately and expire on October 2, 2007. Of the $10,000 in borrowings,
approximately $2,400 has been allocated to the value of the warrants. On
February 14, 1996, the Company repaid the entire balance relating to the
notes. Accordingly, extraordinary interest expense in the amount of $1,524 was
recognized in the first quarter of 1996.
During the third quarter of 1996, the Company established a relationship
with a commercial bank to provide asset financing. The Company utilized
approximately $4,310 in the fourth quarter of 1996 for capital projects. An
additional $1,156 was utilized in the second quarter of 1997.
During the fourth quarter of 1996, the Company established a $5,000 line of
credit with a commercial bank (the "Credit Facility") secured by certain
accounts receivable. The Credit Facility, as amended on March 27, 1997,
contained standard debt covenants relating to financial position and
performance, as well as restrictions on
30
<PAGE>
the declaration and payment of dividends. Through July 31, 1997, the Company
was either in compliance or received waivers with respect to all covenants
under the Credit Facility.
On July 31, 1997, the Company entered into a Revolving Credit Agreement
secured by the Company's accounts receivable and certain intangible assets.
The maximum borrowing under this agreement is $25,000; however, the amount
available to be borrowed is based upon the Company's pledged accounts
receivable and intangible assets.
On July 31, 1997, all borrowings under the Credit Facility were repaid in
full with borrowings under the Revolving Credit Agreement and the Credit
Facility was terminated. As of December 31, 1997, availability under the
Revolving Credit Agreement was approximately $19,702, of which $15,645
(including approximately $600 of letters of credit) had been utilized. At
December 31, 1997, the Company was in compliance with all covenants under the
Revolving Credit Agreement.
Principal payments on all debt obligations are:
<TABLE>
<S> <C>
1998............................................................ $ 17
1999............................................................ 17
2000............................................................ 18
2001............................................................ 19
2002............................................................ 20
Thereafter...................................................... 310
Revolving Credit Agreement...................................... 15,645
-------
Total......................................................... $16,046
=======
</TABLE>
4. LEASE OBLIGATIONS
The Company occupies office facilities and leases certain equipment and
software under noncancelable operating leases. Rental expense for the years
ended December 31, 1997, 1996 and 1995 was $ 1,703, $1,421 and $1,341,
respectively.
During the years ended December 31, 1997 and 1996, the Company acquired
communication equipment of approximately $1,156 and $4,310, respectively,
under capital lease obligations. Asset balances for property acquired under
capital leases consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Transmission and communication equipment................... $5,871 $4,715
Furniture, fixtures and other.............................. 213 270
------ ------
6,084 4,985
Accumulated depreciation................................... (916) (311)
------ ------
$5,168 $4,674
====== ======
</TABLE>
Depreciation expense associated with assets acquired under capital leases is
included with depreciation and amortization expense on the Statements of
Operations. The present value of minimum capital lease payments are included
in the balance sheet as a part of long-term obligations. Future minimum lease
payments for all noncancelable leases at December 31, 1997 are:
31
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- ------
<S> <C> <C> <C>
1998............................................... $1,637 $1,168 $2,805
1999............................................... 1,471 915 2,386
2000............................................... 1,419 731 2,150
2001............................................... 1,073 566 1,639
2002............................................... 90 507 597
Thereafter......................................... -- 138 138
------ ------ ------
Total future minimum lease payments................ 5,690 $4,025 $9,715
====== ======
Less amounts representing interest................. 1,045
------
Present value of net minimum lease payments........ $4,645
======
</TABLE>
5. CAPITALIZATION
Preferred Stock
The Board of Directors of the Company is authorized to issue up to one
million shares of preferred stock, par value $.01 per share (the "Preferred
Stock"), in one or more series and to fix the powers, voting rights,
designations and preferences of each series.
Common Stock
On February 13, 1996, the Company sold 4,545,455 shares of its Common Stock
at $12 per share in its IPO. The net proceeds of this sale were approximately
$48,600. The net proceeds were used to retire debt and accrued interest of
approximately $35,800.
Stock Option Plan
The Company has a stock option plan under which 936,432 options to purchase
shares of Common Stock may be granted to officers, key employees, consultants
and directors. The plan allows the granting of incentive stock options, which
may not have an exercise price below the greater of par value or the market
value on the date of grant, and non-qualified stock options, which may not
have an exercise price below par value. All options must be exercised no later
than 10 years from the date of grant. No option may be granted under the plan
after February 22, 2004.
Options generally vest as to 20% on the first anniversary of the vesting
commencement date or grant date and as to an additional 20% on each
anniversary thereafter. All options expire on the tenth anniversary of the
grant date, unless sooner terminated under the terms of the stock option plan.
In the event of certain changes in control of the Company, all options become
fully vested.
32
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table summarizes all options activity for the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISABLE EXERCISE
GRANTED OPTIONS PRICE
--------- ----------- --------
<S> <C> <C> <C>
Outstanding as of December 31, 1994........... 110,840 $0.42
Canceled...................................... 110,840 0.42
Granted....................................... 484,955 0.42
Forfeited..................................... 12,749 0.42
------- ------- -----
Outstanding as of December 31, 1995........... 472,206 19,826 0.42
Canceled...................................... 220,622 0.42
Granted....................................... 534,119 12.53
Forfeited..................................... 147,452 10.82
Exercised..................................... 141,988 0.42
------- ------- -----
Outstanding as of December 31, 1996........... 496,263 23,713 10.37
Canceled...................................... 2,000 7.50
Granted....................................... 447,000 7.76
Forfeited..................................... 61,790 9.48
Exercised..................................... 16,769 0.42
------- ------- -----
Outstanding as of December 31, 1997........... 862,704 103,733 $9.28
======= ======= =====
</TABLE>
The following table summarizes options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------------ ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE NUMBER AVERAGE
NUMBER OF EXERCISE CONTRACTUAL OF EXERCISE
RANGE OF EXERCISE PRICE OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
----------------------- --------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.42..................... 75,585 $ 0.42 7.66 24,309 $ 0.42
12.00--17.63............. 372,119 12.76 8.26 74,424 12.00
7.50--12.00.............. 415,000 7.76 9.13 5,000 12.00
</TABLE>
Non-cash compensation expense was recorded over the vesting period of the
options. Accordingly, $257, $1,264 and $139 of non-cash compensation expense
was recorded in the years ended December 31, 1997, 1996 and 1995,
respectively.
The Company follows the requirements of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" to account for its stock
option plan and, accordingly, compensation cost is recognized in the
consolidated statements of operations for the stock option plan to the extent
the options are granted at prices below fair market value. The Company adopted
SFAS 123, which requires certain disclosures about stock-based employee
compensation arrangements. SFAS 123 requires pro forma disclosure of the
impact on net income and earnings per share if the fair value method defined
in SFAS 123 had been used. The fair value for these options was estimated at
the date of grant using a minimum value option valuation method for options
granted prior to the IPO and a Black-Scholes option valuation model for
options granted after the IPO with the following weighted-average assumptions:
a risk-free interest rate of 6.1%; a dividend yield of 0%; a volatility factor
of the expected market price of the Common Stock of 1.207 for options granted
during 1997 and .729 for options granted during 1996 and 1995, and an expected
life of five years.
33
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 the Company's stock options have characteristics significantly
different from those of traded options, and because change 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 stock options.
The weighted average grant date fair value of options granted in 1997, 1996
and 1995 is $6.46, $7.88 and $10.50 per share, respectively. The options
granted during 1995 had exercise prices below market value and the options
granted during 1997 and 1996 had exercise prices at or above fair market
value.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
SFAS 123 pro-forma information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Pro forma net loss............................. $(12,583) $(5,713) $(11,627)
Pro forma basic and diluted loss per share..... (1.06) (0.60) (5.29)
</TABLE>
6. INCOME TAXES
The significant components of the Company's deferred tax assets and
liabilities are:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Deferred tax assets
Allowance for bad debts....................... $ 3,251 $ 2,975 $ 1,139
Net operating loss carry-forward.............. 12,256 6,229 6,311
Accruals...................................... 218 566 279
Depreciation and amortization................. -- 101 873
Other......................................... 15 11 270
Valuation allowance........................... (14,053) (8,479) (8,793)
-------- ------- -------
1,687 1,403 79
Deferred tax liabilities
Depreciation and amortization................. (1,558) -- --
Acquisition basis differences................. (129) (1,403) (79)
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
</TABLE>
The net change in the Company's valuation allowance was $5,574, $(314) and
$3,056 for the years ended December 31, 1997, 1996 and 1995, respectively.
On July 17, 1989, the Industrial Development Commission of the U.S. Virgin
Islands granted STSJ tax benefits to cover long distance telecommunications
services in the U.S. Virgin Islands. These benefits include a 90% exemption
from income taxes for a ten-year period effective January 1, 1989.
34
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The reconciliation of income tax attributable to operations computed at the
U.S. federal statutory rates to income tax expense is:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory rate.......................... (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit................. (3.6) (2.0) (2.0)
Amortization of excess of cost over net assets of
businesses acquired................................ 3.8 6.5 2.7
Foreign tax rate differences........................ 2.0 7.1 3.7
Unrecognized benefit of net operating loss.......... 31.8 22.4 29.6
----- ----- -----
-- -- --
===== ===== =====
</TABLE>
At December 31, 1997, the Company has U.S. and foreign net operating loss
carryforwards for tax purposes of $24,335 and $12,354, respectively. These net
operating loss carryforwards expire in the years 1997 through 2012.
7. RETIREMENT PLAN
The Company maintains the TresCom 401(k) Savings and Retirement Plan for all
U.S. and U.S.V.I. subsidiaries and the TresCom 165(e) Savings and Retirement
Plan for the Puerto Rican subsidiary. Employees age 21 or older are eligible
to participate six months after their date of hire and to elect to defer a
percentage of his/her salary. The Company has the discretion to make
contributions to the TresCom 401(k) Savings and Retirement Plan and TresCom
165(e) Saving and Retirement Plan. In 1996, 25,000 shares of stock in the
Company were authorized as retirement plan contributions. In 1997 and 1996,
4,439 and 2,065 shares, respectively, were allocated to the TresCom 401(k)
Savings and Retirement Plan and the TresCom 165(e) Savings and Retirement Plan
for aggregate amounts of approximately $31 and $16, respectively.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and is subject to possible actions
arising out of the normal course of its business. Although the ultimate
outcome of these claims cannot be ascertained at this time, it is the opinion
of the Company's management, based on knowledge of the facts and advice of
counsel, that the resolution of such claims and actions will not have a
material adverse effect on the Company's financial condition or results of
operations.
The Company has commitments under various types of agreements for the
purchase of property and equipment to continue expansion of its network.
Portions of such agreements not completed at year end are not reflected in the
consolidated financial statements. These commitments were approximately $1,000
at year end 1997.
9. SETTLEMENTS
In the past, the Company incurred some significant charges as a result of
disputes with carriers. These charges amounted to $4,100 and $900 in the first
and second quarter of 1995, respectively. In addition, significant losses
resulting from settlements with customers totaled $4,069 during the first
quarter of 1995.
35
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for cash,
accounts receivable, accounts payable and accrued expenses approximate the
respective fair values due to the short nature of these items. The fair values
for long-term obligations at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Loans payable to the Small Business
Administration................................ $401 $323 $416 $335
==== ==== ==== ====
</TABLE>
The fair values of all other long-term obligations approximate the carrying
values and are therefore not disclosed.
11. RELATED PARTY TRANSACTIONS
During 1996, an affiliate of a major shareholder of the Company owned
approximately 20% of LCI International, Inc. ("LCI"). The Company buys network
services from and provides network services to LCI. At December 31, 1996, the
net amount due to LCI was $1,935. During 1996, $7,140 of services were
provided and $5,453 were used. During 1997, the affiliate of the Company's
major shareholder reduced their ownership stake to an insignificant
percentage.
In December 1996, the Company acquired 100% of the common stock of Intex
Telecommunications, Inc. from LCI. The purchase price consideration was
394,095 shares of Common Stock.
12. NATURAL DISASTER
On September 16, 1995, Hurricane Marilyn damaged the island of St. Thomas
where the Company has significant operations. The Company's Property and
Business Interruption Insurance covered a significant portion of the damages
to equipment and certain losses from operations. At September 30, 1995, the
Company estimated its exposure relating to the hurricane to be $2,500. Based
on visits to the affected area, review of accounts receivable and actual
settlements with customers, management revised its estimate of losses
resulting from the hurricane to $1,717. Accordingly, the net loss for the
quarter ended December 31, 1996 included this change in estimate of $783.
36
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Numerator:
Loss before extraordinary item............ $ (10,855) $ (3,621) $ (11,627)
Extraordinary loss on early extinguishment
of debt.................................. -- 1,956 --
---------- ---------- ---------
Net loss.................................. (10,855) (5,577) (11,627)
Preferred stock dividends................. -- 690 4,877
---------- ---------- ---------
Numerator for basic and diluted earnings
per share--net loss applicable to common
stock.................................... $ (10,855) $ (6,267) $ (16,504)
========== ========== =========
Denominator:
Denominator for basic and diluted earnings
per share--weighted average shares....... 11,890,047 10,671,096 3,119,590
========== ========== =========
Basic and diluted per share data:
Loss before extraordinary item............ $ (0.91) $ (0.41) $ (5.29)
Extraordinary item........................ -- (0.18) --
---------- ---------- ---------
Net loss per share of common stock ....... $ (0.91) $ (0.59) $ (5.29)
========== ========== =========
</TABLE>
The earnings per share amounts in the above table have been calculated in
compliance with Statement of Financial Accounting Standards No. 128, Earnings
Per Share. For further information regarding earnings per share and
capitalization of the Company, see Notes 2 and 5.
14. SUBSEQUENT EVENTS
In February 1998, the Company entered into a definitive Agreement and Plan
of Merger with Primus Telecommunications Group, Inc. ("Primus") and Taurus
Acquisition Corporation, a wholly-owned subsidiary of Primus ("Taurus").
Pursuant to the terms of the Agreement and Plan of Merger, it is contemplated
that Taurus will merge with and into TresCom, that TresCom will be the
surviving corporation and that Primus will acquire 100% of the issued and
outstanding shares of TresCom Common Stock. The transaction is expected to be
completed during the second quarter of 1998 and is subject to, among other
things, the approval of both Primus's and the Company's shareholders and
certain regulatory authorities.
37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
TresCom International, Inc.
We have audited the consolidated financial statements of TresCom
International, Inc. and its subsidiaries (the "Company") as of December 31,
1997 and 1996, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated February 27, 1998
(included in this Annual Report on Form 10-K). Our audit also included the
financial statement schedule of the Company listed in Item 8 of this Annual
Report on Form 10-K. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Atlanta, Georgia
February 27, 1998
38
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
TRESCOM INTERNATIONAL, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997:
Reserve and allowance
deducted from asset
accounts:
Allowance for doubtful
accounts............. $7,588 $4,159 $500(1) $4,098(3) $8,149
Valuation allowance
for deferred taxes... 8,479 5,574 -- -- 14,053
Year ended December 31,
1996:
Reserve and allowance
deducted from asset
accounts:
Allowance for doubtful
accounts............. 4,140 5,036 -- 1,588(3) 7,588
Valuation allowance
for deferred taxes... 8,793 -- -- 314(2) 8,479
Year ended December 31,
1995:
Reserve and allowance
deducted from asset
accounts:
Allowance for doubtful
accounts............. 3,761 1,791 700(4) 2,112(3) 4,140
Valuation allowance
for deferred taxes... 5,737 3,056 -- -- 8,793
</TABLE>
- --------
(1) In connection with acquisitions.
(2) Change in deferred taxes.
(3) Write-off of uncollectible accounts.
(4) Uncollectible accounts in U.S. Virgin Islands resulting from Hurricane
Marilyn.
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
40
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The number of directors of the Company, as determined by the Board of
Directors, is seven. The Board of Directors of the Company consists of three
classes: Class I, Class II and Class III, as nearly equal in number as
possible. One of the three classes, comprising approximately one-third of the
directors, is elected each year to succeed the directors whose terms are
expiring. Directors hold offices until the annual meeting for the year in
which their terms expire and until their successors are elected and qualified
unless, prior to that date, they have resigned, retired or otherwise left
office. In accordance with the Company's Articles of Incorporation, Class I
directors are to be elected at the 1999 Annual Meeting of Shareholders, Class
II directors are to be elected at the 2000 Annual Meeting of Shareholders and
Class III directors are to be elected the 1998 Annual Meeting of Shareholders.
See "Item 13. Certain Relationships and Related Transactions."
The following table sets forth certain information concerning the directors
and executive officers of the Company as of March 2, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
President, Chief Executive Officer and
Wesley T. O'Brien........... 42 Director, Class I
Chief Operating Officer and Director,
Rudolph McGlashan........... 45 Class II
Douglas M. Karp............. 42 Director, Class I
Henry Kressel, Ph.D......... 64 Director, Class II
Helen Seltzer............... 51 Director, Class II
Gary D. Nusbaum............. 31 Director, Class III
Read McNamara............... 50 Director, Class III
</TABLE>
WESLEY T. O'BRIEN has served as Chief Executive Officer and a director of
the Company since January 1996 and has served as President of the Company
since October 1995. Prior to joining the Company, Mr. O'Brien held several
positions with MCI, including Vice President of MCI's Small Business Division
from July 1992 to September 1995 and Director of Product Marketing and Sales
from November 1987 to July 1992. Mr. O'Brien has over 14 years of experience
in the telecommunications industry.
RUDOLPH MCGLASHAN, a co-founder of the Company, has served as Chief
Operating Officer of the Company since its formation in December 1993 and as a
director of the Company since August 1995. Prior to joining the Company, Mr.
McGlashan was Vice President of Network Engineering and Operations of LDDS
Communications, Inc. (a predecessor to WorldCom, Inc.) from April 1992 to
October 1993. From May 1989 to April 1992, Mr. McGlashan was Senior Vice
President of Advanced Telecommunications Corporation. Mr. McGlashan has over
26 years of experience in the telecommunications industry.
DOUGLAS M. KARP has served as a director of the Company since December 1994.
Mr. Karp has been a Managing Director of E.M. Warburg, Pincus & Co., LLC (or
its predecessor, E.M. Warburg, Pincus & Co., Inc.) since May 1991. Prior to
joining E.M. Warburg, Pincus & Co., LLC, Mr. Karp held several positions with
Salomon Inc, including Managing Director from January 1990 to May 1991,
Director from January 1989 to December 1989 and Vice President from October
1986 to December 1988. Mr. Karp is a director of LCI International, Inc., TV
Filme, Inc., Journal Register Company and several privately held companies.
HENRY KRESSEL, Ph.D. has served as a director of the Company since its
formation in December 1993. Dr. Kressel has been a Managing Director of E.M.
Warburg, Pincus & Co., LLC (or its predecessor, E.M. Warburg, Pincus & Co.,
Inc.) since 1985. Prior to joining E.M. Warburg, Pincus & Co., LLC, Dr.
Kressel spent 20 years at RCA Laboratories, where he became a Staff Vice
President. Dr. Kressel is a director of Level One Communications Inc., Nova
Information Systems, Inc., IA Corporation and several privately held
companies.
41
<PAGE>
HELEN SELTZER has served as a director of the Company since April 1996. Ms.
Seltzer has been the Senior Vice President of Product Marketing of BDM
International, Inc. since March 1996. Prior to joining BDM International Inc.,
Ms. Seltzer was the Vice President of Marketing/Sales Access Services of Bell
Atlantic from August 1993 to March 1996. Ms. Seltzer was Director, Product
Marketing of MCI from 1990 to July 1993.
GARY D. NUSBAUM has served as a director of the Company since October 1995.
Mr. Nusbaum has been a Managing Director of E.M. Warburg, Pincus & Co., LLC
since January 1997. From January 1995 to December 1996, Mr. Nusbaum was a Vice
President of Warburg, Pincus Ventures, Inc. and from September 1989 to
December 1994, was an associate at Warburg, Pincus Ventures, Inc.
READ MCNAMARA has served as a director of the Company since April 1996. Mr.
McNamara has been the President, Latin American Division of Bausch & Lomb
since September 1996. From January 1996 to September 1996, Mr. McNamara was an
independent consultant. From December 1994 to January 1996, Mr. McNamara was
the President, International of Paging Network, Inc. Prior to joining Paging
Network, Inc., Mr. McNamara was Senior Vice President, International of
Revlon, Inc. from December 1992 to November 1994 and Vice President,
International of Revlon, Inc. from December 1991 to December 1992. Mr.
McNamara was Vice President, International Business of ConAgra-Frozen Foods, a
subsidiary of ConAgra, Inc., from November 1990 to November 1991.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, certain officers and persons holding more than 10% of
a registered class of the Company's equity securities to file reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission (the "Commission") and the NNM. Directors, certain officers and
greater than 10% shareholders are also required by Commission regulations to
furnish the Company with copies of all such reports that they file. Based
solely upon the Company's review of copies of such forms provided to it, the
Company believes that all filing requirements were complied with during the
fiscal year ended December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth information concerning compensation awarded
to, earned by or paid to, any person serving as the Company's Chief Executive
Officer or acting in a similar capacity during fiscal 1997, 1996 and 1995 and
the Company's other most highly compensated executive officers whose aggregate
cash and cash equivalent compensation exceeded $100,000 (the "Named
Executives"), for services rendered to the Company in all capacities during
such fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------- ------------
SECURITIES
NAME AND PRINCIPAL SALARY BONUS OTHER ANNUAL UNDERLYING
POSITION YEAR ($) ($) COMPENSATION (1) OPTIONS (#)
- ------------------ ---- -------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Wesley T. O'Brien....... 1997 $231,000 $107,750 $ -- 50,000
President and Chief 1996 220,000 139,800(2) 157,312 90,119
Executive Officer 1995 55,361 72,000(5) 3,088 43,422
Rudolph McGlashan....... 1997 195,000 39,800 -- 35,000
Chief Operating Officer 1996 195,000 49,600(2) -- 40,000
1995 185,577 25,000(5) -- 75,827(6)
William A. Paquin....... 1997 160,000(3) 23,000 -- 35,000
Chief Financial Officer 1996 104,000(4) 44,600(2) 42,424 100,000
</TABLE>
- --------
(1) The amounts reported in this column for 1996 for Messrs. O'Brien and
Paquin reflect selling and relocation expenses and the related tax gross
ups. The aggregate value of the perquisites and other personal benefits
received by Mr. McGlashan during 1997 and 1996 has not been reflected
because the amount was below the Commission's threshold for disclosure
(i.e., the lesser of $50,000 or 10% of the total of annual salary and
bonus).
42
<PAGE>
(2) Includes $40,000 paid to Mr. O'Brien pursuant to the terms of his 1995
employment agreement and $38,500 paid to Mr. O'Brien, $14,300 paid to Mr.
McGlashan and $14,300 paid to Mr. Paquin during 1997 which relate to the
Company's performance in the third and fourth quarters of 1996. Such
amounts were not included in the Company's Proxy Statement for its 1997
Annual Meeting of Shareholders because such amounts had not been
determined at the time of mailing of such Proxy Statement.
(3) Includes salary continuation payments made by the Company from December
15, 1997 through December 31, 1997 in connection with Mr. Paquin's
separation from the Company. See "--Employment and Severance Agreements."
(4) Mr. Paquin began his employment with the Company as Chief Financial
Officer in April 1996.
(5) Includes $22,000 paid to Mr. O'Brien and $15,000 paid to Mr. McGlashan
during 1996 which relates to the Company's performance in the fourth
quarter of 1995. Such amounts were not included in the Company's Proxy
Statement for its 1996 Annual Meeting of Shareholders because such amounts
had not been determined at the time of mailing of such Proxy Statement.
(6) These options were granted to Mr. McGlashan in exchange for options
cancelled in August 1995.
STOCK OPTION GRANTS
The following table sets forth information regarding grants of options to
purchase Common Stock made by the Company during the fiscal year ended
December 31, 1997 to each of the Named Executives. No stock appreciation
rights were granted during 1997.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
---------------------------------------------- RATES OF STOCK
NUMBER OF PERCENT OF PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------
NAME GRANTED (#) 1997(1) ($/SHARE) DATE (5%) (10%)
- ---- ----------- ------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Wesley T. O'Brien (3)... 50,000 11.2% $7.50 02/07/07 $235,835 $597,653
Rudolph McGlashan (3)... 35,000 7.8 7.50 02/07/07 165,085 418,357
William A. Paquin (3)... 35,000 7.8 7.50 02/07/07 165,085 418,357
</TABLE>
- --------
(1) The Company granted options to purchase a total of 447,000 shares of Common
Stock during 1997.
(2) Amounts reported in these columns represent amounts that may be realized
upon exercise of options immediately prior to the expiration of their term
assuming the specified compounded rates of appreciation (5% and 10%) on
the Common Stock over the term of the options. These assumptions are based
on rules promulgated by the Commission and do not reflect the Company's
estimate of future stock price appreciation. Actual gains, if any, on the
stock option exercises and Common Stock holdings are dependent on the
timing of such exercise and the future performance of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by
the option holder.
(3) Options granted in 1997 vest as to 20% on the first anniversary of the
date of grant and as to an additional 20% on each anniversary thereafter.
All options expire on the tenth anniversary of the grant date, unless
sooner terminated under the terms of the Stock Option Plan (as hereinafter
defined). In the event of a Change in Control (as hereinafter defined) of
the Company, all options become fully vested. See "--Second Amended and
Restated 1994 Stock Option Plan."
43
<PAGE>
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth information regarding option exercises and
the number and year-end value of unexercised options held by each of the Named
Executives. No stock appreciation rights were exercised by the Named
Executives during 1997.
AGGREGATE OPTION EXERCISES IN FISCAL 1997 AND FISCAL 1997 YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL "IN-THE-MONEY" OPTIONS
ACQUIRED ON VALUE YEAR-END(#) AT FISCAL YEAR-END($)
NAME EXERCISE(#) REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
- ---- ----------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Wesley T. O'Brien....... -- $ -- 40,065/135,122 $145,029/$ 85,718
Rudolph McGlashan....... 15,165 97,890 8,000/ 97,322 0/ 199,585
William A. Paquin....... -- -- 20,000/115,000 0/ 0
</TABLE>
- --------
(1) The figures presented in this column have been calculated based upon the
difference between the fair market value of each stock option on the date
of exercise and its exercise price.
(2) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set
forth represent the difference between $7.00 per share, the fair market
value of the Common Stock issuable upon exercise of options at December
31, 1997 and the exercise price of the option, multiplied by the
applicable number of options.
EMPLOYMENT AND SEVERANCE AGREEMENTS
On February 22, 1994, the Company entered into an employment agreement with
Rudolph McGlashan, pursuant to which Mr. McGlashan agreed to serve full time
as Chief Operating Officer of the Company until February 22, 1999, unless
earlier terminated in accordance with the terms of the agreement. The annual
base salary under such agreement is reviewed annually, but may not be less
than $175,000 per annum. In 1997, Mr. McGlashan's salary was $195,000. In
addition, Mr. McGlashan is eligible to receive quarterly bonus payments in
amounts to be determined by the Compensation Committee based on the financial
performance of the Company in relation to the then-current annual operating
plan of the Company. Such bonus, however, may not exceed 35% of base salary in
any fiscal year. Pursuant to his employment agreement, if Mr. McGlashan is
terminated for "cause" (as defined therein), the Company is required to pay
Mr. McGlashan, within ten days following such termination, any unpaid base
salary and bonus, accrued through the date of termination. If the Company
terminates Mr. McGlashan's employment without cause, and, at such time certain
performance standards were met, the Company is required to pay Mr. McGlashan
any unpaid base salary and bonus accrued through the date of termination, plus
an additional amount equal to unpaid base salary for the balance of the term.
The Company is required to pay Mr. McGlashan such amounts within ten days
following a termination without cause, but can, at its option, pay the
additional amounts in equal monthly installments over the 12-month period
following the date of termination. The Company also may terminate Mr.
McGlashan's employment agreement for non-performance (as defined therein) and
upon his death or disability (as defined therein) with specified payment
obligations in each instance.
On February 15, 1997, the Company entered into an amended and restated
employment agreement with Wesley T. O'Brien, which agreement amended and
restated Mr. O'Brien's original employment agreement dated October 1, 1995.
Pursuant to his amended and restated employment agreement, Mr. O'Brien agreed
to continue to serve full time as President and Chief Executive Officer of the
Company until June 15, 1999, unless earlier terminated in accordance with the
terms of such agreement. The annual base salary under such agreement is
reviewed annually, but may not be less than $231,000 per annum. In addition,
Mr. O'Brien is eligible to receive an annual bonus equal to 40% of his base
salary to be determined by the Compensation Committee based on the financial
and operating performance of the Company. The Compensation Committee may, in
its sole discretion, award additional bonuses to Mr. O'Brien on any other
basis as it deems appropriate from time to time. Pursuant
44
<PAGE>
to his employment agreement, if Mr. O'Brien is terminated for "cause" (as
defined therein), the Company is required to pay Mr. O'Brien, within ten days
following such termination, any unpaid base salary through the date of
termination. If the Company terminates Mr. O'Brien's employment without cause,
and, at such time certain performance standards were met, the Company is
required to pay Mr. O'Brien any unpaid base salary and bonus accrued through
the date of termination, subject also to any bonus which may be payable to Mr.
O'Brien pursuant to his amended employment agreement discussed below, plus an
additional amount equal to unpaid base salary for the balance of the term. The
Company may also terminate Mr. O'Brien's employment agreement for non-
performance (as defined therein) and upon his death or disability (as defined
therein) with specified payment obligations in each instance.
On November 20, 1997, TresCom's Compensation Committee approved, and the
Company subsequently entered into, an amendment to the employment agreement of
Mr. O'Brien, which provided for a special bonus in order to induce Mr. O'Brien
to remain employed with TresCom while it explored various strategic
alternatives and with a corporate successor, if so desired by the successor.
Subject to certain federal tax limitations, the amount of the special bonus is
$1.5 million and is payable over the course of two years from the date a
Change in Control (as defined in the employment agreement) is consummated;
provided, however, if a corporate successor elects not to employ Mr. O'Brien,
such bonus shall be payable at the closing for such Change in Control or
within 15 business days after public notice of the Change in Control if no
closing is required. In addition, Mr. O'Brien's amended employment agreement
provides that he may terminate his employment agreement for "Good Reason," in
which event the Company is required to pay Mr. O'Brien (i) any unpaid base
salary and bonus accrued through the date of termination, (ii) an additional
amount equal to unpaid base salary for the balance of the term and (iii) any
unpaid amount of the special bonus. For purposes of Mr. O'Brien's employment
agreement, "Good Reason" means the occurrence, without Mr. O'Brien's express
written consent, of any of the following circumstances following a Change in
Control: (A) if Mr. O'Brien is requested to execute a new employment contract
by a corporate successor to TresCom, the failure of Mr. O'Brien to obtain an
agreement in form and substance reasonably satisfactory to him from such
successor to provide employment to Mr. O'Brien in the capacity of a senior
executive, at his then current base salary, for a period of at least two years
from the date of the Change in Control; (B) the failure of Mr. O'Brien to
continue to be retained as an employee in a senior executive position; (C) a
reduction by the Company or a corporate successor in Mr. O'Brien's base
salary; or (D) a relocation of Mr. O'Brien's office to a location more than 50
miles from the current executive office of the Company and a failure to make
Mr. O'Brien whole for all losses and costs reasonably incurred in connection
with the relocation, including, but not limited to, moving expenses, forfeited
bonds, fees or escrows to clubs or other organizations and losses from the
sale of Mr. O'Brien's personal residence.
Each of Messrs. McGlashan's and O'Brien's employment agreement provides that
the executive will not, for certain specified periods, without the prior
written consent of the Company, directly or indirectly conduct or engage in or
be associated with any person or entity which conducts or engages in the
telecommunications business in any geographic areas in which the Company or
any of its subsidiaries is then so engaged in business or proposes to engage
in business in accordance with its then-current strategic plan. Each of the
employment agreements also provides that the executives may not interfere
with, disrupt or attempt to disrupt the relationship, contractual or
otherwise, between the Company or any of its subsidiaries and their customers,
suppliers, lessors, lessees or employees.
Effective December 15, 1997, Mr. Paquin resigned as Chief Financial Officer
of the Company. In connection with such resignation, the Company entered into
an agreement with Mr. Paquin pursuant to which the Company agreed to (i)
continue Mr. Paquin's base salary until June 1998 at the annual rate then in
effect, (ii) reimburse him for unpaid business expenses and certain other
specified expenses and (iii) permit the continued vesting of his options
through the end of such period.
SECOND AMENDED AND RESTATED 1994 STOCK OPTION PLAN
In February 1997, the Board of Directors of the Company adopted the Second
Amended and Restated 1994 Stock Option Plan (the "Stock Option Plan"), which
provides for the grant to officers, key employees,
45
<PAGE>
consultants and directors of the Company of both "incentive stock options"
within the meaning of Section 422 of the Code and stock options that are non-
qualified for federal income tax purposes. The total number of shares of
Common Stock for which options may be granted pursuant to the Stock Option
Plan is 936,432, subject to certain adjustments reflecting changes in the
Company's capitalization. The Stock Option Plan is currently administered by
the Compensation Committee. The Compensation Committee determines, among other
things, which officers, employees, consultants and directors will receive
options under the plan, the time when options will be granted, the type of
option (incentive stock options or non-qualified stock options, or both) to be
granted, the number of shares subject to each option, the time or times when
the options will become exercisable (subject to early vesting in the event of
a Change in Control), and, subject to certain conditions discussed below, the
option price and duration of the options. Members of the Compensation
Committee are not eligible to receive options under the plan.
The exercise price of incentive stock options is determined by the
Compensation Committee, but may not be less than the greater of the fair
market value on the date of grant or the par value of the Common Stock and the
term of any such option may not exceed ten years from the date of grant. With
respect to any participant in the Stock Option Plan who owns stock
representing more than 10% of the voting power of the outstanding capital
stock of the Company, the exercise price of any incentive stock option may not
be less than 110% of the fair market value of such shares on the date of grant
and the term of such option may not exceed five years from the date of grant.
The exercise price of non-qualified stock options is determined by the
Compensation Committee on the date of grant, but may not be less than the par
value of the Common Stock on the date of grant, and the term of such option
may not exceed ten years from the date of grant.
Payment of the option price may be made by certified or bank cashier's
check, by tender of shares of Common Stock then owned by the optionee or by
any other means acceptable to the Company. Options granted pursuant to the
Stock Option Plan are not transferable, except by will or the laws of descent
and distribution in the event of death. During an optionee's lifetime, the
option is exercisable only by the optionee. With respect to options granted in
1995, the Compensation Committee may, in its discretion, and on terms it
considers appropriate, require an optionee, or the executors or administrators
of an optionee's estate, to sell back to the Company such options or shares of
Common Stock issued upon exercise of such options in the event such optionee's
employment with the Company is terminated.
Pursuant to the terms of the Stock Option Plan, if a "Change in Control" of
the Company occurs, all outstanding stock options become vested and fully
exercisable. For purposes of the Stock Option Plan, a "Change in Control" is
deemed to occur if (A) any "person" as such term is defined in Section 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (other than the Company, any trustee or other fiduciary holding
securities under any employee benefit plan of the Company or any Company
owned, directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of Common Stock, of the
Company), becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing 30% or more of the combined voting power of all classes of the
Company's then outstanding voting securities; (B) during any period of two
consecutive calendar years individuals who at the beginning of such period
constitute the Board, cease for any reason to constitute at least a majority
thereof, unless the election or nomination for the election by the Company's
shareholders of each new director was approved by a vote of at least two-
thirds ( 2/3) of the directors then still in office who either were directors
at the beginning of the two-year period or whose election or nomination for
election was previously so approved; (C) the shareholders of the Company
approve a merger or consolidation of the Company with any other corporation or
legal entity, other than a merger or consolidation that would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; provided, however,
that a merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no
46
<PAGE>
person acquires more than 30% of the combined voting power of the Company's
then outstanding securities shall not constitute a Change in Control of the
Company; or (D) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets. For purposes of
the Stock Option Plan, the Company's merger with Taurus will constitute a
Change in Control at the effective time of the Merger.
The Board of Directors has the right at any time and from time to time to
amend or modify the Stock Option Plan, without the consent of the Company's
shareholders or optionees; provided, that no such action may adversely affect
options previously granted without the optionee's consent, and provided
further that no such action, without the approval of the shareholders of the
Company, may increase the total number of shares of Common Stock which may be
purchased pursuant to options granted under the plan, expand the class of
persons eligible to receive grants of options under the plan, decrease the
minimum option price, extend the maximum term of options granted under the
plan or extend the term of the plan. The expiration date of the Stock Option
Plan, after which no option may be granted thereunder, is February 22, 2004.
The Company has filed with the Commission a Registration Statement on Form
S-8 covering the shares of Common Stock underlying options granted under the
Stock Option Plan.
COMPENSATION OF DIRECTORS
Independent non-employee directors receive an annual fee of $10,000, a
meeting fee of $1,000 for every board meeting attended and each committee
meeting held separately and a $500 fee for each board meeting or committee
participated in by telephone. All directors are reimbursed for out-of-pocket
expenses. During 1997, two directors were paid $2,500 each as compensation
relating to special committee meetings of the Board. Under the Stock Option
Plan, the Company may, from time to time and in the discretion of the Board of
Directors, grant options to directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, as of March 16, 1998, by (i) each
person known to the Company to own beneficially more than 5% of the Company's
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the Named Executives, and (iv) all executive officers and directors of
the Company, as a group. All information with respect to beneficial ownership
has been furnished to the Company by the respective shareholders of the
Company (except as set forth in footnote(1)). See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Factors Which May Affect the Company's Future Results--Proposed
Merger."
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENTAGE
NAME OWNERSHIP(1) OF CLASS
---- ----------------- ----------
<S> <C> <C>
Warburg, Pincus Investors, L.P. (2)(3)
466 Lexington Avenue
New York, New York 10017...................... 6,319,468 50.5%
Rockefeller Financial Services
30 Rockefeller Plaza
New York, New York 10112...................... 929,480 7.4
Wesley T. O'Brien.............................. 30,595 *
Rudolph McGlashan.............................. 220,032 1.8
William Paquin................................. 12,000 *
Douglas M. Karp (3)(4)......................... 6,319,468 50.5
Henry Kressel, Ph.D. (3)(4).................... 6,319,468 50.5
Gary Nusbaum (3)(4)............................ 6,319,468 50.5
Helen Seltzer.................................. 200 *
Read McNamara.................................. 200 *
All executive officers and directors as a group
(seven persons)............................... 6,570,495 52.5
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
47
<PAGE>
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common Stock
subject to options and warrants held by that person that are currently
exercisable or exercisable within 60 days of March 2, 1998 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Except
as indicated in the footnotes to this table, the shareholder named in the
table has sole voting and investment power with respect to the shares set
forth opposite such shareholder's name. In connection with the Merger,
Primus entered into a Stockholder Agreement with Warburg, Pincus
Investors, L.P. ("Warburg, Pincus") and Voting Agreements with Messrs.
O'Brien and McGlashan, and has since filed a Schedule 13D with the
Commission due to certain limited voting rights relating to the Merger
contained in these agreements.
(2) E.M. Warburg, Pincus & Co., LLC, a New York limited liability company
("E.M. Warburg"), manages Warburg, Pincus. Warburg, Pincus & Co., a New
York general partnership ("WP"), the sole general partner of Warburg,
Pincus, has a 20% interest in the profits of Warburg, Pincus as the
general partner. Lionel I. Pincus is the managing partner of WP and the
managing member of E.M. Warburg and may be deemed to control both WP and
E.M. Warburg. The members of E.M. Warburg are substantially the same as
the partners of WP. Messrs. Karp, Kressel and Nusbaum, each a director of
the Company, are each a Managing Director and member of E.M. Warburg and a
general partner of WP. As such, Messrs. Karp, Kressel and Nusbaum may be
deemed to have an indirect pecuniary interest, within the meaning of Rule
16a-1 under the Exchange Act, in an indeterminate portion of the shares of
Common Stock beneficially owned by Warburg, Pincus and WP. See Note 4
below.
(3) Includes 358,034 shares of Common Stock which Warburg, Pincus has the
right to acquire through exercise of a warrant agreement entered into with
the Company.
(4) All of the shares indicated as owned by Messrs. Karp, Kressel and Nusbaum
are owned directly by Warburg, Pincus and are included because of Messrs.
Karp's, Kressel's and Nusbaum's affiliation with Warburg, Pincus. Messrs.
Karp, Kressel and Nusbaum disclaim "beneficial ownership" of these shares
within the meaning of Rule 13d-3 under the Exchange Act. See Note 2 above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Pursuant to a Stockholders Agreement among Warburg, Pincus, the Company,
Norman Klugman and Rudolph McGlashan (the "Stockholders Agreement"), Warburg,
Pincus is entitled to certain registration rights with respect to its shares
of capital stock. In addition, pursuant to the terms of such agreement, the
Company has agreed to nominate and use its best efforts to elect to the Board
of Directors two Warburg, Pincus designees for so long as Warburg, Pincus owns
at least 15% of the outstanding shares of Common Stock, and one Warburg,
Pincus designee for so long as Warburg, Pincus owns between 5% and 15% of the
shares of Common Stock then outstanding.
On October 2, 1995 and November 16, 1995, the Company issued two notes to
Warburg, Pincus in the aggregate principal amount of $10.4 million (including
accrued interest) (the "Warburg Notes"). Interest on the Warburg Notes accrued
at the rate of 12% per annum. The Warburg Notes were paid in full by the
Company out of the net proceeds of the Company's initial public offering in
February 1996. As additional consideration for the purchase of the Warburg
Notes, the Company issued to Warburg, Pincus a warrant to purchase 358,034
shares of Common Stock at $0.42 per share (the "Warburg Warrant"). The Warburg
Warrant expires on October 2, 2007.
The Company believes that the above transactions were or are on terms no
less favorable to the Company than could have been obtained in transactions
with independent third parties.
See "Item 11. Executive Compensation--Employment and Severance Agreements"
for a description of certain payments made by the Company to Mr. Paquin in
connection with his separation from the Company.
48
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) 1. Financial Statements.
The financial statements are included in Part II, Item 8 of this Report.
2. Financial Statement Schedules and Supplementary Information Required to
be Submitted.
The financial statement schedules are included in Part II, Item 8 of this
Report.
(B) Reports on Form 8-K.
No Reports on Form 8-K were filed by the Company during the fourth quarter
of 1997.
(C) Index to Exhibits.
The following is a list of all Exhibits filed as part of this Report:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
*2.1 Agreement and Plan of Merger, dated as of February 3, 1998, by and
among Primus Telecommunications Group, Inc., Taurus Acquisition
Corporation and the Company (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K, dated February 9, 1998).
*3.1(i) Third Amended and Restated Articles of Incorporation of the
Company (filed as Exhibit 4.1 to the Company's Registration
Statement on Form S-8, File No. 333-1912, filed on March 4,
1996).
**3.1(ii) Second Amended and Restated By-laws of the Company.
4.1 See Exhibit numbers 3.1(i) and 3.1(ii) for provisions of the Third
Amended and Restated Articles of Incorporation and Second Amended
and Restated By-laws of the Company defining the rights of the
holders of Common Stock.
*4.2 Second Amended and Restated 1994 Stock Option Plan (filed as
Exhibit 4.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).+
*4.3 Amended and Restated Stockholders Agreement (filed as Exhibit 4.3
to the Company's Registration Statement on Form S-1, File No. 33-
99738, filed on November 22, 1995 (the "Company's Form S-1")).+
*4.4 Form of Stock Option Agreement for Management Employees who are a
party to an employment agreement and the Stockholders Agreement
(filed as Exhibit 4.4 to the Company's Form S-1).+
*4.5 Form of Stock Option Agreement for Management Employees who are
not a party to an employment agreement or the Stockholders
Agreement (filed as Exhibit 4.5 to the Company's Form S-1).+
*4.6 Form of Stock Option Agreement for Employees who will receive non-
contingent options only (filed as Exhibit 4.6 to the Company's
Form S-1).+
*4.7 Form of Stock Option Agreement for Management Employees who are a
party to an employment agreement but are not a party to the
Stockholders Agreement (filed as Exhibit 4.7 to the Company's
Form S-1).+
*4.8 1996 Form of Stock Option Agreement for Rudolph McGlashan (filed
as Exhibit 4.8 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 (the "1995 Form 10-K")).+
*4.9 1996 Basic Form of Stock Option Agreement for Management Employees
(filed as Exhibit 4.9 to the 1995 Form 10-K).+
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*4.10 1996 Form of Stock Option Agreement for Wesley T. O'Brien (filed
as Exhibit 4.10 to the 1995 Form 10-K).+
*4.11 1996 Modified Form of Stock Option Agreement for Management
Employee (filed as Exhibit 4.11 to the 1995 Form 10-K).+
*4.12 Form of Common Stock Certificate of the Company (filed as Exhibit
4.8 to the Company's Form S-1).
*4.13 1997 Form of Stock Option Agreement for Rudolph McGlashan (filed
as Exhibit 4.13 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (the "1996 Form 10-K")).+
*4.14 1997 Basic Form of Stock Option Agreement for Employees (filed as
Exhibit 4.14 to the 1996 Form 10-K).+
*4.15 1997 Form of Stock Option Agreement for Wesley T. O'Brien (filed
as Exhibit 4.15 to the 1996 Form 10-K).+
*10.1 Amended and Restated Employment Agreement between the Company and
Wesley T. O'Brien (filed as Exhibit 10.3 to the 1996 Form 10-K).+
**10.2 First Amendment to Amended and Restated Employment Agreement
between the Company and Wesley T. O'Brien.+
*10.3 Employment Agreement between the Company and Rudolph McGlashan
(filed as Exhibit 10.4 to the Company's Form S-1).+
*10.4 Amendment to Employment Agreement between the Company and Rudolph
McGlashan (filed as Exhibit 10.5 to the Company's Form S-1).+
*10.5 Warrant Agreement between the Company and Warburg, Pincus
Investors, L.P. (filed as Exhibit 10.6 to the Company's Form S-
1).
*10.6 Stock Purchase and Sale Agreement, dated December 15, 1993, by and
among Teracom Communications, Inc. ("Purchaser") and Douglas M.
Lapin, Stanley P. Lapin and Eileen Lapin ("Sellers") (filed as
Exhibit 10.13 to the Company's Form S-1).
*10.7 Asset Purchase Agreement, dated June 30, 1994, between IDB
Communications Group, Inc. on behalf of its subsidiaries, IDB
WorldCom Services, Inc. and IDB WorldCom, Inc. ("Seller") and
Teracom U.S.A., Inc. ("Purchaser") (filed as Exhibit 10.14 to the
Company's Form S-1).
*10.8 Stock Purchase and Sale Agreement, dated July 8, 1994, by and
among Teracom U.S.A., Inc. ("Purchaser") and Peter Buffa, Sam
Herzberg, Lawrence Levy and Felix Fernandez ("Sellers") (filed as
Exhibit 10.15 to the Company's Form S-1).
*10.9 Asset Purchase Agreement, dated July 12, 1994, by and between
Virgin Islands Tele-Com, Inc. ("Seller") and Teracom U.S.A., Inc.
("Purchaser") (filed as Exhibit 10.16 to the Company's Form S-1).
*10.10 Equipment Lease, dated February 1, 1993, by and between DSC
Finance Corporation ("Lessor") and Total Telecommunications, Inc.
("Lessee") (filed as Exhibit 10.17 to the Company's Form S-1).
*10.11 Equipment Lease, dated February 17, 1992, between Advanced
Telecommunications Corporation ("Lessor") and Total
Telecommunications, Inc. ("Lessee") (filed as Exhibit 10.18 to
the Company's Form S-1).
*10.12 Agreement for Billing and Related Services, dated August 1994,
between TresCom U.S.A., Inc. and Electronic Data Systems
Corporation (filed as Exhibit 10.19 to the Company's Form S-1).
*10.13 Lease Agreement, dated June 28, 1990, between Twenty One Century
Building and Puerto Rico Telecom Corporation (filed as Exhibit
10.20 to the Company's Form S-1).
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
*10.14 Lease, dated February 1, 1992, between Telcom Building Corporation
and Total Telecommunications, Inc. (filed as Exhibit 10.21 to the
Company's Form S-1).
*10.15 Lease, dated December 20, 1993, between Hudson Telegraph
Associates and Caribbean Telecommunications, Inc. (filed as
Exhibit 10.22 to the Company's Form S-1).
*10.16 Form of Indemnification Agreement between the Company and its
directors and executive officers (filed as Exhibit 10.23 to the
Company's Form S-1).
*10.17 Amendment No. 1 to Restated Stockholders Agreement, dated February
5, 1996 (filed as Exhibit 10.24 to the Company's Form S-1).
*10.18 Employment Agreement between the Company and William A. Paquin
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1996).+
**10.19 Separation Agreement between the Company and William A. Paquin.+
*10.20 Revolving Credit and Security Agreement, among TresCom
International, Inc., TresCom U.S.A., Inc., Intex
Telecommunications, Inc., The St. Thomas and San Juan Telephone
Company, Inc., STSJ Overseas Telephone Company, Inc., PNC Bank,
National Association (as lender and as agent) and the other
lenders a party thereto (the "Loan Agreement") (filed as Exhibit
10.22 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1997).
*10.21 Revolving Credit Note, dated July 31, 1997, payable to PNC Bank,
National Association and the other lenders a party to the Loan
Agreement (filed as Exhibit 10.23 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1997).
**21.1 Subsidiaries of the Company.
**23.1 Consent of Ernst & Young LLP.
**27.1 Financial Data Schedule.
</TABLE>
- --------
+ Management contract or compensatory plan or arrangement.
* Incorporated herein.
** Filed herewith.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Ft. Lauderdale, State of Florida, on the 18th day of March, 1998.
TRESCOM INTERNATIONAL, INC.
By: /s/ Wesley T. O'Brien
-----------------------------------
Wesley T. O'Brien
President and Chief Executive
Officer
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Wesley T. O'Brien his true and lawful attorney-
in-fact and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to sign any and
all amendments to this Annual Report on Form 10-K, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or their or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 18th day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<C> <S>
/s/ Wesley T. O'Brien President, Chief Executive Officer
____________________________________ and Director (Principal Executive
Wesley T. O'Brien Officer)
/s/ Rudolph McGlashan Chief Operating Officer and Director
____________________________________
Rudolph McGlashan
/s/ Michael Brachfeld Controller (Principal Financial and
____________________________________ Accounting Officer)
Michael Brachfeld
/s/ Douglas M. Karp Director
____________________________________
Douglas M. Karp
/s/ Henry Kressel Director
____________________________________
Henry Kressel
/s/ Gary D. Nusbaum Director
____________________________________
Gary D. Nusbaum
/s/ Helen Selzer Director
____________________________________
Helen Selzer
/s/ Read McNamara Director
____________________________________
Read McNamara
</TABLE>
52
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ------------
<C> <S> <C>
*2.1 Agreement and Plan of Merger, dated as of February
3, 1998, by and among Primus Telecommunication
Group, Inc., Taurus Acquisition Corporation and
the Company (filed as Exhibit 2.1 to the Company's
Current Report on Form 8-K, dated February 9,
1998).
*3.1(i) Third Amended and Restated Articles of
Incorporation of the Company (filed as Exhibit 4.1
to the Company's Registration Statement on Form S-
8, File
No. 333-1912, filed on March 4, 1996).
**3.1(ii) Second Amended and Restated By-laws of the Company.
4.1 See Exhibit numbers 3.1(i) and 3.1(ii) for
provisions of the Third Amended and Restated
Articles of Incorporation and Second Amended and
Restated By-laws of the Company defining the
rights of the holders of Common Stock.
*4.2 Second Amended and Restated 1994 Stock Option Plan
(filed as Exhibit 4.2 to the Company's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1996).+
*4.3 Amended and Restated Stockholders Agreement (filed
as Exhibit 4.3 to the Company's Registration
Statement on Form S-1, File No. 33-99738, filed on
November 22, 1995 (the "Company's Form S-1")).+
*4.4 Form of Stock Option Agreement for Management
Employees who are a party to an employment
agreement and the Stockholders Agreement (filed as
Exhibit 4.4 to the Company's Form S-1).+
*4.5 Form of Stock Option Agreement for Management
Employees who are not a party to an employment
agreement or the Stockholders Agreement (filed as
Exhibit 4.5 to the Company's Form S-1).+
*4.6 Form of Stock Option Agreement for Employees who
will receive non-contingent options only (filed as
Exhibit 4.6 to the Company's Form S-1).+
*4.7 Form of Stock Option Agreement for Management
Employees who are a party to an employment
agreement but are not a party to the Stockholders
Agreement (filed as Exhibit 4.7 to the Company's
Form S-1).+
*4.8 1996 Form of Stock Option Agreement for Rudolph
McGlashan (filed as Exhibit 4.8 to the Company's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1995 (the "1995 Form 10-K")).+
*4.9 1996 Basic Form of Stock Option Agreement for
Management Employees (filed as Exhibit 4.9 to the
1995 Form 10-K).+
*4.10 1996 Form of Stock Option Agreement for Wesley T.
O'Brien (filed as Exhibit 4.10
to the 1995 Form 10-K).+
*4.11 1996 Modified Form of Stock Option Agreement for
Management Employee (filed as Exhibit 4.11 to the
1995 Form 10-K).+
*4.12 Form of Common Stock Certificate of the Company
(filed as Exhibit 4.8 to the Company's Form S-1).
*4.13 1997 Form of Stock Option Agreement for Rudolph
McGlashan (filed as Exhibit 4.13 to the Company's
Annual Report on Form 10-K for the fiscal year
ended
December 31, 1996 (the "1996 Form 10-K")).+
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ------------
<C> <S> <C>
*4.14 1997 Basic Form of Stock Option Agreement for
Employees (filed as Exhibit 4.14
to the 1996 Form 10-K).+
*4.15 1997 Form of Stock Option Agreement for Wesley T.
O'Brien (filed as Exhibit 4.15 to the 1996 Form
10-K).+
*10.1 Amended and Restated Employment Agreement between
the Company and Wesley T. O'Brien (filed as
Exhibit 10.3 to the 1996 Form 10-K).+
**10.2 First Amendment to Amended and Restated Employment
Agreement between the Company and Wesley T.
O'Brien.+
*10.3 Employment Agreement between the Company and
Rudolph McGlashan (filed as Exhibit 10.4 to the
Company's Form S-1).+
*10.4 Amendment to Employment Agreement between the
Company and Rudolph McGlashan (filed as Exhibit
10.5 to the Company's Form S-1).+
*10.5 Warrant Agreement between the Company and Warburg,
Pincus Investors, L.P. (filed as Exhibit 10.6 to
the Company's Form S-1).
*10.6 Stock Purchase and Sale Agreement, dated December
15, 1993, by and among Teracom Communications,
Inc. ("Purchaser") and Douglas M. Lapin, Stanley
P. Lapin and Eileen Lapin ("Sellers") (filed as
Exhibit 10.13 to the Company's
Form S-1).
*10.7 Asset Purchase Agreement, dated June 30, 1994,
between IDB Communications Group, Inc. on behalf
of its subsidiaries, IDB WorldCom Services, Inc.
and
IDB WorldCom, Inc. ("Seller") and Teracom U.S.A.,
Inc. ("Purchaser") (filed as Exhibit 10.14 to the
Company's Form S-1).
*10.8 Stock Purchase and Sale Agreement, dated July 8,
1994, by and among Teracom U.S.A., Inc.
("Purchaser") and Peter Buffa, Sam Herzberg,
Lawrence Levy and Felix Fernandez ("Sellers")
(filed as Exhibit 10.15 to the Company's Form S-
1).
*10.9 Asset Purchase Agreement, dated July 12, 1994, by
and between Virgin Islands
Tele-Com, Inc. ("Seller") and Teracom U.S.A., Inc.
("Purchaser") (filed as Exhibit 10.16 to the
Company's Form S-1).
*10.10 Equipment Lease, dated February 1, 1993, by and
between DSC Finance Corporation ("Lessor") and
Total Telecommunications, Inc. ("Lessee") (filed
as Exhibit 10.17 to the Company's Form S-1).
*10.11 Equipment Lease, dated February 17, 1992, between
Advanced Telecommunications Corporation ("Lessor")
and Total Telecommunications, Inc. ("Lessee")
(filed as Exhibit 10.18 to the Company's Form S-
1).
*10.12 Agreement for Billing and Related Services, dated
August 1994, between TresCom U.S.A., Inc. and
Electronic Data Systems Corporation (filed as
Exhibit 10.19 to the Company's Form S-1).
*10.13 Lease Agreement, dated June 28, 1990, between
Twenty One Century Building and Puerto Rico
Telecom Corporation (filed as Exhibit 10.20 to the
Company's
Form S-1).
*10.14 Lease, dated February 1, 1992, between Telcom
Building Corporation and Total Telecommunications,
Inc. (filed as Exhibit 10.21 to the Company's Form
S-1).
*10.15 Lease, dated December 20, 1993, between Hudson
Telegraph Associates and Caribbean
Telecommunications, Inc. (filed as Exhibit 10.22
to the Company's
Form S-1).
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DESCRIPTION PAGE
----------- ----------- ------------
<C> <S> <C>
*10.16 Form of Indemnification Agreement between the
Company and its directors and executive officers
(filed as Exhibit 10.23 to the Company's Form S-
1).
*10.17 Amendment No. 1 to Restated Stockholders Agreement,
dated February 5, 1996 (filed as Exhibit 10.24 to
the Company's Form S-1).
*10.18 Employment Agreement between the Company and
William A. Paquin (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1996).+
**10.19 Separation Agreement between the Company and
William A. Paquin.+
*10.20 Revolving Credit and Security Agreement, among
TresCom International, Inc., TresCom U.S.A., Inc.,
Intex Telecommunications, Inc., The St. Thomas and
San Juan Telephone Company, Inc., STSJ Overseas
Telephone Company, Inc., PNC Bank, National
Association (as lender and as agent) and the other
lenders a party thereto (the "Loan Agreement")
(filed as Exhibit 10.22 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended
June 30, 1997).
*10.21 Revolving Credit Note, dated July 31, 1997, payable
to PNC Bank, National Association and the other
lenders a party to the Loan Agreement (filed as
Exhibit 10.23 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended June 30,
1997).
**21.1 Subsidiaries of the Company.
**23.1 Consent of Ernst & Young LLP.
**27.1 Financial Data Schedule.
</TABLE>
- --------
+ Management contract or compensatory plan or arrangement.
* Incorporated herein.
** Filed herewith.
55
<PAGE>
EXHIBIT 3.1(ii)
SECOND AMENDED AND RESTATED
BY-LAWS
OF
TRESCOM INTERNATIONAL, INC.
As Adopted February 1, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I -- Principal Office.................................. 1
ARTICLE II -- Seal.............................................. 1
ARTICLE III -- Meetings of Shareholders........................ 1
Section 1. Place of Meeting............................... 1
Section 2. Annual Meetings................................ 1
Section 3. Special Meetings............................... 2
Section 4. Notice of Meetings............................. 2
Section 5. Quorum......................................... 2
Section 6. Required Vote.................................. 2
Section 7. Voting and Proxies............................. 2
Section 8. Voting Lists................................... 3
Section 9. Record Date.................................... 3
Section 10. Business Brought Before a Meeting.............. 3
Section 11. Office......................................... 4
ARTICLE IV -- Board of Directors............................... 4
Section 1. Powers......................................... 4
Section 2. Number......................................... 4
Section 3. Election and Term of Office.................... 4
Section 4. Vacancies...................................... 4
Section 5. Nominations.................................... 5
Section 6. Removal........................................ 6
Section 7. Place of Meetings.............................. 6
Section 8. Annual Meetings................................ 6
Section 9. Other Meetings................................. 6
Section 10. Quorum......................................... 6
Section 11. Compensation................................... 6
Section 12. Executive Committee............................ 6
Section 13. Presence at Meetings........................... 7
Section 14. Written Consent................................ 7
ARTICLE V -- Officers.......................................... 7
Section 1. Designation.................................... 7
Section 2. Election....................................... 7
Section 3. Removal and Resignation........................ 7
Section 4. Vacancies...................................... 7
Section 5. Chairman of the Board.......................... 7
Section 6. Chief Executive Officer........................ 8
Section 7. President...................................... 8
Section 8. Chief Operating Officer........................ 8
Section 9. Chief Financial Officer........................ 8
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
Section 10. Vice Presidents................................ 8
Section 11. Secretary...................................... 8
Section 12. Treasurer...................................... 9
Section 13. Compensation................................... 9
ARTICLE VI -- Certificates of Stock............................ 9
Section 1. Description.................................... 9
Section 2. Lost Certificates.............................. 9
Section 3. Transfers of Stock............................. 9
Section 4. Registered Shareholders........................ 9
Section 5. Restriction on Ownership, Voting and
Transfer; Right to Redeem..................... 10
ARTICLE VII -- General Provisions.............................. 10
Section 1. Dividends...................................... 10
Section 2. Checks......................................... 10
Section 3. Fiscal Year.................................... 10
Section 4. Execution of Deeds, Contracts and
Other Documents............................... 10
ARTICLE VIII -- Amendment to By-laws........................... 11
ARTICLE IX -- Indemnification.................................. 11
Section 1. General........................................ 11
Section 2. Expenses....................................... 11
Section 3. Standard of Conduct............................ 11
Section 4. Advance Expenses............................... 11
Section 5. Benefit........................................ 11
Section 6. Insurance...................................... 12
Section 7. Affiliates..................................... 12
Section 8. Survival....................................... 12
ARTICLE X -- Severability...................................... 12
ARTICLE XI -- Control-Share Acquisitions....................... 12
</TABLE>
-ii-
<PAGE>
SECOND AMENDED AND RESTATED
BY-LAWS
OF
TRESCOM INTERNATIONAL, INC.
_____________________
ARTICLE I
Principal Office
----------------
The principal office of the Corporation shall be established and
maintained at 200 East Broward Boulevard, in the City of Ft. Lauderdale, in the
State of Florida, until changed to such place or places as the Board of
Directors may determine.
ARTICLE II
Seal
----
The corporation shall have a corporate seal which shall be in circular
form and have inscribed thereon the name of the Corporation, the year of its
incorporation and the words "CORPORATE SEAL 1993 FLORIDA" and may use the same
by causing it or a facsimile thereof to be impressed or affixed or in any other
manner reproduced upon any paper or document.
ARTICLE III
Meetings of Shareholders
------------------------
SECTION 1. Place of Meeting. All meetings of the shareholders shall
----------------
be held at such place in or out of the State of Florida as shall be designated
from time to time by the Board of Directors and stated in the notice of such
meeting or in a duly executed waiver of notice thereof.
SECTION 2. Annual Meetings. Unless otherwise directed by the Board
---------------
of Directors, annual meetings of the shareholders of the Corporation shall be
held the first Wednesday of June. If the day fixed for the annual meeting shall
be a legal holiday in the State of Florida or the state or jurisdiction where
the meeting is to be held, such meeting shall be held on the next succeeding
business day. The purpose of the annual meeting of shareholders shall be to
elect directors and to transact such other business as may properly come before
the meeting pursuant to Article III, Section 10 hereof. If the election of
directors shall not be held on the day designated herein for the annual meeting
of the shareholders, or at any adjournment thereof, the
-1-
<PAGE>
Board of Directors shall cause such election to be held at a special meeting of
the shareholders as soon thereafter as conveniently possible.
SECTION 3. Special Meetings. Special meetings of the shareholders,
----------------
for any purpose or purposes, may be called only by the Chairman of the Board,
the Chief Executive Officer, the President, the Board of Directors pursuant to a
resolution adopted by the affirmative vote of the majority of the total number
of directors then in office, or, upon written demand, in compliance with Section
607.0702 of the Florida Statutes, of holders of 50% of all the votes entitled to
be cast on the issue to be considered at the proposed special meeting.
SECTION 4. Notice of Meetings. Whenever shareholders are required or
------------------
authorized to take any action at a meeting, a notice of such meeting, stating
the place, day and hour of the meeting and, in the case of a special meeting,
the purpose or purposes for which the meeting is called, shall be delivered, no
fewer than ten (10) nor more than sixty (60) days before the date set for such
meeting, either personally or by first-class mail, by or at the direction of the
Chairman of the Board, the Chief Executive Officer, the President or the
Secretary, to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail addressed to the shareholder, at his address as it appears on the
stock transfer books of the Corporation, with first-class postage prepaid
thereon. Written waiver by a shareholder of notice of a shareholders' meeting,
signed by him, whether before or after the time stated thereon, shall be
equivalent to the giving of such notice.
SECTION 5. Quorum. The majority of the shares entitled to vote
------
thereat, present or represented by proxy at any meeting, shall constitute a
quorum of the shareholders for the transaction of business except as otherwise
provided by statute or by the Corporation's Articles of Incorporation, as
amended (the "Articles of Incorporation"). If, however, such quorum shall not
be present or represented at any meeting of the shareholders, the shareholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty (30) days, or
if after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each shareholder of record
entitled to vote at the meeting, subject to the provisions of Section 4 hereof.
SECTION 6. Required Vote. If a quorum is present at any meeting, the
-------------
affirmative vote of the majority of the shares represented at the meeting and
entitled to vote on the subject matter shall be the act of the shareholders,
unless the question is one for which, by express provision of law or of the
Articles of Incorporation or these By-laws, a different vote is required, in
which case such express provision shall govern and control the decision of such
question. Stockholders may act only at an annual or special meeting and
stockholders may not act by written consent.
-2-
<PAGE>
SECTION 7. Voting and Proxies. Except as otherwise provided in the
------------------
Articles of Incorporation or by the general corporate laws of the State of
Florida, each shareholder shall be entitled at each meeting and upon each
proposal presented at such meeting to one vote in person or by proxy for each
share of voting stock recorded in his name on the books of the Corporation on
the record date fixed as below provided, or if no such record date was fixed, on
the day of the meeting. Every proxy must be signed by the shareholder or his
attorney in fact. No proxy shall be valid after the expiration of eleven (11)
months from the date thereof unless otherwise provided in the proxy. Every
proxy shall be revocable at the pleasure of the shareholder executing it,
except as otherwise provided by law. If a proxy expressly provides, any proxy-
holder may appoint in writing a substitute to act in his place.
SECTION 8. Voting Lists. The Secretary shall have charge of the
------------
stock ledger and shall prepare and make, or cause to be prepared and made, at
least ten (10) days before every meeting of shareholders, a complete list of the
shareholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each shareholder and the number and class and series,
if any, of shares registered in the name of each shareholder. Such list shall
be open to the examination of any shareholder at any time during usual business
hours for a period of at least ten (10) days prior to the meeting, either at (i)
the registered office of the Corporation, (ii) the principal place of business
of the Corporation, or (iii) the office of the transfer agent or registrar of
the Corporation. The list also shall be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any
shareholder, proxy holder or their attorney. The stock ledger shall be the only
evidence as to who are the shareholders entitled to examine the stock ledger,
the list required by this section or the books of the Corporation, or to vote in
person or by proxy at any meeting of shareholders.
SECTION 9. Record Date. In order that the Corporation may determine
-----------
the shareholders entitled to notice of or to vote at any meeting of shareholders
or any adjournment thereof or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix in advance,
but shall not be required to, a record date in accordance with the Florida
Statutes then in effect.
SECTION 10. Business Brought Before a Meeting. At an annual meeting
---------------------------------
of the shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
brought before the meeting by or at the direction of the Board of Directors, or
(c) otherwise properly brought before the meeting by a shareholder. For
business to be properly brought before an annual meeting by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation, not
less than one hundred and thirty (130) days prior to the meeting; provided,
--------
however, that in the event that less than seventy (70) days' notice of the date
- -------
of the meeting is given or made to shareholders, notice by the shareholder to be
timely must be so received not later than the close of business on the tenth
(10) day following the date on which such notice of the date of the annual
meeting was mailed. A shareholder's notice to the Secretary shall set forth as
to each matter the shareholder proposes to bring before the annual meeting (a) a
brief
-3-
<PAGE>
description of the business desired to be brought before the annual meeting, (b)
the name and address, as they appear on the Corporation's books, of the
shareholder proposing such business, (c) the class and number of shares of the
Corporation which are beneficially owned by the shareholder, and (d) any
material interest of the shareholder in such business. Notwithstanding anything
in these By-laws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 10.
The presiding officer of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 10; and if
he should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted.
SECTION 11. Office. No person shall be required to own, hold or
------
control stock in the Corporation as a condition precedent to holding an office
in the Corporation.
ARTICLE IV
Board of Directors
------------------
SECTION 1. Powers. The business of the Corporation shall be managed
------
and its corporate powers shall be exercised by its Board of Directors, except as
otherwise provided by statute or by the Articles of Incorporation.
SECTION 2. Number. The Board of Directors is divided into three (3)
------
classes serving staggered three-year terms. Until changed by resolution of the
Board of Directors, at any time and from time to time, the Board shall consist
of not more than nine (9) nor less than three (3) directors.
SECTION 3. Election and Term of Office. Directors shall be elected
---------------------------
at the annual meeting of shareholders, except as provided in Sections 4 and 5 of
this Article. At each meeting of shareholders for the election of directors at
which a quorum is present, the persons receiving the greatest number of votes,
up to the number of directors to be elected, shall be the directors. Each
director shall hold office until his successor is elected and qualified, or
until his earlier resignation by written notice to the Secretary of the
Corporation, or until his removal from office.
SECTION 4. Vacancies. Any vacancy occurring in the Board of
---------
Directors, including any vacancy created by reason of an increase in the number
of directors, may be filled by the affirmative vote of a majority of the
directors then in office, though less than a quorum of the Board of Directors.
A director elected to fill a vacancy resulting from an increase in the number of
directors shall hold office for a term that shall coincide with the remaining
term of the class of directors to which he is elected. A director elected to
fill a vacancy not resulting from an increase in the number of directors shall
have the same remaining term as that of his or her predecessor. Except in the
case of newly created directorships where the directors fail to fill any such
vacancy, shareholders may not fill vacancies on the Board of Directors. In such
event, the shareholders may do so at the next annual or special meeting called
for that purpose. If there are no directors in office, then any officer or any
shareholder or an executor, administrator, trustee or guardian of a shareholder
or other fiduciary entrusted with like responsibility for the person or
-4-
<PAGE>
estate of a shareholder, may call a special meeting of shareholders for the
purpose of electing a new Board of Directors.
SECTION 5. Nominations.
-----------
(a) Only persons who are nominated in accordance with the procedures
set forth in these By-laws shall be eligible to serve as directors. Nominations
of persons for election to the Board of Directors of the Corporation may be made
at a meeting of shareholders (i) by or at the direction of the Board of
Directors or (ii) by any shareholder of the Corporation who was a shareholder of
record at the time of giving of notice provided for in these By-laws, who is
entitled to vote for the election of directors at the meeting and who shall have
complied with the notice procedures set forth below in Section 5(b).
(b) In order for a shareholder to nominate a person for election to
the Board of Directors of the Corporation at a meeting of shareholders, such
shareholder shall have delivered timely notice of such shareholder's intent to
make such nomination in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation (i) in the case of an annual
meeting, not less than one hundred and thirty (130) days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
-------- -------
the event that the date of the annual meeting is changed by more than thirty
(30) days from such anniversary date, notice by the shareholder to be timely
must be so received not later than the close of business on the tenth (10) day
following the day on which notice of the date of the meeting was mailed, or (ii)
in the case of a special meeting at which directors are to be elected, not later
than the close of business on the tenth (10) day following the day on which
notice of the date of the meeting was mailed. Such shareholder's notice shall
set forth (i) as to each person whom the shareholder proposes to nominate for
election as a director at such meeting all information relating to such person
that is required to be disclosed in solicitations of proxies for election of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (ii) as to the shareholder giving the notice
(A) the name and address, as they appear on the Corporation's books, of such
shareholder and (B) the class and number of shares of the Corporation which are
beneficially owned by such shareholder and also which are owned of record by
such shareholder; and (iii) as to the beneficial owner, if any, on whose behalf
the nomination is made, (A) the name and address of such person and (B) the
class and number of shares of the Corporation which are beneficially owned by
such person. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the Corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee.
(c) No person shall be eligible to serve as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 5. The chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by this Section 5, and if he should so determine, he shall
so declare to the meeting and the defective nomination shall be disregarded. A
shareholder seeking to nominate a person to serve as a director must also comply
with all applicable requirements of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder with respect to
the matters set forth in this Section 5.
-5-
<PAGE>
SECTION 6. Removal. At a special meeting of the shareholders, duly
-------
called expressly for that purpose as provided in these By-laws, any director or
directors, by the affirmative vote of the holders of a majority of all the
shares of stock outstanding and entitled to vote for the election of directors,
may be removed from office, either with or without cause, and the remaining
directors, in the manner provided in these By-laws, shall fill any vacancy or
vacancies created by such a removal.
SECTION 7. Place of Meetings. Meetings of the Board of Directors of
-----------------
the Corporation, annual, regular or special, may be held either within or
without the State of Florida.
SECTION 8. Annual Meetings. The Board of Directors shall hold an
---------------
annual meeting each year immediately after the annual meeting of the
shareholders at the place where such meeting of the shareholders was held for
the purpose of election of officers and for the consideration of any other
business that may be properly brought before the meeting. No notice of any kind
to either old or new members of the Board of Directors for such annual meeting
shall be necessary.
SECTION 9. Other Meetings. Regular meetings, other than the annual
--------------
meeting, of the Board of Directors may be held without notice at such time and
at such place as shall from time to time be determined by resolution of the
Board of Directors. Special meetings of the Board of Directors may be called by
any two directors, the Chairman of the Board, the Chief Executive Officer, or
the President or Secretary on two (2) days' written notice to each director,
either personally or by mail or by telegram. Notice of any special meeting of
the Board of Directors need not be given to any director who signs a waiver of
notice either before or after the meeting. Attendance by a director at a
special meeting shall constitute a waiver of notice of such special meeting,
except where a director attends a meeting for the express purpose of objecting
to the transaction of any business because such special meeting is not lawfully
convened.
SECTION 10. Quorum. A majority of all the directors shall constitute
------
a quorum for the transaction of business. The affirmative vote of the majority
of directors present at a meeting where a quorum is present shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, a majority of the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
SECTION 11. Compensation. The Board of Directors shall have the
------------
authority to fix the compensation of directors, and the directors may be paid
their expenses, if any, for attendance at each meeting of the Board of
Directors.
SECTION 12. Executive Committee. The Board, by resolution passed by
-------------------
a majority of the whole Board, may designate from among its members an executive
committee and one or more other committees, which committees, to the extent
provided in such resolution, shall have and exercise any or all of the authority
of the Board of Directors, except that no such committee shall have the
authority to take actions prohibited to such committees by the Florida Statutes.
-6-
<PAGE>
SECTION 13. Presence at Meetings. Members of the Board of Directors
--------------------
or any committee thereof shall be deemed present in person at a meeting of such
Board or committee if a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other
is used.
SECTION 14. Written Consent. Any action of the Board of Directors or
---------------
of any committee thereof, which is required or permitted to be taken at a
meeting, may be taken without a meeting if a consent in writing, setting forth
the action so to be taken, signed by all of the members of the Board of
Directors or of the committee, as the case may be, is filed in the minutes of
the proceedings of the Board of Directors or committee.
ARTICLE V
Officers
--------
SECTION 1. Designation. The Corporation shall have a Chairman of the
-----------
Board, a Chief Executive Officer, a President, a Chief Operating Officer, a
Chief Financial Officer and a Secretary. The Corporation also may have, at the
discretion of the Board of Directors, one or more Vice Presidents (however
titled) and Assistant Secretaries, and such other officers as may be appointed
in accordance with the provisions of Section 3 of this Article. One person may
hold two or more offices. In its discretion, the Board of Directors may choose
not to fill any office for any period as it may deem advisable, except that the
offices of Chief Executive Officer, President and Secretary shall be filled as
expeditiously as possible.
SECTION 2. Election. The Board of Directors shall elect officers of
--------
the Corporation at the annual meeting of the Board of Directors or at a special
meeting called for that purpose. Each such officer shall hold his office until
he shall resign or shall be removed or otherwise disqualified to serve, or his
successor shall be elected and qualified. Officers shall be elected by the
affirmative vote of the majority of directors present at a meeting where a
quorum is present.
SECTION 3. Removal and Resignation. Any officer elected or appointed
-----------------------
by the Board of Directors may be removed, either with or without cause, by the
affirmative vote of the majority of directors present at any meeting where a
quorum is present. Any officer may resign at any time by giving written notice
to the Board of Directors, or to the Chairman of the Board, the Chief Executive
Officer, the President or the Secretary of the Corporation. Any such
resignation shall take effect at the date of the receipt of such notice or at
any later time specified therein, and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Removal shall be without prejudice to the contract rights, if any, of the person
so removed. Election or appointment of an officer or agent shall not of itself
create contract rights.
SECTION 4. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or any other cause may be filled by the
Board of Directors.
-7-
<PAGE>
SECTION 5. Chairman of the Board. The Chairman of the Board, if
---------------------
present, shall preside at all meetings of the Board of Directors and exercise
and perform such other powers and duties as may from time to time be assigned to
him by the Board of Directors or prescribed by these By-laws.
SECTION 6. Chief Executive Officer. The Chief Executive Officer,
-----------------------
subject to the control of the Board of Directors, shall have general
supervision, direction and control of the business and affairs of the
Corporation. He shall preside at all meetings of the shareholders, and in the
absence of the Chairman of the Board, shall preside at all meetings of the Board
of Directors. He shall execute deeds, bonds, mortgages and other instruments on
behalf of the Corporation, except where required or permitted by law to be
signed and executed otherwise and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors to some other officer or
agent of the Corporation. He shall be ex-officio a member of all the standing
committees, if any, shall have the general powers and duties of management
usually vested in the office of the chief executive officer of a corporation,
and shall have such other powers and duties as may be prescribed by the Board of
Directors or these By-laws.
SECTION 7. President. The President shall perform such duties and
---------
services and shall have such authority and responsibilities as shall be assigned
to or required from time to time by the Chairman of the Board or the Board of
Directors.
SECTION 8. Chief Operating Officer. The Chief Operating Officer
-----------------------
shall have direct management responsibility for the general business operations
of the Corporation, and he shall have the general powers and duties usually
vested in the office of chief operating officer of a corporation, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these By-laws.
SECTION 9. Chief Financial Officer. The Chief Financial Officer
-----------------------
shall have responsibility for all financial and accounting matters. The Chief
Financial Officer shall have the general powers and duties usually vested in the
office of the chief financial officer of a corporation, and shall have such
other powers and duties as may be prescribed by the Board of Directors or these
By-laws.
SECTION 10. Vice Presidents. The Vice Presidents, if any, shall have
---------------
such powers and perform such duties as may be prescribed from time to time for
them respectively by the Chairman of the Board, the Chief Executive Officer, the
President, the Board of Directors or these By-laws.
SECTION 11. Secretary. The Secretary shall keep, or cause to be
---------
kept, a book of minutes at the registered or principal office, or such other
place as the Board of Directors may order, of all meetings of directors and
shareholders, with the time and place of holding, whether annual, regular or
special, and if special, how authorized, the notice thereof given, the names of
those present at directors' meetings, the number of shares present or
represented at shareholders' meetings and the proceedings thereof.
The Secretary shall give, or cause to be given, notice of all the
meetings of the shareholders and of the Board of Directors required by these By-
laws or by law to be given, and he shall keep the seal of the Corporation in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or these By-laws.
-8-
<PAGE>
SECTION 12. Treasurer. The Treasurer shall, in the absence or
---------
disability of the Chief Financial Officer, act with all of the powers and be
subject to all the restrictions of the Chief Financial Officer. The Treasurer
shall also have such other powers and duties as may be prescribed from time to
time by the Chairman of the Board, the Chief Executive Officer, the President
and the Board of Directors.
SECTION 13. Compensation. The compensation of the officers and
------------
agents of the Corporation shall be fixed from time to time by the Board of
Directors, or by such officer or officers as said Board shall direct, and no
officer shall be prevented from receiving such compensation by reason of the
fact that he is or was a director of the Corporation.
ARTICLE VI
Certificates of Stock
---------------------
SECTION 1. Description. Every shareholder shall be entitled to have
-----------
for each kind, class or series of stock held a certificate certifying the number
of shares thereof held of record by him. Certificates shall be signed by the
President or a Vice-President and the Secretary or an Assistant Secretary, and
may be sealed with the seal of the Corporation. The seal may be facsimile,
engraved or printed. Where such certificate is signed by a transfer agent or a
registrar other than the Corporation itself, the signature of any of those
officers named herein may be facsimile. In case any officer who signed, or
whose facsimile signature has been used on, any certificate shall cease to be
such officer for any reason before the certificate has been delivered by the
Corporation, such certificate may nevertheless be adopted by the Corporation and
issued and delivered as though the person who signed it or whose facsimile
signature has been used thereon had not ceased to be such officer.
SECTION 2. Lost Certificates. The Corporation may issue a new
-----------------
certificate of stock in the place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed. The Corporation may require the
owner of the lost, stolen or destroyed certificate, or his legal representative,
to give the Corporation a bond sufficient to indemnify the Corporation against
any claim that may be made against it on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
SECTION 3. Transfers of Stock. Upon surrender to the Corporation or
------------------
the transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books, except as otherwise required by law or by the terms
of the stock certificate.
SECTION 4. Registered Shareholders. The Corporation shall be
-----------------------
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls, to the extent permitted by law, a person registered on its
books as the owner of shares, and shall not be bound to recognize any
-9-
<PAGE>
equitable or other claim to interest in such shares on the part of any other
person, regardless of whether it shall have express or other notice thereof,
except as otherwise required by law.
SECTION 5. Restriction on Ownership, Voting and Transfer; Right to
-------------------------------------------------------
Redeem. Article VIII of the Articles of Incorporation restricts the ownership,
- ------
voting and transfer of shares of capital stock of the Corporation to the extent
necessary to prevent ownership of such shares by Aliens (as defined) from
violating the Communications Act of 1934, as amended (the "Communications Act"),
and the regulations of the Federal Communications Commission (the "FCC
Regulations"). In addition, Article VIII of the Articles of Incorporation
entitles the Corporation to redeem shares of capital stock determined by the
Board of Directors to be owned beneficially by an Alien or Aliens if such
ownership violates the Communications Act or FCC Regulations. Each certificate
representing shares of capital stock of the Corporation shall contain a legend
referencing such restrictions and right to redeem set forth in Article VIII of
the Articles of Incorporation.
ARTICLE VII
General Provisions
------------------
SECTION 1. Dividends. The Board of Directors, at any meeting
---------
thereof, subject to any restrictions established by law or contained in the
Articles of Incorporation, may declare and pay dividends upon the shares of its
capital stock in cash, property or its own shares, except when the Corporation
is insolvent or when the payment thereof would render the Corporation insolvent.
SECTION 2. Checks. All checks or demands for money and notes of the
------
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may designate from time to time.
SECTION 3. Fiscal Year. The fiscal year of the Corporation shall end
-----------
on the last day of December.
-10-
<PAGE>
SECTION 4. Execution of Deeds, Contracts and Other Documents. Except
-------------------------------------------------
as otherwise provided by the Articles of Incorporation and the Board of
Directors, all deeds and mortgages made by the Corporation and all other written
contracts and agreements to which the Corporation shall be a party may be
executed on behalf of the Corporation by the Chairman of the Board, the Chief
Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, or one or more Vice Presidents, if any shall have been
elected, and may be attested to and the corporate seal affixed thereto by the
Secretary or Assistant Secretary. The Board of Directors may authorize the
execution of deeds, mortgages and all other written contracts and agreements to
which the Corporation may be a party by such other officers, assistant officers
or agents, as may be selected by the Chairman of the Board, Chief Executive
Officer, President, Chief Operating Officer or Chief Financial Officer from time
to time and with such limitations and restrictions as authorization may
prescribe.
ARTICLE VIII
Amendment to By-laws
--------------------
These By-laws may be altered, amended, repealed or added to by the
vote of a majority of the Board of Directors present at any regular meeting of
the said Board, or at a special meeting of the directors called for that
purpose, provided a quorum of the directors are present at such meeting, unless
the power to alter, amend, repeal or add to the By-laws is reserved to the
shareholders by the Articles of Incorporation.
ARTICLE IX
Indemnification
---------------
SECTION 1. General. The Corporation shall indemnify to the fullest
-------
extent permitted by law any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a director, officer, employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of any other corporation, partnership, joint venture, trust or
other enterprise.
SECTION 2. Expenses. To the extent that a director, officer,
--------
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section 1
above, or in any defense of any claim, issue or matter therein, he shall be
indemnified against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection therewith.
SECTION 3. Standard of Conduct. Unless a court of competent
-------------------
jurisdiction determines otherwise, any indemnification shall be made hereunder
only if a determination is made that indemnification of the director, officer,
employee or agent is proper in the circumstances because such person has met the
applicable standard of conduct required by law. Such determination shall be
made as required by law.
-11-
<PAGE>
SECTION 4. Advance Expenses. Expenses incurred in defending any
----------------
action, suit or proceeding shall be paid in advance of the final disposition of
such action, suit or proceeding as authorized in the manner provided in Section
3 above upon receipt of any undertaking by or on behalf of the director,
officer, employee or agent to repay such amount, if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article.
SECTION 5. Benefit. The indemnification provided by this Article
-------
shall not be deemed exclusive of any other rights to which any person seeking
indemnification may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent of the Corporation and shall inure to the benefit of
the heirs, executors and administrators of such a person.
SECTION 6. Insurance. The Corporation shall be empowered to purchase
---------
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
liability asserted against him and incurred by him in any such capacity or
arising out of his status as such, whether or not the Corporation would have the
power to indemnify him against such liability under the provisions of this
Article.
SECTION 7. Affiliates. For the purposes of this Article, references
----------
to "the Corporation" include all constituent corporations absorbed in a
consolidation or merger, as well as the resulting or surviving corporation, so
that any person who is or was a director, officer, employee or agent of such a
constituent corporation or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise shall stand in the same
position under the provisions of this Article with respect to the resulting or
surviving corporation as he would if he had served the resulting or surviving
corporation in the same capacity.
SECTION 8. Survival. Upon the death of any person having a right to
--------
indemnification under this Article, such right shall inure to his heirs and
legal representatives. In addition, such heirs and legal representatives shall
be entitled to indemnification, under the terms of this Article, against all
expenses (including attorneys' fees, judgments, fines and amounts paid in
settlement) imposed upon or reasonably incurred by them in connection with any
claim, action, suit or proceeding described in the foregoing Section 1 on
account of such deceased person.
ARTICLE X
Severability
------------
The provisions of these By-laws shall be separable each from any and
all other provisions of these By-laws, and if any such provision shall be
adjudged to be invalid or unenforceable, such invalidity or unenforceability
shall not affect any other provision hereof, or the powers granted to this
Corporation by the Articles of Incorporation or By-laws.
-12-
<PAGE>
ARTICLE XI
Control-Share Acquisitions
--------------------------
Section 607.0902 of the Florida Business Corporation Act, pertaining
to control-share acquisitions, shall not apply to the Corporation.
-13-
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
-----------------------------------------
This FIRST AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT
(this "Amendment") is made and entered into as of February 3, 1998, by and
between TresCom International, Inc., a Florida corporation (the "Employer"), and
Wesley T. O'Brien (the "Executive").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Employer and the Executive previously entered into an
Amended and Restated Employment Agreement dated as of February 15, 1997 (the
"Agreement"); and
WHEREAS, it is now the intention of the Employer and the Executive to
amend the Agreement as set forth below;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Employer and the Executive
agree as follows:
1. Section 3 of the Agreement is hereby supplemented as follows:
3.8 Special Bonus.
-------------
3.8.1 In the event of a Change in Control, and subject to
the provisions of Sections 3.8.2 and 3.8.3, the Executive shall
be eligible to receive a one-time special bonus of $1.5 million
(the "Special Bonus").
3.8.2 The total amount of the Special Bonus shall be
payable to the Executive in three equal installments as follows:
(i) the first installment shall be payable contemporaneously with
the closing of any transaction constituting a Change in Control,
or, if no closing is required with respect to such Change in
Control, within 15 business days after public notice of the
Change in Control has been made; (ii) the second installment
shall be payable on the first anniversary of the payment of the
first installment; and (iii) the third installment shall be
payable on the second anniversary of the payment of the first
installment; provided, however, that each such payment shall be
contingent on the Executive being then currently employed by the
Employer, or any corporate successor or successor's assignee (the
"Successor"); and provided, further, that if after a Change in
Control, there is a Termination pursuant to Section 4.3.2, 4.3.3,
4.3.4, 4.3.5 or 4.3.6 of the Agreement, the remaining amount of
the Special Bonus, if any, shall accelerate and be payable to the
Executive (or his personal representative) within five business
days of such Termination, except for a Termination pursuant to
Section 4.3.4 of the Agreement, in which case such Special Bonus
shall be immediately payable upon such Termination.
<PAGE>
3.8.3 Notwithstanding anything to the contrary contained in
this Agreement, if payments under this Section 3.8 are to be made
as a result of a Change in Control, and such Change in Control
constitutes a change in the ownership or effective control of the
Employer (within the meaning of Section 280G of the Internal
Revenue Code (the "Code") and the regulations issued thereunder),
the amount so payable shall be reduced, so that the present value
of such payments and the value of accelerating the exercise of
any stock options in respect of such Change in Control
(determined in accordance with Code Section 280G(d)(4)), computed
on the date of such Change in Control, shall not exceed 2.99
times the Executive's average annual compensation which is
includible in his gross income (for federal income tax purposes)
during the most recent five taxable years ending before that date
on which such Change in Control occurs.
2. Section 4.2.2(vi) of the Agreement is hereby amended and restated
in its entirety as follows:
"(vi) "Good Reason" shall, upon a Change in Control, mean the
occurrence, without the Executive's express written consent, of
any of the following circumstances, unless such circumstances are
fully corrected prior to the date of termination specified in the
termination notice given with respect thereto: (A) if the
Executive is requested to execute a new employment contract by a
Successor, the failure of the Executive to obtain an agreement in
form and substance reasonably satisfactory to him from such
Successor to provide employment to the Executive in the capacity
of a senior executive, at his then current Base Salary, for a
period of at least two years from the date of the Change in
Control; (B) the failure of the Executive to continue to be
retained as an employee in a senior executive position; (C) a
reduction by the Employer or the Successor in the Executive's
Base Salary currently payable pursuant to Section 3.1 hereof; or
(D) a relocation of the Executive's office to a location more
than 50 miles from the current executive office of the Employer
and a failure to make the Executive whole for all losses and
costs reasonably incurred in connection with the relocation,
including, but not limited to, moving expenses, forfeited bonds,
fees or escrows to clubs or other organizations and losses from
the sale of the Executive's personal residence."
3. All capitalized terms used herein and not otherwise defined shall
have the meaning ascribed to them in the Agreement.
4. Except as expressly provided for in this Amendment, all terms,
conditions or obligations contained in the Agreement shall remain unchanged and
in full force and effect.
5. In the case of any inconsistency between this Amendment and the
terms of the Agreement, the terms of this Amendment shall govern.
-2-
<PAGE>
6. Notwithstanding anything to the contrary contained in this
Amendment or the Agreement, Section 3.8 shall survive the termination of the
Agreement, if any, for a period of two years from the date of any Change in
Control.
7. Notwithstanding anything to the contrary contained in the
Agreement, the Executive's rights and obligations under this Amendment and the
Agreement shall not be transferable by assignment or otherwise, and any
purported assignment, transfer or delegation thereof shall be null and void.
This Amendment and the Agreement shall inure to the benefit of, and be binding
upon and enforceable by any Successor.
8. THIS AMENDMENT SHALL BE GOVERNED BY AND INTERPRETED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO SUCH STATE'S CONFLICT
OF LAWS RULES.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the day and year first above written.
TRESCOM INTERNATIONAL, INC.
By: /s/ Rudolph McGlashan
--------------------------------
Name: Rudolph McGlashan
Title: Chief Operating Officer
By: /s/ Wesley T. O'Brien
--------------------------------
Name: Wesley T. O'Brien
-3-
<PAGE>
EXHIBIT 10.19
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT ("Agreement") is made this 15th day of December,
1997, by and between William Paquin ("Employee") and TresCom International, Inc.
("Employer").
WITNESSETH
WHEREAS, Employee is an employee of Employer pursuant to that certain
Employment Agreement, dated June 15, 1997, a copy of which is attached hereto as
EXHIBIT "A"; and
WHEREAS, the Employer has exercised its rights under the Employment
Agreement to terminate the Employee's employment "without cause"; and
WHEREAS, the Employee and Employer have agreed upon the terms of
separation, consistent with the terms of the Employment Agreement.
NOW THEREFORE, in consideration of the mutual promises contained herein and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties agree as follows:
1. RECITALS. The above recitals are true and correct and are incorporated
--------
herein by this reference.
2. RETURN OF PROPERTY. On or before the date of this Agreement, the
------------------
Employee will return to the Employer any and all documents, lists, data,
confidential information, trade secrets, keys, equipment or other property in
his possession belong to the Employer or relating, in any manner, to the
Employer's relationship with the Employee.
3. RELEASE. The Employee hereby releases the Employer and the Employer's
-------
directors, officers, Executive Director, employees, agents, affiliates,
successors and assigns, from all claims or causes of action, known or unknown,
arising prior to and/or on the date of this Agreement, including, but not
limited to, any claim or cause of action arising out of, under, or relating to
the Employee's employment with the Employer, the severance of his employment
relationship, the Civil Rights Act of 1871 (42 U.S.C. Section 1981), the Labor
Management Relations Act of 1947, the Equal Pay Act of 1963, Title VII of the
Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967 (29
U.S.C. Sections 621 et seq.), the Occupational Safety and Health Act of 1970,
the Rehabilitation Act of 1973, the Health Maintenance Organization Act of 1973,
the Employee Retirement Income Security Act of 1974, the Immigration Reform and
Control Act of 1986, the Americans with Disabilities Act of 1990, the Civil
Rights Act of 1991, the Family and Medical Leave Act of 1993, Executive Order
11141, Executive Order 11246, Executive Order 11375, Chapter 760 of the Florida
Statutes, the Florida Civil Rights Act of 1992, the Broward County Human Rights
Act (93-386, Special Acts, Laws of Florida), the Broward County Human Rights Act
(Chapter 16 1/2, Broward County Code) and/or any other state, federal or local
law.
<PAGE>
4. WORKPLACE INJURY. The Employee acknowledges and represents that he
----------------
suffered no workplace injury during the period of his employment.
5. ADDITIONAL PAYMENT AND SETTLEMENT SUM.
--------------------------------------
a. SEPARATION WAGES. After execution of this Agreement by the
----------------
Employee and through June 15, 1998, Employer shall pay to Employee, pursuant to
Section 4.3.3 of the Employment Agreement, the Additional Payment, as defined in
the Employment Agreement, equal only to the unpaid Base Salary, and shall
reimburse Employee for reasonable business expenses incurred prior to the date
of termination, as well as reasonable attorney's fees associated with this
Agreement, not to exceed $500.00, all subject to the provisions of the
Employment Agreement. Employer elects, as is its option, that the Additional
Payment be made in equal monthly installments from the date of this Agreement
through June 15, 1998, except as may be modified by paragraph 7. The Employer
will withhold all applicable taxes from the Additional Payment.
b. SETTLEMENT SUM. In consideration of the matters contained
--------------
herein, the Employer shall pay to the Employee the sum $5,000 (the "Settlement
Sum"). The Employee expressly acknowledges the adequacy of the Settlement Sum
for such purposes. The Settlement Sum shall be paid to the Employee, following
execution of this Agreement by the Employee and the expiration of the seven (7)
day revocation period described in paragraph 9 below. The Employer will
withhold all applicable taxes from the Settlement Sum and this withholding will
reduce the net amount received by the Employee. This Settlement Sum is the only
additional consideration to the terms of paragraph 5.a.
c. During the time period of the Additional Payment, Employee's
stock options will continue in effect and the shares under option will continue
to vest and become exercisable in accordance with the stock option agreements.
6. NO ADMISSION. The parties agree that this Agreement does not
------------
constitute an admission of any violation by the Employer of the laws identified
in paragraph 3 above, or any other wrongdoing. This Agreement is offered in
settlement and is without prejudice to the Employer.
7. SURVIVAL OF EMPLOYMENT AGREEMENT COVENANTS. The Employer and Employee
------------------------------------------
agree that the restrictive covenants contained in paragraph 6 of the Employment
Agreement and the Confidentiality Provisions contained in paragraph 5 of the
Employment Agreement shall survive the Employee's termination of employment and
shall remain in full force and effect for their applicable terms. With respect
to the "non-compete" covenants, they shall survive so long as Employee is
receiving the Additional Payment. If Employee begins employment elsewhere
during the term of the Additional Payment, the Additional Payment obligation and
the "non-compete" obligation shall end.
<PAGE>
8. CONFIDENTIALITY.
----------------
a. LIMITED DISCLOSURE. The Employer and the Employee agree to keep
-------------------
the existence and the terms of this Agreement strictly confidential and not to
disclose the same to third parties except that:
(1) The Employee and/or the Employer may disclose the same as
necessary to secure legal or tax advice;
(2) The Employer may disclose the same to its Board of Directors,
its Executive Director and to such other persons who need to know of same in
order to arrange for payment of the Settlement Sum.
(3) The Employer and the Employee may disclose the same as
necessary to enforce same and/or prevent prosecution of an action in
contravention hereof.
b. DISCLOSURE PURSUANT TO LEGAL PROCESS/NOTICE. In the event either
--------------------------------------------
the Employee or the Employer is subpoenaed, summoned or noticed to appear for a
deposition or other legal proceeding involving the other party to this Agreement
or this Agreement, the subpoenaed, summoned or noticed party shall notify the
other party, in writing of such subpoena, summons or notice not less than 20
days prior to their scheduled appearance. It is contemplated that such 20 day
period shall provide adequate time within which appropriate protective orders
may be sought by the other party hereto.
c. LIQUIDATED DAMAGES AND OTHER RELIEF. In the event the Employee
------------------------------------
violates this confidentiality provision of the Agreement, he acknowledges that
the Employer would be irreparably harmed and that the damage the Employer would
suffer would be difficult to ascertain. Accordingly, the Employee agrees that,
in the event he violates this confidentiality provision and the Employer
proves such a violation to the satisfaction of an arbitrator, the Employee will
pay the Employer, as liquidated damages and not as a penalty, the amount of Five
Thousand and 00/100 Dollars ($5,000) ("Liquidated Damages"). This subparagraph
shall not be deemed to modify or apply to any prior Employment Agreement
executed by Employee.
9. OPPORTUNITY TO REVIEW & RIGHT TO COUNSEL. The Employee acknowledges
-----------------------------------------
that he has been advised, in writing, that he has twenty-one (21) days to
consider this Agreement and to review the terms hereof with an attorney prior to
execution. The Employer also acknowledges that he has been advised that he has
seven (7) days after he signs this Agreement to revoke it by notifying Employer
in writing. The Employee further states that he has carefully read this
Agreement, has reviewed the same with legal counsel, knows and understands the
contents hereof and its binding legal effect. He signs the same of his own free
will and act, and it is his intention that he be legally bound hereby.
<PAGE>
10. FUTURE EMPLOYMENT. The Employee will not, hereafter, apply for
------------------
employment with employer.
11. ARBITRATION. Any dispute with respect to this Agreement shall be
------------
decided by arbitration, in Broward County, Florida and utilizing/applying
Florida law. In the event either party wishes to initiate an arbitration
proceeding, said party shall notify the other party, in writing, of such desire
("Notice"). Within 10 days after the date of the Notice, each party shall
submit the name of an arbitrator of their choosing to the other party. These
two arbitrators shall, within 20 days after being selected, select a third
arbitrator. Within 60 days after the date of the Notice, a hearing will be held
at which each party will have an opportunity to present evidence and legal
argument. Within 90 days after the date of the Notice, the panel of arbitrators
shall issue a final and binding, written decision of the issue presented.
12. WAIVER OF JURY TRIAL. The Employer and the Employee hereby knowingly,
--------------------
voluntarily, and intentionally waive any right to a jury trial in respect to any
claims arising in connection with the Employee's employment with the Employer
and/or this Agreement.
13. SEVERABILITY. If any provision(s) in this Agreement are held by a
------------
court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall nevertheless continue in full force without being
impaired or invalidated in any way.
14. ENTIRE AGREEMENT. The Employer and the Employee agree that this
-----------------
Agreement sets forth all the promises and agreements between them and supersedes
all prior and contemporaneous agreements, understandings, inducements or
conditions, expressed or implied, oral or written, except as herein contained.
IN WITNESS WHEREOF, the Employer and the Employee have caused this
Agreement to be executed on the date set forth above.
WITNESSES: TRESCOM INTERNATIONAL, INC.
/s/ Laura A. Meli By: /s/ Wesley T. O'Brien
- ------------------------------------- -----------------------------------
- -------------------------------------
WILLIAM PAQUIN
/s/ William Paquin
- ------------------------------------- --------------------------------------
- -------------------------------------
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF TRESCOM INTERNATIONAL, INC.
---------------------------------------------------
The following is a list of the corporations that are subsidiaries of
TresCom International, Inc., a Florida corporation (the "Company"). If
indented, the corporation listed is a wholly-owned subsidiary of the corporation
under which it is listed.
<TABLE>
<CAPTION>
===============================================================================
Name of Corporation State of
Incorporation
<S> <C>
- -------------------------------------------------------------------------------
Rate Reduction Center, Inc. Florida
- -------------------------------------------------------------------------------
Least Cost Routing, Inc. Florida
- -------------------------------------------------------------------------------
Rockwell Communications Corporation Florida
- -------------------------------------------------------------------------------
Intex Telecommunications, Inc. South Carolina
- -------------------------------------------------------------------------------
TresCom Network Services, Inc./1/ Florida
- -------------------------------------------------------------------------------
TresCom U.S.A., Inc. (formerly known as Teracom U.S.A., Inc.) Florida
- -------------------------------------------------------------------------------
Global Telephone Holdings, Inc. U.S. Virgin
Islands
- -------------------------------------------------------------------------------
Interisland Telephone Corp. U.S. Virgin
Islands
- -------------------------------------------------------------------------------
The St. Thomas and San Juan Telephone Company, Inc. U.S. Virgin
Islands
- -------------------------------------------------------------------------------
STSJ Overseas Telephone Company, Inc. (d/b/a Puerto Rico
TresCom Puerto Rico)
- -------------------------------------------------------------------------------
OTC Network Assets, Inc. Puerto Rico
- -------------------------------------------------------------------------------
Puerto Rico Telecom Corporation (formerly known as New York
Caribbean Telecommunications, Inc.)
- -------------------------------------------------------------------------------
STSJ Network Assets, Inc. U.S. Virgin
Islands
===============================================================================
</TABLE>
__________________
/1/ TresCom Network Services, Inc. is 85.1% owned by the Company and 14.9% owned
by The St. Thomas and San Juan Telephone Company, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-1912) pertaining to the Second Amended and Restated 1994 Stock
Option Plan of TresCom International, Inc. of our reports dated February 27,
1998 with respect to the consolidated financial statements and schedule of
TresCom International, Inc. in the Annual Report (Form 10-K) of TresCom
International, Inc. for the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Atlanta, Georgia
March 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF TRESCOM INTERNATIONAL, INC. AT DECEMBER 31, 1997
AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,481
<SECURITIES> 0
<RECEIVABLES> 39,892
<ALLOWANCES> 8,149
<INVENTORY> 0
<CURRENT-ASSETS> 35,630
<PP&E> 39,340
<DEPRECIATION> 9,668
<TOTAL-ASSETS> 108,429
<CURRENT-LIABILITIES> 29,886
<BONDS> 0
0
0
<COMMON> 505
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 108,429
<SALES> 157,641
<TOTAL-REVENUES> 157,641
<CGS> 124,365
<TOTAL-COSTS> 36,386
<OTHER-EXPENSES> 6,599
<LOSS-PROVISION> (9,709)
<INTEREST-EXPENSE> 1,146
<INCOME-PRETAX> (10,855)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,855)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,855)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
