<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-KSB/A
(AMENDMENT NO.1)
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended March 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-18663
---------------------------
TESCORP, INC.
(Name of small business issuer in its charter)
Texas 74-2129403
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
327 Congress Avenue, Suite 200 78701
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number: (512) 476-2995
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.02 per share
(Title of class)
Series 1990 10% Convertible Preferred Stock
(Title of class)
------------------------------
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended March 31, 1997: $22,580,466
At June 27, 1997 the aggregate market value of Common Stock, $0.02 par
value of the Registrant held by non-affiliates was $34,574,972.
At June 27, 1997, the registrant had 13,189,785 outstanding shares of
Common Stock, $0.02 par value.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
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This Annual Report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act (and
Section 21E of the Exchange Act). The words "expect," "estimate,"
"anticipate," "predict," "believe," and similar expressions and variations
thereof are intended to identify forward-looking statements. Such statements
appear in a number of places in this Annual Report and include statements
regarding the intent, belief or current expectations of the Registrant, its
directors or its officers with respect to, among other things: (i) trends
affecting the Registrant's financial condition or results of operations; (ii)
the Registrant's financing plans; (iii) the Registrant's business and growth
strategies; and (iv) the declaration and payment of dividends. Shareholders
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors. The accompanying information contained in this
Annual Report including, without limitation, the information set forth under
the headings "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business," as well as information
contained in the Registrant's filings with the Securities and Exchange
Commission, identify important factors that could cause such differences.
ITEM 1. DESCRIPTION OF BUSINESS
Tescorp, Inc. ("Tescorp" or the "Company") acquires, develops and
operates cable television and telecommunication systems in the Republic of
Argentina ("Argentina"), with concentrations in the Patagonia and Tierra del
Fuego regions. Management anticipates that it will continue to focus the
Company's acquisition activity in Argentina. However, the Company is also
exploring cable and other telecommunications opportunities in other Latin
American markets that are consistent with the Company's strategy. At March 31,
1997, the Company provided cable television service to approximately 69,000
subscribers. In addition, the Company holds a license to provide data services
to its customers under the name "Patagonia On-Line(TM)."
To facilitate the acquisition and management of its Argentine cable
television systems and to comply with Argentine regulatory policies, Tescorp
entered into a contractual joint venture (the "Joint Venture"). Tescorp,
through its subsidiary, Austrial Communications Corp., and its Joint Venture
partners (the "Joint Venture Partners") organized Comunicaciones Austral S.A.,
Cabledifusion S.A. and SMR S.A. (collectively, the "Argentine Joint Venture
Companies") to acquire and manage companies that operate cable television
systems in Argentina (the "Argentine Cable Companies"). The Argentine Joint
Venture Companies are owned 97% by the Company and 3% by the Joint Venture
Partners.
From April 1994 (when the Company acquired its first cable television
system) through June 1997, the Company acquired 15 cable television companies
in 13 transactions. The acquisitions have been completed at an average price
of approximately $605 per subscriber, an amount that management believes is
lower than the average price per subscriber paid by the major MSOs in the
Argentine market.
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The Company owns and manages the Argentine Cable Companies through the
Argentine Joint Venture Companies, which are owned 97% by Tescorp and 3% by its
Joint Venture Partners, with the Company having an additional preference to
receive the aggregate amount of its advances to those subsidiaries, plus 12%
per annum (the "Priority Return"), in preference to any other distributions.
The Company has granted to third party a 1% profits interest in its ownership
in the Argentine Joint Venture Companies. Therefore, the Company has the right
to receive 100% of the distributions from the Argentine Joint Venture Companies
until it has received the Priority Return, and 96% of the distributions
thereafter.
HISTORY
The Company was incorporated in 1980 and, through fiscal 1994, it
operated businesses in the oil and gas service industry. The Company's only
remaining operations in that industry were sold in February 1994, and in April
1994 the Company commenced its current business strategy with the acquisition
of its first cable television system in Argentina. Since that time, the
Company has operated exclusively in the cable television business in Argentina.
ARGENTINE MARKET
Management believes that Argentina is an attractive market because of
the following factors:
Attractive Demographics. Argentina represents the third largest market
in Latin America with a total population of 34.8 million. Management estimates
that 88% of the approximately 10.6 million households are located in densely-
populated cities, which contributes to the efficient utilization of
telecommunications technologies, particularly cable television. The population
is relatively affluent and well-educated. Argentina's 1996 per capita Gross
Domestic Product ("GDP") was $8,132, the highest in Latin America, and the
nation's literacy rate of approximately 96% is among the highest in the world.
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1996 Latin America GDP Per Capita in U.S. Dollars
[CHART]
Positive Economic Environment; Stable Currency. In 1991, the
Argentine government implemented a currency board system (the "Convertibility
Plan") and adopted or implemented economic reform laws based upon the adoption
of free market policies, the privatization of state-owned businesses, and the
reduction of the role of government in business (collectively, the "Economic
Reform Plan") to promote a stable currency, free market policies and economic
efficiencies. Under the Convertibility Plan, every Argentine Peso in
circulation is fully backed by one U.S. Dollar held in deposit by the Banco
Central de la Republica, and the Argentine Peso is convertible on a one-for-one
basis into U.S. Dollars. The Economic Reform Plan resulted in the adoption of
free market policies, the privatization of state-owned businesses, and the
reduction of the role of government in business. Passage of and adherence to
the Convertibility Plan and Economic Reform Plan is generally considered to
have resulted in a stabilization in the value of the Argentine Peso relative to
the U.S. Dollar, a sharp reduction in the level of inflation, economic growth,
the influx of foreign investment, improvements in infrastructure, and increased
economic efficiency. Since 1994, the inflation rate in Argentina has been
lower than that of the United States, and the Argentine Peso has traded on
world markets on parity with or at a slight discount to the U.S. Dollar. See
"-- Risk Factors -- Country Risks -- Argentine Economic Risks."
Strong Demand for Cable Television Services. The cable television
industry in Argentina delivers service to approximately 5.2 million
subscribers. The average revenue per cable subscriber is approximately $32.00
per month compared to approximately $36.00 per month in the United States and
the penetration of cable television is the second highest in the world at
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approximately 49% compared to approximately 68% penetration in the United
States. The following table summarizes Latin American cable television
penetration:
[CHART]
Management believes that the following factors have contributed to the high
penetration of cable television in Argentina:
o High demand for sports, news and movie entertainment
o High relative population density and ready availability of aerial
space required for economic construction of cable television
systems
o Highest per capita GDP in Latin America
o Generally, fewer than four "over-the-air" signals available
outside of Buenos Aires
o Improved quality of signal received by cable television
subscribers
Industry Fragmentation. Management estimates that the Argentine
subscription television market is served by as many as 1,000 independent
companies. This highly fragmented environment resulted from regulations
adopted in 1958 that limited licensure to Argentine individuals and prohibited
licensees from holding more than one license. In 1992, these regulations were
amended to allow companies and individuals to hold multiple licenses, which
stimulated market consolidation and facilitated the organization of MSOs.
Possible Future Convergence with Telephony. At present, Argentine
cable television systems are prohibited from offering telephony services, and
Telecom Argentina STET - France Telecom S.A. ("Telecom") and Telefonica de
Argentina S.A. ("Telefonica"), the holders of the two geographic monopoly
concessions for telephony, are prohibited from offering video programming. The
monopoly concessions granted to Telecom and Telefonica expire in November 1997,
but they have the right to apply for an extension of their concessions through
November 2000. Upon expiration of the telephone monopoly period, management
believes that the telecommunications industry will be significantly deregulated
and telecommunications
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convergence will occur as multiple services are offered for sale through common
delivery systems. While the timing and scope of such deregulation is
uncertain, management believes that deregulation of the telecommunications
industry will enable the Company and other telecommunications providers to
bundle telephony, video and data services for delivery to customers through
integrated telecommunications networks. See "-- Competition" and "-- Risk
Factors -- Competition."
ACQUISITION AND EXPANSION STRATEGY
From April 1994 (when the Company acquired its first cable television
system) through June 1997, the Company acquired 15 cable television companies in
13 transactions. The acquisitions have been completed at an average price of
approximately $605 per subscriber, an amount that management believes is lower
than the average price per subscriber paid by the major MSOs in the Argentine
market. The following table summarizes certain information regarding the
acquisitions of the Company's cable television systems:
TESCORP ACQUISITION HISTORY
<TABLE>
<CAPTION>
PURCHASE ESTIMATED PURCHASE
DATE PRICE SUBSCRIBERS PRICE PER
NAME OF COMPANY LOCATION OF OPERATIONS ACQUIRED (IN THOUSANDS) AT ACQUISITION SUBSCRIBER
--------------- ---------------------- -------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Televisora Austral S.A. Ushuaia, Tierra del 4/7/94 $ 1,500 2,700 $556
Fuego Province
Canal 2 TV Austral S.A.(1) Rio Gallegos, Santa 8/16/94 4,900 10,100 485
Cruz Province
Reconquista Televisora Color S.R.L.(2) Reconquista, Santa Fe 12/9/94 4,587 8,600 533
Province
Avellaneda Video Cable S.R.L.(2) Avellaneda, Santa Fe 2/7/95 1,320 2,600 508
Province
Cable Vision Gallegos S.A.(1) Rio Gallegos, Santa 3/1/95 1,850 3,300 561
Cruz Province
Teveca S.R.L.(3) San Carlos de 7/3/95 6,480 8,450 767
Cable Plus Bariloche S.A.(3) Bariloche, Rio Negro
Province
SIR TV S.R.L. Trelew, Rawson & 12/20/95 6,500 12,000 542
Puerto Madryn, Chubut
Province
TV Nieve S.A.(4) Ushuaia, Tierra del 4/1/96 1,350 1,400 964
Fuego Province
Canal 4 Rawson Video Cable(5) Rawson, Chubut 5/31/96 500 1,000 500
Province
TV SIS S.R.L.(2) Reconquista and 8/30/96 1,450 3,100 468
Avellaneda, Santa Fe
Province
Comodoro Rivadavia Sociedad Comercial Comodoro Rivadavia, 12/23/96 3,500 4,130 847
Colectiva de Television y Chubut Province
Radiodifusion(5)
Cable Viedma S.R.L.(6) Viedma, Rio Negro 2/28/97 6,300 9,300 677
Televiedma S.R.L.(6) Province
Carmen de Patagones,
Buenos Aires Province
Vision Codificada S.A.(3) San Carlos de 3/1/97 960 1,380 696
Bariloche, Rio Negro ------- ------ ----
Province
TOTAL/AVERAGE $41,197 68,060 $605(7)
======= ====== ====
</TABLE>
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(1) Presently known as Cablemax S.A.
(2) Presently known as ARTV S.A.
(3) Presently known as BTC S.A., which is 80% owned by the Company through the
Argentine Joint Venture Companies. Teveca S.R.L. and Cable Plus Bariloche
S.A. were acquired simultaneously. Vision Codificada S.A. was subsequently
acquired.
(4) Presently known as Televisora Austral S.A.
(5) Presently known as Transcable S.A.
(6) Cable Viedma S.R.L. and Televiedma S.R.L. were acquired simultaneously.
(7) Calculated as a weighted average.
The Company plans to continue to pursue an aggressive expansion strategy
primarily through the acquisition of existing cable television systems. The
Company will also consider the establishment of new television systems where
existing systems are not available at favorable prices. The Company seeks to
maintain a highly disciplined approach to expansion through the consideration
of many factors, including the: (i) cost of acquisition per subscriber; (ii)
cost of acquisition as a multiple of projected cash flow; (iii) competitive
nature of the market; (iv) pricing of services; (v) technical conditions of the
acquired company; and (vi) the availability and cost of financing.
The Company identifies potential candidates for acquisition through
direct relationships with sellers, referrals and opportunities presented by
third parties. The Company believes that the Argentine telecommunications
industry is in the process of consolidating and that there are numerous
acquisition opportunities. The Company is presently evaluating and negotiating
a number of potential acquisitions, none of which are, individually, material
to the Company. There can be no assurance, however, that the Company will be
able to identify and acquire cable companies on terms favorable to the Company
in the future. See "-- Risk Factors -- Sustainability of Recent Growth Through
Acquisitions."
Since April 1994, the Company has expanded from a single cable
television system to a network of 13 systems in 11 cities, operating in seven
"clusters." The Company has focused its acquisition activities by
concentrating geographically, clustering its systems and consolidating existing
markets.
Concentrating Geographically. The Company concentrates acquisition and
expansion efforts on specific geographic areas to achieve strategic presence.
Management believes that geographic considerations are of major importance in
the ongoing consolidation of the Argentine cable television market and the
anticipated convergence of telecommunications services.
Clustering. The Company focuses its acquisition efforts on creating
"clusters" of cable television systems. Cable television clusters enable the
Company to benefit from economies of scale through reduced marketing and
personnel costs, particularly in systems where cable television service can be
delivered through a central head-end reception facility. Clusters allow the
Company to utilize high level management personnel more cost effectively by
spreading the cost of this personnel over a group of systems clustered within
relatively close geographic
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proximity. In addition, the speed and cost effectiveness of deploying new
products and services are enhanced in operating clusters. The Company has
employed such clustering techniques in the Avellaneda/Reconquista, Carmen de
Patagones/Viedma, and Rawson/Trelew markets.
Consolidating Existing Markets. Historically, the Company has acquired
cable television systems within markets served by more than one cable
television system. Over time, the Company seeks to consolidate markets through
acquisition or attrition. The Company believes that such consolidation
increases customer stability and contributes to improved operating and
financial performance. The Company has consolidated markets through the
acquisition of competing cable television systems in San Carlos de Bariloche,
Carmen de Patagones, Rawson, Rio Gallegos, Trelew, Ushuaia and Viedma. The
Company has also consolidated markets through the acquisition of companies
providing competing subscription television through alternative technologies in
Bariloche (UHF system) and Ushuaia (MMDS system).
OPERATING STRATEGY
The Company seeks to maximize the financial performance of its cable
television systems by: (i) emphasizing customer satisfaction and retention;
(ii) standardizing operations; and (iii) upgrading and expanding existing
networks. A long-term strategy of the Company is to develop an interactive,
integrated network that would enable the bundling of video, voice and data
services.
Emphasizing Subscriber Satisfaction and Retention. Management of the
Company believes that its subscriber base is among its most important assets.
A primary goal of the Company is to retain existing subscribers by providing a
high quality service that is perceived to be an excellent value relative to its
costs, which management believes leads to increased subscriber satisfaction,
reduced subscriber turnover and heightened subscriber interest in purchasing
additional Company services. Specific measures taken by the Company to
emphasize subscriber satisfaction and retention include:
o Customizing Program Offerings. The Company customizes the mix of
programming selections distributed to subscribers in a manner
intended to meet the individual needs of each community served.
o Improving Signal Quality. Upon acquiring a cable television
system, the Company initiates immediate action to improve the
quality of signal received by subscribers, thereby improving
television picture quality. This typically involves rebuilding
the cable television headend facility and repairing the network.
o Improving Customer Service. The Company also implements a
standardized organizational structure, provides specialized
employee training and utilizes a customized subscriber billing
and management system to improve the competence and timeliness of
customer service at acquired cable television systems.
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o Increasing Subscriber Communication. The Company has implemented
a policy of delivering to subscribers, on a monthly basis,
programming guides and invoices for payment. This enables the
Company to communicate regularly with subscribers regarding new
service offerings and policy changes.
o Maintaining Strong Community Image. The Company endeavors to
project a strong community image through professional conduct,
visible improvements in service and plant, and involvement in
local affairs. Through local managers and branding, the Company
strives to maintain a strong local presence.
Standardizing Operations. The systems acquired by the Company have had
dissimilar operations. Upon consummation of an acquisition, the Company
immediately begins to standardize operations to create a homogeneous operating
environment that provides uniform and timely financial reporting, strong cash
controls, uniform organization, improved service to customers and reliable
communications. This typically results in improvements in the financial
performance and operating efficiencies of its cable television systems.
Specific measures taken by the Company include:
o Standardizing Procedures. The Company implements standardized
procedures for connecting, disconnecting and billing customers,
and begins delivering to subscribers monthly invoices for payment
and a programming guide.
o Installing Communications Systems. The Company installs a local
area network and electronic mail system to provide for timely and
cost effective communication and data transfer between the
corporate headquarters, regional offices and individual cable
television operations.
o Centralizing Accounting and Administrative Functions. The
Company standardizes the general ledger accounting system and
accounts receivable system and consolidates most administrative
functions, including the acquisition of programming, at its
regional and corporate headquarters.
o Training Personnel. The Company provides on-going training to
its managers, customer service representatives, accounting
personnel and technical personnel to improve operating
efficiencies and customer service.
Upgrading and Expanding Existing Networks. The Company's current
systems have a bandwidth of 300 Mhz to 330 Mhz, which enables the Company to
deliver an average of approximately 35 channels of programming. The Company
plans to upgrade existing systems in selected markets to 550 Mhz to 750 Mhz
bandwidth, thereby enabling it to provide better value to its customers by: (i)
increasing the number of program channels offered; (ii) offering additional
services; and (iii) improving service to customers. Expanding existing networks
will provide an opportunity to increase the subscriber count by extending
service to homes not previously served by the Company and to increase revenues
per subscriber by selling additional services. In Fiscal 1996, the Company
began offering a premium soccer channel to subscribers
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and achieved an average 21% penetration at June 30, 1997. Additionally, the
Company has begun installing converter boxes in certain of its markets to
reduce piracy and increase revenue through improved penetration.
Developing an Interactive, Integrated Network. A long-term strategy of
the Company is to develop an interactive, integrated telecommunications
network, which would enable the Company to bundle multiple types of
telecommunications services for sale to subscribers. Such a network would
enable the Company to increase revenues from the sale of additional services,
to improve signal quality and network reliability and to solidify market share.
The Company currently operates a separate network in each city served
that consists primarily of a coaxial cable television network designed with
"tree and branch" architecture and supplemented in certain markets with
Microwave Multi-Point Distribution Systems ("MMDS") or ultra high frequency
systems ("UHF") technologies. In each of its markets, the Company has designed
a new hybrid fiber optic, coaxial cable ("HFC") network featuring an
architecture commonly referred to as "fiber to the node." The HFC design would
provide the Company with the technical capacity to transmit and receive signals
from subscribers, thereby facilitating the sale of additional
telecommunications services.
The Company believes that a good opportunity exists to sell bundled
services to subscribers for additional cost. The Company presently holds the
licenses necessary to provide certain data transmission services using the name
"Patagonia On-Line(TM)," which services may include internet, intranet and e-
mail services. Deregulation of the telecommunications industry in Argentina
could provide the Company with the legal authority to provide additional types
of telecommunications services such as telephony and voice communications.
Approximately 70% of the Company's subscribers pay their monthly bill in person
at the Company's offices, which creates an opportunity for employees of the
Company to sell additional services to subscribers in person.
The ability of the Company to bundle services for sale to subscribers
depends, to a certain extent, upon deregulation of the telecommunications
market and the timing of the construction of an integrated telecommunications
network. At present, the Company is not able to predict whether the
telecommunications industry will be deregulated. The timing of the
construction of an integrated network will be determined by the availability of
capital for such projects, determination by management of the relative merits
of developing an interactive network versus expanding operations through
acquisition, the status of deregulation, and other factors. See "-- Argentine
Market."
ARGENTINE CABLE TELEVISION OPERATIONS
The Company's 13 cable television systems are organized into seven
locally managed clusters providing cable television service to 11 cities in
Argentina. At March 31, 1997, the Company's cable television systems passed
approximately 131,000 homes and provided services to approximately 69,000
subscribers. In eight of the 11 markets served, the Company is the sole
provider of cable television services. In all of those markets, the number of
terrestrial or "over-
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the-air" video television signals available is less than four, and these
signals are typically re-transmissions of the "superstations" serving Buenos
Aires, the capital of Argentina.
Cable television is the primary technology utilized by the Company for
the distribution of video television signals. In the Bariloche and Ushuaia
markets, the Company supplements its cable television systems by delivering
video programming to subscribers using UHF and MMDS technologies, respectively,
to complement its cable television operations and improve its ability to serve
the target market and surrounding markets cost effectively. Additionally, MMDS
and UHF provide alternative mechanisms for the Company to segment or tier
channel offerings.
The Company's cable television systems offer customers packages of
programming services sold in basic and premium tiers. Subscribers purchasing
the basic tier of service receive a variety of program services featuring
movie, news, weather, sports, music, children's, women's and local programming.
The Company customizes the mix of programming selections distributed to basic
subscribers in a manner intended to meet the individual needs of the community
served. Basic subscribers have the option to purchase a channel of premium
sports programming. An upgrade and the introduction of addressable converter
boxes would provide the Company an opportunity to increase the number of
premium services. The rate charged for the basic and premium tiers varies by
market.
The following table sets forth certain information for each of the
Company's cable television systems:
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CABLE TELEVISION SYSTEMS AND SUBSCRIBERS
JUNE 30, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
HOMES BASIC
COMPETITION IN SERVICE HOMES BASIC SUBSCRIBERS
NAME OF COMPANY LOCATION OF OPERATIONS IN MARKET AREA (1) PASSED (2) SUBSCRIBERS PENETRATION
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Televisora Austral S.A. Ushuaia, No 9,844 9,450 5,577 59%
& TV Nieve S.A. Tierra del Fuego Province
Cablemax S.A. Rio Gallegos, No 18,568 17,825 13,623 76%
ARTV S.A. Reconquista & Avellaneda No 16,923 16,246 11,442 70%
Santa Fe Province
BTC S.A. & San Carlos de Bariloche No 18,340 17,606 11,104 63%
Vision Codificada S.A. Rio Negro Province
SIR TV S.R.L. Trelew & Rawson Puerto Yes 37,258 35,768 11,432 32%
Madryn, Chubut Province
Transcable S.A.(4) Rawson, Yes 5,415 5,198 2,161 42%
Chubut Province
Transcable S.A.(4) Comodoro Rivadavia, Yes 36,138 12,000 5,608 47%
Chubut Province
Cable Viedma S.R.L. Viedma, Rio Negro Province No 18,638 17,892 9,338 52%
& Televiedma S.R.L. & Carmen de Patagones,
Buenos Aires Province
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL/AVERAGE 161,124 131,985 70,285 53%(5)
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------
PREMIUM PREMIUM PREMIUM SUBSCRIPTION
SOCCER SOCCER BASIC SOCCER REVENUE PER
NAME OF COMPANY SUBSCRIBERS PENETRATION RATE (3) RATE SUBSCRIBER
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Televisora Austral S.A. 1,771 32% $45.00 $8.00 $48.46
& TV Nieve S.A.
Cablemax S.A. 4,224 31% 35.00 $8.00 37.92
ARTV S.A. 2,161 19% 27.00 $8.00 28.78
BTC S.A. & 1,237 11% 35.00 $12.00 38.09
Vision Codificada S.A.
SIR TV S.R.L. 2,169 19% 26.58 $8.00 28.38
Transcable S.A.(4) 426 20% 25.00 $8.00 25.31
Transcable S.A.(4) 1,337 24% 25.00 $8.00 27.50
Cable Viedma S.R.L. 1,097 12% 33.00 $9.00 34.36
& Televiedma S.R.L.
- -----------------------------------------------------------------------------------------
TOTAL/AVERAGE 14,422 21%(3) $31.75(5) $8.42(5) $34.05(5)
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Based upon 1991 Argentine Census.
(2) Estimated by the Company.
(3) Rate for "Basic Service". The Company has other rates for different
classes of subscribers.
(4) Operates as one cluster.
(5) Percentages and dollar amounts calculated as weighted averages.
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Subscribers generally pay fixed monthly fees for basic and premium cable
television services, which constitute the principal sources of revenues to the
Company. In addition, other sources of potential revenue for the Company
include the sale of advertising time on locally originated and satellite
delivered programming services.
The Company's cable television systems have an average capacity of
approximately 35 channels, and all are fully operational. The Company plans to
rebuild and modify certain systems to increase channel capacity and improve
signal quality. The Company also intends to extend certain cable television
systems to cover areas not previously served. See "-- Operating Strategy --
Upgrading and Expanding Existing Networks."
With the exception of the cable television system serving Ushuaia, the
Company's systems are not equipped with addressable decoding converters.
Addressable decoding converters permit the Company to encrypt program signals
and remotely activate and deactivate subscriber service, thereby reducing
piracy and increasing operating efficiency. In March 1997, the Company began
installing addressable decoding converters in Ushuaia. The Company will
determine whether to expand the use of addressable decoding converters in
certain of its other markets based upon the results experienced in Ushuaia.
PROGRAMMING SUPPLIERS
Video programming is acquired under contract from numerous
international, domestic and local suppliers. International and domestic
suppliers typically supply programming to the Company in encrypted digital
format via satellite transmission. Local programming is originated by
subcontractors at the Company's facilities. The Company's programming
contracts are generally for a fixed period of time and are subject to
negotiation upon renewal. The Company believes that it has satisfactory
relations with all of its programming suppliers. See "-- Risk Factors --
Reliance on Sole Supplier for Soccer Programming."
CABLE ENTRY INTO TELECOMMUNICATIONS
In 1990, the Argentine government privatized the historically
inefficient state-owned telephone company. A monopoly for telephone service in
the northern region was granted to Telecom and a monopoly for telephone service
in the southern region was granted to Telefonica. Through a 50/50 joint
venture, the two companies hold a monopoly on domestic and international long
distance services, and they also control certain data transfer businesses.
Although the privatization has led to improvements in service quality and
upgrades to digital switching, the cost of telephone service remains expensive
relative to United States standards. In Argentina, telephone penetration is 18
telephone lines per 100 persons, compared to 62 telephone lines per 100 persons
in the United States. The monopoly concessions granted to Telecom and
Telefonica expire on November 7, 1997, but Telecom and Telefonica have the
right to apply for an extension of their concessions through November 7, 2000.
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Management believes that Telecom, Telefonica and other local telephony
providers will view cable television technology as a means of introducing
telecommunications services into new territories. Recent developments in the
Argentine market indicate that major telecommunications providers are acquiring
interests in cable television companies to position themselves for possible
deregulation and convergence. These acquisitions have included: (i) the
acquisition of a 20% ownership interest in Multicanal S.A., the largest cable
television company in Argentina, by an affiliate of Telefonica; (ii) the
acquisition of a 51% ownership interest in a major cable television operation
located in Neuquen Province of Argentina by affiliates of Telecom; and (iii)
the acquisition of a 50% ownership interest in the parent of Video Cable
Comunicaciones S.A., the second largest cable television company in Argentina,
by US West Media, Inc., an affiliate of US West Company. See "-- Risk Factors -
- - Competition."
COMPETITION
Cable television systems, such as the systems operated by the Company,
are subject to competition from several alternative means of signal
transmission including but not limited to MMDS, UHF, Microwave Master Antenna
Television Systems ("MATV"), Satellite Master Antenna Television Systems
("SMATV"), Home Satellite Television Systems ("HSTV") and Direct Broadcast
Satellite ("DBS"). In addition, cable television systems are subject to
competition from other communications and entertainment media, including movie
theaters, live sporting events, interactive computer programs and home video
products such as video cassettes.
Certain providers recently began offering DBS in Argentina. The
advantages of DBS include the quality of signal and quantity of channel
offerings. Management of the Company believes that disadvantages of DBS,
especially with regard to Argentina include: high subscriber equipment costs;
lack of local programming offered (for example, local news, weather and
sports), which has been historically produced and delivered by cable television
operators; relatively high penetration of cable television into Argentine
households (approximately 49%); and relatively low penetration of telephones
into households, which may inhibit purchases of "pay per view" programming.
While DBS has obtained an approximate 8% penetration of homes passed by cable
television in the United States, penetration in Argentina is insignificant.
Nonetheless, the potential exists for DBS to garner a significant share of the
market in the future.
In the United States, regional telephone companies have announced plans
to begin offering cable television service through fiber optic trunk lines and
coaxial or copper drops or distribution networks. At present, Argentine
telephone companies are prohibited from supplying video programming to
subscribers through the telephone system. However, active discussions are
reportedly occurring in the executive and legislative branches of the Argentine
government with regards to a possible deregulation of the telecommunications
industry, including deregulation of providers of voice, data and video
services. Affiliates of Telefonica and Telecom have acquired interests in
cable television systems in Argentina. Management also believes that the
Argentine telecommunications industry may be deregulated during the period from
1998 to 2000, and that such deregulation could enable the Company to provide a
broad range of telecommunications services to its existing subscriber base.
Deregulation would likely result in
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direct competition among telephone companies and cable television companies
with regard to the supply of voice, data and video signals.
Argentina authorizes competitive cable service in the same markets.
Accordingly, in several of its current markets, the Company faces competition
from other cable television systems for the same subscribers. Also, there are
few regulatory barriers keeping competitors from entering markets currently
serviced principally by the Company. It is likely that many of the cable
television companies targeted by the Company for future acquisition will be
engaged in direct competition with other operations in a given market,
requiring multiple acquisitions to secure the market, if such acquisitions can
be consummated.
REGULATION
The Comite Nacional de Radiodifusion ("COMFER"), an Argentine
governmental agency that is analogous to the television broadcast division of
the Federal Communications Commission in the United States, licenses and
regulates cable television operations in Argentina. Prior to October 20, 1994,
Argentine law was unclear as to whether persons or entities other than
Argentine citizens could legally hold licenses to operate cable television
systems, and management was advised that COMFER would likely reject
applications to operate such systems submitted by non-Argentine citizens.
Effective October 20, 1994, the United States and Argentina ratified the
Treaty Concerning the Reciprocal Protection and Encouragement of Investment
(the "Bi-Lateral Treaty"), which allows, among other things, for the ownership
of Argentine cable television systems by companies domiciled in the United
States. Effective March 27, 1995, COMFER promulgated Resolution No. 350/95
relating to the approval of companies domiciled in the United States to own and
operate Argentine cable television systems, and a representative of COMFER has
indicated to the Company's management that COMFER no longer will distinguish
between Argentine and United States applicants in the licensure process. To
the knowledge of the Company, COMFER has issued licenses to two companies
controlled by United States companies since that time. The Company intends to
seek authorization from COMFER as a principal owner of its subsidiaries. The
Company has no assurance that COMFER will approve the Company as an owner of
its subsidiaries. A decision by COMFER to deny such approval would require the
Company to continue to operate systems pursuant to licenses that are held by
subsidiaries whose owners may not have been approved by COMFER, which could
have a material adverse effect on the business, results of operations and
financial condition of the Company. See "-- Risk Factors -- Issuances of
Licenses."
EMPLOYEES
At March 31, 1997, the Company employed five full-time employees in the
United States, and contracted with an affiliate of Jack R. Crosby, the Chairman
of the Board and Chief Executive Officer of the Company, for services provided
on a part-time basis by five additional persons. None of these employees is
represented by a labor union. The Company has not
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experienced any work stoppages or strikes in the United States as a result of
labor disputes. The Company considers its relations with its United States
employees to be good.
At March 31, 1997, the Company had 228 employees in Argentina, of which
171 are members of the Sindicato Argentino de Television ("SAT"), a union
representing employees of the cable television industry. The Asociacion
Argentine de Television por Cable ("ATVC") is the Argentine cable television
trade association. Certain members of ATVC and SAT entered into the Convencion
Colectiva de Trabajo Nacional para Circuitos Cerrados No. 223/75 (the
"Convencion"), which prescribes work rules for employees of cable television
companies in Argentina. The Company is required by law to adhere to the
Convencion regarding its Argentine operations whether or not its employees are
members of SAT. The Company has not experienced any work stoppages or strikes
in Argentina as a result as a result of labor disputes. Management believes
that the Company has fully complied with the terms of the Convencion and that
the relationships between the Company, its Argentine employees and SAT are
good.
RISK FACTORS
Country Risks. Substantially all of the Company's assets and operations
are located in Argentina, which is generally considered to be an emerging
market. In addition, the Company is exploring opportunities in other Latin
American markets. Emerging markets, including Argentina and the other
countries in which the Company is exploring opportunities, are more volatile
and less developed economically and politically than markets in the United
States and Western Europe. Relatively minor changes in economic, political and
governmental conditions in the Company's markets may result in significant
adverse economic consequences, which in turn could have a detrimental impact on
the business, results of operations and financial condition of the Company.
Therefore, an investment in the Company is riskier than it would be if the
Company's assets and operations were located in the United States.
Argentine Governmental Risks. The Argentine government exercises
significant influence over many aspects of the Argentine economy. Accordingly,
Argentine governmental actions concerning the economy could significantly
affect private sector entities in general, and the Company in particular.
Argentine governmental activities may also affect the ability of foreign
companies to transact business in Argentina, market conditions, and prices and
returns on securities issued by companies with significant investments in
Argentina, including the Company.
Prior to 1981, Argentina experienced alternating periods of
democratically elected governments and military interventions, which resulted
in significant inconsistencies in governmental policy. Although Argentina held
its third consecutive democratic Presidential election in 1995, there can be no
assurance that Argentina will continue to be governed through a democratic form
of government. Any military intervention or other change in the form of
government could result in changes in governmental and economic policies, which
could have an adverse impact on the business, results of operations and
financial condition of the Company.
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Argentine Economic Risks. In the past, Argentina has experienced
periods of slow or negative economic growth, high inflation, large currency
devaluations and limited availability of foreign exchange. Prior to 1992, the
Argentine economy experienced hyper-inflation and periods of extreme economic
volatility and turmoil, resulting in broad fluctuations in the real exchange
rate of the Argentine currency relative to the U.S. Dollar. In 1988, 1989,
1990 and 1991 the annual inflation rates in Argentina were approximately 388%,
4,924%, 1,344% and 172%, respectively, based on the Argentine Consumer Price
Index. Percentage changes in the GDP for those same years were approximately -
1.9%, -6.2%, 0.1% and 8.9%, respectively. On March 20, 1991, the Argentine
government adopted the Convertibility Plan for the purpose of reducing
inflation and promoting currency stability. The Convertibility Plan included
the Convertibility Law and a regulatory decree, which became effective on April
1, 1991. Under the Convertibility Plan, the Argentine government mandated that
every Argentine Peso in circulation be fully backed by one U.S. Dollar held in
deposit by the Central Bank. Additionally, the Convertibility Plan provides
that all holders of Argentine Pesos can surrender their Pesos at the Central
Bank and receive in exchange an equal number of U.S. Dollars.
Concurrent with the adoption of the Convertibility Plan, the Argentine
government adopted the Economic Reform Plan. Passage of and adherence to the
Convertibility Plan and Economic Reform Plan is generally considered to have
resulted in stabilization in the value of the Argentine Peso relative to the
U.S. Dollar, a significant reduction in the level of inflation, economic
growth, an influx of foreign investment, improvements in infrastructure and
increased economic efficiency. The negative consequences of the Convertibility
Plan and Economic Reform Plan included a sharp reduction in the ability of the
Argentine government to manage the economy through changes in the money supply
and increased levels of unemployment resulting primarily from privatizations
and increased enterprise efficiencies.
Changes in governmental policies affecting adherence to the
Convertibility Plan and Economic Reform Plan could have an adverse impact on
the economy of Argentina and the business, results of operations and financial
condition of the Company. In addition, there can be no assurances as to the
continued success of these measures. The currency board system adopted by
Argentina as part of the Convertibility Plan is virtually without precedent.
Doubts exist among economists regarding the long-term efficacy of a currency
board system, and no assurances can be made as to whether the Convertibility
Plan will result in long-term currency stability and moderate inflation.
Factors that could undermine the continued success of the Convertibility Plan
and the Economic Reform Plan include relatively high unemployment rates, trade
and tariff barriers that currently contribute to foreign trade deficits,
relatively high cost of labor, fiscal deficits in excess of International
Monetary Fund targets and continued reliance on foreign debt. If the
Convertibility Plan and the Economic Reform Plan do not continue to be
successful, Argentina may face a return to economic instability, the
implementation of foreign exchange controls, difficulty in making its future
national debt payments or a currency devaluation. These or other effects on
the Argentine economy may cause adverse financial or operational difficulties
for the Company.
Regional Economic Volatility. The economy of Argentina may be
negatively impacted by adverse economic developments in other countries,
especially those in the Latin
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American region. This negative impact could result even though the adverse
economic developments are unique to a specific country other than Argentina.
For example, on December 20, 1994 the currency of the Republic of Mexico
suffered a major devaluation as a result of the Mexican central bank's
inability to support the value of the Mexican Peso relative to the U.S. Dollar.
The devaluation resulted in an economic crisis in Mexico. Although it is
generally considered that the currency devaluation and economic crisis in
Mexico resulted from political and economic factors that were unique to Mexico,
other Latin American economies, including that of Argentina, were negatively
impacted by the resulting impairment of confidence. As a consequence, in 1995
Argentina experienced a sharp decline in foreign investment, significant
reductions in bank deposits and foreign reserves, increased unemployment,
contraction of its GDP and a decline in the value of stocks and bonds traded on
the Argentine stock exchange. The Argentine government responded to these
developments by increasing the Value Added Tax to 21% from 18%, reducing
government spending to minimize fiscal deficits, increasing bank reserve
requirements and reaffirming its commitment to a stable currency and free
market economy. Liquidity improved after implementation of these measures and
bank deposits and foreign reserves that were lost during the crisis were
recovered by the end of calendar 1996. Unemployment rates have declined to
approximately 17% from 21%, but remain at historically high levels.
In the future, regional volatility may again impact Argentine politics
and economics. There can be no assurance that such regional volatility would
not have an adverse impact on the economy of Argentina or the business, results
of operations and financial condition of the Company.
History of Losses. The Company reported net operating losses of
approximately $1.5 million and approximately $2.4 million in fiscal 1996 and
1997, respectively. Financial results of the Company prior to fiscal 1996 were
for an unrelated business and should not be considered comparable to the
results of the past two fiscal years. The Company had an accumulated deficit
of approximately $33.6 million at March 31, 1997. There can be no assurance
that the Company will be able to achieve sustained profitability in the future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Consolidated Financial Statements.
Sustainability of Recent Growth Through Acquisitions. The Company
commenced its cable television operations in April 1994 with the acquisition of
a system in Ushuaia, Argentina. Since that date, the Company has experienced
rapid growth in its cable television operations as a result of the number and
size of acquisitions consummated by the Company. The Company completed five
acquisitions in fiscal 1995 (inclusive of the system in Ushuaia), two
acquisitions in fiscal 1996 and six acquisitions in fiscal 1997. Primarily as
a result of these acquisitions, the Company's cable television operations grew
to approximately 69,000 subscribers at March 31, 1997 and annual revenues
derived from cable television operations have grown from $10.3 million
(unconsolidated) in fiscal 1995 to $22.6 million in fiscal 1997.
The Company's growth and pace of acquisitions has placed, and will
continue to place, a substantial burden on the Company's management,
operational, financial and accounting
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resources. The successful management of this growth will require the Company
to continue to implement and improve its financial and management information
systems and to train, motivate and manage its employees. There can be no
assurance that the Company will be able to identify, consummate or integrate
acquisitions without substantial delays, costs or other problems. Once
integrated, an acquired cable television system may not achieve sales,
profitability and asset productivity commensurate with the Company's other
operations. In addition, acquisitions involve several other risks, including
adverse short-term effects on the Company's reported operating results, write
downs of goodwill and other intangibles, the diversion of management's
attention, the dependence on retention, hiring and training of key personnel,
the amortization of intangible assets and risks associated with unanticipated
problems or legal liabilities. The Company's failure to manage growth
effectively would have a material adverse effect on the Company's business,
results of operations, financial condition and its ability to execute its
business strategy. See "-- Acquisition and Expansion Strategy."
Dependence on Acquisitions for Future Growth. The Company's growth
strategy is dependent principally on its ability to acquire existing cable
television systems. Successful acquisitions involve a number of factors that
are difficult to control, including the identification of potential acquisition
candidates, the willingness of owners to sell on reasonable terms and the
satisfactory completion of negotiations. There can be no assurance that the
Company will be able to identify and timely acquire acceptable acquisition
candidates on terms favorable to the Company. Assuming the availability of
capital, the Company's plans include an aggressive acquisition program. The
Company continues to evaluate potential acquisitions and negotiate with several
potential acquisition candidates. The failure to complete acquisitions and
continue expansion could have a material adverse effect on the Company's
business, results of operations and financial condition. See "-- Acquisition
and Expansion Strategy."
Need for Additional Capital. The Company's cash requirements have been
and will continue to be significant. In fiscal 1995, 1996 and 1997, the
Company used (net of cash from acquired companies) $12.3 million, $14.8 million
and $14.2 million, respectively, for acquisitions and the retirement of
acquisition-related debt. The continued pursuit of the Company's expansion
strategy will require significant additional capital resources. Capital is
needed not only for acquisitions, but also to service acquisition-related
indebtedness and for the effective integration, systemization, operation and
expansion of the acquired cable systems. Further acquisitions may have to be
financed through either the issuance of additional shares of Common Stock,
convertible securities or options or warrants to purchase shares of Common
Stock, which would dilute the percentage ownership of existing shareholders,
the issuance of debt instruments or other increases in the Company's borrowing,
which would increase the Company's leverage position, or a combination of both.
See "-- Acquisition and Expansion Strategy."
Reliance on Sole Supplier for Soccer Programming. The Company is
dependent on one program supplier for a majority of the Argentine soccer
programming in the Company's basic tier and all of the soccer programming in
its premium tier. Management believes that its Argentine soccer programming is
the only television content that cannot be readily replaced by similar
programming from a different supplier. The Company's current programming
contracts for
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soccer are due to expire at various times during fiscal 1998. While the
Company intends to renew these contracts as they expire, there is no assurance
that renewal of such contracts will be available at acceptable prices. The
Company believes that it has a good relationship with the supplier who provides
the soccer programming, but there can be no assurance that the Company will be
able to maintain this relationship. The loss of this soccer programming would
result in the loss of all revenues from the premium tier and could result in
the loss of some basic subscribers, which would have a material adverse effect
on the Company's business, results of operations and financial condition. See
"-- Programming Suppliers."
Issuances of Licenses. COMFER, an Argentine governmental agency that is
analogous to the television broadcasting division of the Federal Communications
Commission in the United States, licenses and regulates cable television
operations in Argentina. Prior to the ratification of the Bi-Lateral Treaty
between Argentina and the United States in October 1994, COMFER did not issue
licenses to own and operate cable television systems to companies controlled by
United States companies. To the knowledge of the Company, COMFER has issued
licenses to two companies controlled by United States companies since that
time. The Company intends to seek authorization from COMFER as a principal
owner of its subsidiaries. A decision by COMFER to deny the authorization of
the Company would require the Company to continue to operate systems pursuant
to licenses that are held by subsidiaries whose owners may not have been
approved by COMFER, which could have a material adverse effect on the business,
results of operations and financial condition of the Company. There can be no
assurance that there will not be changes in the current regulatory scheme, the
imposition of additional regulations or the creation of new regulatory
agencies, that would restrict or curtail the ability of the Company to acquire,
operate and dispose of its cable television systems or, in general, to compete
profitably with other operators of cable television systems and other
telecommunication properties. Further, there can be no assurance that there
will not be other regulatory changes, including aspects of deregulation, that
will result in a decline in the value of licenses held by the Company or its
affiliates or adversely affect the Company's competitive position. See "--
Regulation."
Reliance on Key Personnel. The operations and financial performance of
the Company are highly dependent upon the continued involvement of Jack R.
Crosby, the Chairman and Chief Executive Officer of the Company, Jack S. Gray,
Jr., the President and Chief Operating Officer of the Company and the Company's
Joint Venture Partners, Osvaldo Rossi and Carlos Saba, who are key employees of
the Company in Argentina. The Company does not have employment agreements with
any of these persons. Certain of the Company's cable television systems and
the licenses to own and operate those cable television systems in Argentina are
held in the names of Messrs. Rossi and Saba. The death, departure or
incapacity of any of these persons could have a material adverse impact on the
business, results of operation and financial condition of the Company, and
there is no assurance that the Company could replace any or all of these
executive officers or key employees with persons having comparable management
and operating skills. The Company does not maintain "key man" insurance on any
of its officers or key employees and does not currently plan to obtain any such
coverage. See "-- Issuances of Licenses" and "Management."
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Competition. The cable television industry in Argentina is highly
competitive and is currently characterized by significant changes in
technology. In addition, cable television systems are subject to competition
from other communications and entertainment media, including movie theaters,
live sporting events, interactive computer programs and home video products
such as video cassettes. Many of the Company's competitors have greater
financial and technical resources than the Company. The Company may be
required to devote significant resources and effort to implement or obtain
rights to new development of technology in order to remain competitive.
Argentina authorizes competitive cable television services to operate in
the same geographic markets. Accordingly, in several of its current markets,
the Company faces competition from other cable television systems for the same
subscribers. Also, there are few regulatory barriers to competitors seeking to
enter markets currently dominated by the Company. It is likely that many of the
markets targeted by the Company for future expansion will include cable
television systems engaged in direct competition with other operations in a
given market. There is no assurance that the Company will be able to
consummate the acquisitions necessary to secure these markets.
Recent developments in the Argentine market indicate that major
telecommunications providers are entering the cable television industry.
Telefonica de Espana International S.A., an affiliate of Telefonica, has
acquired a 20% ownership interest in Multicanal S.A., the largest cable
television company in Argentina. Affiliates of Telecom have acquired a 51%
ownership interest in a major cable television operation located in Neuquen
Province, Argentina. US West Media, Inc., an affiliate of US West Company, has
acquired a majority ownership interest in the parent of Video Cable
Comunicaciones S.A., a major Argentine cable television company. Tele-
Communications International, Inc., an affiliate of the largest operator of
cable television systems in the United States, has acquired a 51% ownership
interest in Cablevision, S.A., a major cable television company serving Buenos
Aires. The Company's ability to locate and acquire systems at acceptable
prices may be diminished as competition for subscribers and cable television
systems increases. There is no assurance that the Company can successfully
compete against larger companies for the acquisition of cable television
systems in Argentina or other countries in Latin America.
In the United States, regional telephone companies have announced plans
to begin offering cable television service through fiber optic trunk lines and
coaxial or copper drop distribution networks. At present, Argentine telephone
companies are prohibited from supplying video programming to subscribers
through the telephone system. However, active discussions are reportedly
occurring in the executive and legislative branches of the Argentine government
concerning a possible deregulation of the telecommunications industry,
including deregulation of providers of voice, data and video services.
Deregulation will likely result in direct competition among telephone companies
and cable television companies with regard to the supply of voice, data and
video signals. While deregulation will provide the Company and other cable
television operators the opportunity to compete in additional markets, it will
also subject such companies to competition from additional competitors who are
well capitalized and technically competent.
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Cable television systems, such as the systems operated by the Company,
are also subject to competition from alternative means of signal transmission
including, but not limited to, MMDS, UHF, MATV, SMATV, HSTV and DBS. The
advantages of DBS over cable include the quality of signal and quantity of
channel offerings. Certain providers recently began offering DBS in Argentina.
Although DBS is relatively expensive and lacks local programming, widespread
acceptance of DBS in Argentina could have a material adverse effect on the
Company. See "-- Competition" and "-- Operating Strategy."
Labor Relations. In Argentina, labor unions are strong and influential.
Approximately 80% of the Company's Argentine employees are unionized. In the
future, the Company's efforts to modernize its operations and the potential
negative effects of any Argentine inflation on real wages could result in labor
conflicts. Accordingly, no assurances can be given that strikes or any other
type of conflict with unions or personnel will not have a material adverse
effect on the Company. See "-- Employees."
Limited Insurance Coverage. The Company's operating subsidiaries obtain
insurance in type and amount customary for the property in their systems.
However, consistent with industry practice in the United States, they do not
insure the entire cable portion of cable television systems. Any catastrophe
affecting a significant portion of a system's cable could result in substantial
uninsured losses.
Convertible Preferred Stock. The Company's Articles of Incorporation
preclude the declaration or payment of dividends on the Common Stock unless
dividends on the Company's Series 1990 10% Convertible Preferred Stock ("Series
1990 Preferred Stock") and Series 1995 8% Convertible Preferred Stock ("Series
1995 Preferred Stock") have been declared and paid in full or declared and a
sum sufficient to pay such declared dividends set aside. The Company paid
$637,000 and $1.5 million in dividends on both series of preferred stock in
fiscal year 1996 and 1997, respectively. In addition, in the event of
liquidation, the holders of Series 1990 Preferred Stock are entitled to receive
$5.00 per share plus accrued and unpaid dividends before the holders of Common
Stock or Series 1995 Preferred Stock are entitled to receive any of the
liquidation proceeds. In the event of liquidation, the holders of Series 1995
Preferred Stock are entitled to receive $100.00 per share plus accrued and
unpaid dividends before the holders of Common Stock are entitled to receive any
of the liquidation proceeds. Consequently, because the Series 1990 Preferred
Stock and the Series 1995 Preferred Stock are entitled to receive preferential
dividends and preferential treatment on liquidation, the Series 1990 Preferred
Stock and the Series 1995 Preferred Stock could recover disproportionately
higher returns than the Common Stock, particularly if the proceeds of a
liquidation were less than or only marginally greater than the aggregate
liquidation preference for the Series 1990 Preferred Stock and the Series 1995
Preferred Stock. In addition, the holders of the Series 1990 Preferred Stock
and Series 1995 Preferred Stock have the option of converting into Common Stock
if it appears that the Common Stock will recover more than the Series 1990
Preferred Stock or the Series 1995 Preferred Stock, respectively, in the event
of liquidation.
Market for Common Stock; Illiquid Securities. The Common Stock has been
quoted on The Nasdaq Stock Market's Small-Cap Market (the "Nasdaq Small-Cap
Market"). There have been
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periods of significant volatility in the market price and trading volume of the
Common Stock, which in many cases were unrelated to the operating performance
of, or announcements concerning, the Company. General market price declines or
market volatility in the future could adversely affect the price of the Common
Stock. In addition, the trading price of the Common Stock has been and is
likely to continue to be subject to significant fluctuations in response to
variations in quarterly operating results, the successful integration of
acquired companies, changes in management, competitors, regulatory changes,
general trends in the industry, recommendations by securities industry analysts
and other events or factors. This volatility has been exacerbated by the lack
of a significant public float in the Common Stock, which has the effect of
reducing liquidity in the Company's Common Stock in the hands of institutional
and other large holders, thus reducing interest among market analysts and
contributing to limited market support. There can be no assurance that an
adequate trading market can be maintained for the Common Stock. Also, many
lending institutions in the United States will not permit the use of low-priced
or thinly traded securities as collateral for loans. See "Market for Common
Equity and Related Stockholder Matters."
Absence of Dividends. The Company has not historically declared or paid
dividends on its Common Stock and has no plans to do so in the foreseeable
future. In addition, the Company's Articles of Incorporation preclude the
declaration or payment of dividends on the Common Stock unless the Series 1990
Preferred Stock dividends and the Series 1995 Preferred Stock dividends have
been declared and paid in full or declared and a sum sufficient to pay such
declared dividends set aside. The terms of certain of the Company's debt,
which matures in February 1998, restrict the ability of the Company to pay
dividends on the Common Stock for so long as that debt is outstanding. See
"Market for Common Equity and Related Stockholder Matters."
Immunity of Certain Assets from Attachment. Under Argentine law,
attachment of a company's property prior to execution and attachment of a
company's property in aid of execution will not be ordered by courts of
Argentina with respect to property that is located in Argentina and determined
by such courts to be dedicated to the provision of essential public services.
A substantial portion of the Company's assets may be considered to be dedicated
to the provision of an essential public service. If an Argentine court were to
make such a determination with respect to certain of the Company's assets, such
assets would not be subject to attachment, execution or other legal process and
the ability of a creditor of the Company to realize a judgment against the
assets of the Company may be adversely affected.
Anti-Takeover Provisions. The new Texas Business Combination Law, which
becomes effective September 1, 1997, restricts certain transactions between a
public corporation and affiliated shareholders. The statute, which will be
applicable to the Company, may have the effect of inhibiting a non-negotiated
merger or other business combinations involving the Company.
In addition, the Company's Articles of Incorporation authorize 5,000,000
shares of preferred stock, $1.00 par value ("Preferred Stock"), of which only
833,114 shares are currently issued and outstanding. The Preferred Stock may
be issued in series from time to time with such designations, rights,
preferences and limitations as the Board of Directors of the Company may
determine by resolution. Additional series of Preferred Stock might be issued
that would grant dividend
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preferences and liquidation preferences to preferred shareholders over holders
of the Common Stock. Unless the nature of a particular transaction, applicable
statutes or Nasdaq rules require such approval, the Board of Directors has the
authority to issue Preferred Stock without shareholder approval. The issuance
of Preferred Stock may have the effect of delaying or preventing a change in
control of the Company without any further action by the shareholders.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its corporate offices located in Austin, Texas at a
cost of approximately $4,300 per month pursuant to a lease that expires on May
14, 2000. The Company owns a vacant sales/manufacturing facility located in
Odessa, Texas, which was related to the Company's previous operations. The
property owned by the Company is not currently utilized by the Company in any
of its on-going operations. Each of the facilities leased by the Company in
the United States is in good condition and adequately maintained. The facility
owned by the Company is presently vacant, and may require improvements prior to
any sale, lease or other occupancy.
The Company leases or owns various properties in Argentina, including
leases of utility poles for its cable plant. Aggregate monthly rent for all of
the leased property in Argentina is approximately $59,000 at March 31, 1997.
Management believes that all of its Argentine properties are in good condition
and are adequate and suitable for its purposes. Management believes that
alternatives can be found for all of the leased property in Argentina, except
for certain leases of pole space, which may be difficult to replace.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any formal legal proceedings pending against
it other than routine litigation, none of which would have a material adverse
effect on the Company if adverse judgments were rendered. From time to time,
the Company may become involved in routine litigation arising in the ordinary
course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the fourth quarter of the
fiscal year ended March 31, 1997.
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================================================================================
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock and Series 1990 Preferred Stock are included
for quotation in the Nasdaq Small-Cap Market under the symbols TESC and TESCP,
respectively. The high and low bid prices as reported by the Nasdaq Small-Cap
Market each quarter for the past two fiscal years ended March 31 are as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
--------------------------------------------------
1997 1996
--------------------- --------------------
High Low High Low
------ ------ ------ -----
<S> <C> <C> <C> <C>
Common Stock
First quarter 4.5000 3.2500 4.000 1.875
Second quarter 4.1250 2.8750 3.563 2.750
Third quarter 4.6250 2.8750 3.875 2.750
Fourth quarter 4.3125 3.2500 4.375 2.500
Preferred Stock
First quarter 6.0000 5.2500 5.500 4.375
Second quarter 5.8750 4.1250 5.250 4.500
Third quarter 5.6250 4.7500 5.500 4.500
Fourth quarter 5.5000 4.6250 6.000 4.875
</TABLE>
These quotations may reflect inter-dealer prices, without retail mark-
up, mark-down or commissions and may not necessarily represent actual
transactions. The Series 1995 Preferred Stock does not trade on any exchange
or in the over-the-counter market.
At April 1, 1997, the (i) 13,178,007 shares of common stock outstanding
were held by 353 shareholders of record, and (ii) 693,864 shares of Series 1990
Preferred Stock outstanding were held by 252 shareholders of record. No
dividends have been declared on the Company's Common Stock during the past two
fiscal years and the Company has no plans to pay dividends on its common stock
in the foreseeable future. The Articles of Incorporation restrict the
Company's ability to declare or pay dividends on the common stock unless full
cumulative dividends on the preferred stock have been paid or declared and a
sum sufficient for the payment thereof set apart for such payment.
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<PAGE> 25
In reliance upon Section 4(2) of the Securities Act of 1933 and Rule 506
of Regulation D promulgated by the Securities and Exchange Commission, the
Company entered into a Note Purchase and Warrant Agreement dated February 7,
1997 pursuant to which accredited investors obtained 13% Senior Notes
("Acquisition Notes") dated February 7, 1997 in the aggregate principal amount
of $6.0 million. In addition to the Acquisition Notes, the accredited
investors obtained Stock Purchase Warrants dated February 7, 1997 exercisable
at $4.00 per share for an aggregate of 210,000 shares of the Common Stock of
the Company. The Warrants expire February 7, 2002. Additionally, 90,000
Warrants were issued to the Company's investment banking firm as consideration
for the professional services rendered in connection with the placement of the
Acquisition Notes.
25
<PAGE> 26
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Annual Report. The Consolidated Financial Statements provide
additional information regarding the Company's financial activities and
condition. Moreover, this discussion contains forward looking statements that
include risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward looking statements.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1996 COMPARED TO THE YEAR ENDED MARCH 31, 1997
For the years ended March 31, 1996 ("Fiscal 1996") and 1997 ("Fiscal
1997"), the operations of the Argentine Cable Companies and Argentine Joint
Venture Companies (the "Latin American Operations") were included in the
Company's consolidated statement of operations. The Company's results of
operations for Fiscal 1996 and Fiscal 1997 tend not to be directly comparable
as a result of acquisition activities. The Company's acquisitions during
Fiscal 1996 and Fiscal 1997 include: (i) Teveca S.R.L. and Cable Plus Bariloche
S.A. (collectively "BTC") in July 1995; (ii) SIR TV S.R.L. ("SIR TV") in
December 1995; (iii) TV Nieve S.A. ("TV Nieve") in April 1996; (iv) Canal 4
Rawson Video Cable ("Canal 4 Rawson") in May 1996; (v) TV SIS S.R.L. ("TV SIS")
in August 1996; (vi) Comodoro Rivadavia Sociedad Comercial Colectivade
Television y Radiodifusion ("Comodoro") in December 1996; (vii) Televiedma
S.R.L. ("Televiedma") and Cable Viedma S.R.L. ("Cable Viedma") in February
1997; and (viii) Vision Codificada S.A. ("Vision") in March 1997. The results
of operations for these systems are included in the Company's Consolidated
Financial Statements from the dates of their respective acquisition.
Revenues. Revenues increased 41.0% from $16.0 million in Fiscal 1996 to
$22.6 million in Fiscal 1997 primarily as a result of the acquisitions listed
above. Aggregate subscriber revenue from the systems in operation during both
fiscal years remained approximately level. Although revenues increased as a
result of a rate increase implemented in the Reconquista/Avellaneda market and
from a premium service launched in August 1995 offering sports programming and
exclusive soccer coverage in all systems, the increase was offset by overall
declines in revenues from basic services attributable to a decrease in basic
subscribers.
Operating Costs. Operating costs increased 42.3% from $11.4 million in
Fiscal 1996 to $16.3 million in Fiscal 1997 primarily as a result of the
acquisitions listed above. As a percentage of revenues, operating costs in
connection with the Argentine Cable Companies increased from 71.4% in Fiscal
1996 to 72.0% in Fiscal 1997. Franchise and gross receipts taxes increased by
approximately $280,000 as the Company's exemption from COMFER fees in Rio
Gallegos and Ushuaia expired during Fiscal 1997. In addition, the Province of
Tierra del Fuego implemented a new gross receipts tax equal to 3% of revenues.
Although the new acquisitions in
26
<PAGE> 27
Comodoro, Viedma and Carmen de Patagones had operating losses during Fiscal
1997, the Company expects these operations to improve as a result of combining
the operations of Cable Viedma and Televiedma and as the Company completes the
post-acquisition restructuring and rebuilding program for Comodoro. The
acquisition and subsequent consolidation of competing cable television systems
in Ushuaia, Rawson and Reconquista/Avellaneda have enabled the Company to
reduce costs and increase operating margins in those markets.
General and Administrative Expenses. General and administrative
expenses increased 20.6% from $3.1 million in Fiscal 1996 to $3.7 million in
Fiscal 1997. The increase in expenses was primarily attributable to expanded
operations and acquisition activity in Argentina and expenditures incurred in
exploring possible financing and strategic opportunities. As a percentage of
revenues, general and administrative expenses decreased from 19.1% in Fiscal
1996 to 16.3% in Fiscal 1997.
Depreciation and Amortization. Depreciation and amortization increased
68.1% from $3.0 million in Fiscal 1996 to $5.0 million in Fiscal 1997. This
increase was attributable to the amortization of franchise costs related to new
acquisitions and increased depreciation of capital expenditures in existing
cable television systems and the additional cable television plant acquired in
the new acquisitions.
Other Income (Expense). Other income (expense) increased from net other
income of $69,000 in Fiscal 1996 to net other expense of $92,000 in Fiscal
1997. This change was due to: (i) a $106,000 decrease in interest income;
(ii) a $65,000 decrease in other income primarily as a result of a Fiscal 1996
transaction that was not duplicated in Fiscal 1997; and (iii) a $10,000 decline
in interest expense.
Income Tax Expense. Income tax expense increased from $117,000 in
Fiscal 1996 to $899,000 in Fiscal 1997 primarily as a result of the increase in
taxable income of an Argentine subsidiary. Although the Company had a net loss
for each of Fiscal 1996 and Fiscal 1997, it had income tax expense primarily
due to Argentine income tax regulations that prohibit the deduction of losses
from one subsidiary against income from another subsidiary in a consolidated
return.
Preferred Stock Dividends. Preferred stock dividends increased by 135%
from $637,000 in Fiscal 1996 to $1,495,000 in Fiscal 1997 due to the issuance
of the Series 1995 Preferred Stock in December 1995.
27
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company held $1.6 million of cash and cash
equivalents. The $6.9 million decrease from $8.5 million at March 31, 1996
resulted primarily from the acquisition of cable television systems
(approximately $14.0 million in the aggregate) less the $7.1 million of debt
financing that was obtained during the year. Cash and cash equivalents are
generally not subject to or impacted by changes in conditions or trends in any
single industry. However, they may be subject to significant changes in
overall economic conditions, and the funds held in
28
<PAGE> 29
accounts outside of the United States (approximately $1.2 million at March 31,
1997) may be subject to diminution in value caused by foreign currency
devaluation or governmental action.
Cash provided by operations for Fiscal 1996 and Fiscal 1997 was $456,000
and $3.8 million, respectively. The increase in Fiscal 1997 was primarily
attributable to the cash generated by the acquired cable television systems.
Cash used in investing activities for Fiscal 1996 and Fiscal 1997 was
$13.8 million and $16.7 million, respectively. Cash used in investing
activities relates primarily to acquisitions of cable television systems and
capital expenditures to upgrade those systems. The Company has consummated
eight acquisitions in the past two fiscal years, including: (i) BTC in July
1995; (ii) SIR TV in December 1995; (iii) TV Nieve in April 1996; (iv) Canal 4
Rawson in May 1996; (v) TV SIS in August 1996; (vi) Comodoro in December 1996;
(vii) Televiedma and Cable Viedma in February 1997; and (viii) Vision in March
1997.
Cash provided by financing activities for Fiscal 1996 and Fiscal 1997
was $19.1 million and $6.0 million, respectively. In Fiscal 1996, cash provided
by financing activities relates primarily to proceeds from the private
placement of equity securities in the amount of $22.7 million, which was offset
by dividends paid on preferred stock in the amount of $587,000 and principal
payments on debt in the amount of $2.9 million. In Fiscal 1997, cash provided
by financing activities relates primarily to the issuance of debt in the amount
of $7.1 million, including the Acquisition Notes, and $690,000 from the
exercise of warrants, which was offset by dividends paid on preferred stock in
the amount of $1.3 million.
In February 1997, the Company issued the Acquisition Notes, with an
aggregate principal amount of $6.0 million. Interest at the rate of 13% per
annum is payable semi-annually beginning in August 1997. The Acquisition Notes
are not subject to prepayment (except at the holder's option in the event the
Company issues securities or debt sufficient to retire the Acquisition Notes)
and are due and payable in full in February 1998. In connection with the
issuance of the Acquisition Notes, the Company: (i) granted warrants to
purchase 210,000 shares of Common Stock and (ii) incurred approximately $50,000
of costs and issued, as a financial advisory fee, 22,500 shares of Common Stock
and warrants to purchase an additional 90,000 shares of Common Stock. The
warrants are exercisable at any time at an exercise price of $4.00 per share
and expire on February 7, 2002. The proceeds of the Acquisition Notes were
used to fund the Cable Viedma and Televiedma acquisitions.
The Series 1995 Preferred Stock provides for cumulative, annual
dividends in the amount of $8.00 per share payable on a quarterly basis. The
Series 1990 Preferred Stock provides for cumulative, annual dividends in the
amount of $0.50 per share payable on a quarterly basis. For Fiscal 1997, this
resulted in approximately $1.3 million of cash outflow compared to
approximately $600,000 for the comparable period in the prior year, principally
as a result of the issuance of the Series 1995 Preferred Stock in December
1995. The Company has not paid dividends on its Common Stock, and it has no
plans to make any such payments in the future.
29
<PAGE> 30
Working capital requirements vary with business conditions and the
nature of the business being conducted. The Company's management seeks to
minimize working capital requirements to the extent practicable. In the
opinion of management, the Company has adequate cash flow from operations to
meet the on-going operating requirements of the existing Latin American
Operations through the fiscal year ending March 31, 1998. The Company
continues to be actively involved in the acquisition and development of cable
television and communications properties in Argentina and Latin America, and it
incurs expenses in identifying and pursuing opportunities before any
acquisition decision is made. The Company expects that any additional
acquisitions and the repayment of the Acquisition Notes will be financed
through cash provided by an anticipated public offering of its Common Stock
(the "Offering"), cash generated from operations and additional debt and equity
financing.
IMPACT OF INFLATION; EXCHANGE RATES
Inflation has not had a material impact on the operations of the Company
during the past three years. In the opinion of management, inflation should
not have a material impact on the results of operations in fiscal year 1998.
However, management is unable to predict future rates of inflation in Argentina
or its financial impact on the Company.
It is possible that the Argentine government will be unable to maintain
control over inflation and sustain the current Argentine Peso to U.S. Dollar
conversion ratio. Economic volatility and sustained high unemployment could
diminish the ability of subscribers to pay for service, resulting in an
increase in bad debts and reductions in the number of subscribers.
Funds held in accounts in Argentina (approximately $1.2 million at March
31, 1997) and current receivables maintained in Argentine Pesos could decline
in value before such amounts are converted to hard assets or U.S. Dollars. In
addition, the Argentine government could impose price freezes, prohibit the
transfer of funds outside Argentina and adopt other measures that alone, or
together with those previously mentioned, could have a material adverse impact
on the Company.
While management will monitor the exchange rates and take appropriate
measures in response to perceived risks, the Company has no current plan to
implement a policy of hedge transactions to reduce the Company's exposure to
foreign currency exchange rate risks. Accordingly, the Company could
experience losses and a negative impact on earnings with respect to its
holdings solely as a result of devaluation of the Argentine Peso against the
U.S. Dollar. Argentina does not restrict the removal or conversion of local or
foreign currency. However, there can be no assurance that such policies will
not be adopted in the future in reaction to a sustained deterioration of their
financial markets.
30
<PAGE> 31
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 "Earnings Per Share" ("FAS 128"). This standard is effective
for periods ending after December 15, 1997 and early adoption is not permitted.
Adoption of FAS 128 is not expected to have a material effect on the Company's
calculation of primary and fully diluted earnings per share.
31
<PAGE> 32
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Tescorp, Inc.:
We have audited the accompanying consolidated balance sheets of Tescorp, Inc.
and subsidiaries as of March 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
then ended. These consolidated 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 audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tescorp, Inc. and
subsidiaries as of March 31, 1996 and 1997, and the results of their operations
and their cash flows for each of the years in the two year period ended March
31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Austin, Texas
June 3, 1997
32
<PAGE> 33
TESCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1996 and 1997
<TABLE>
<CAPTION>
Assets 1996 1997
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 8,529,100 $ 1,623,375
Accounts receivable-subscribers, net 1,596,676 2,208,417
Prepaid expenses and other assets 2,036,461 1,306,904
Plant and equipment, net 7,132,938 11,639,281
Franchise costs, net of amortization 24,949,470 32,848,985
============ ============
Total assets $ 44,244,645 $ 49,626,962
============ ============
Liabilities and Stockholders' Equity
Accounts payable $ 1,311,578 $ 1,435,522
Accrued license and copyright fees 1,718,450 1,795,300
Income taxes payable 461,140 1,384,833
Accrued payroll and social charges 422,734 738,476
Accrued taxes 502,612 273,020
Other liabilities 938,821 2,229,614
Debt 447,651 7,262,237
------------ ------------
Total liabilities 5,802,986 15,119,002
------------ ------------
Minority Interest 1,018,702 887,303
------------ ------------
Stockholders' Equity:
Preferred stock, $1 par value value, 5,000,000 shares authorized:
Series 1990 Convertible preferred stock, $5 redemption value
per share, 704,684 shares authorized and 693,864 shares issued and
outstanding with an aggregate preference on liquidation of $3,469,320 693,864 693,864
Series 1995 Convertible preferred stock, $100 redemption
value per share, 200,000 shares authorized and 148,500 and 139,250 shares
outstanding at March 31, 1996 and 1997, respectively, with an aggregate
preference on liquidation of $14,850,000 and $13,925,000, respectively 148,500 139,250
Common stock, $.02 par value, 50,000,000 shares authorized and 12,495,091
and 13,178,007 issued and outstanding at March 31, 1996
and 1997, respectively 249,902 263,560
Additional paid-in capital 65,359,628 66,508,484
Accumulated deficit (28,959,437) (33,984,501)
------------ ------------
37,492,457 33,620,657
Less treasury stock, 100,000 shares of common, at cost (69,500) --
------------ ------------
Total stockholders' equity 37,422,957 33,620,657
Commitments and contingencies -- --
============ ============
Total liabilities and stockholders' equity $ 44,244,645 $ 49,626,962
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 34
TESCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended March 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Revenues $ 16,009,116 $ 22,580,466
------------ ------------
Operating costs and expenses:
Operating costs 11,432,377 16,263,772
General and administrative expenses 3,062,005 3,691,258
Depreciation 1,909,646 3,603,230
Amortization of franchise costs 1,075,379 1,413,654
------------ ------------
Total operating costs and expenses 17,479,407 24,971,914
------------ ------------
Operating loss (1,470,291) (2,391,448)
------------ ------------
Other income (expense):
Interest income 322,135 215,761
Other income 103,030 38,394
Interest expense (355,879) (346,100)
------------ ------------
Total other income (expense), net 69,286 (91,945)
------------ ------------
Loss before provision for income taxes and minority interests (1,401,005) (2,483,393)
Income tax expense 117,602 898,551
------------ ------------
Loss before minority interests (1,518,607) (3,381,944)
Minority interest in the (income) loss of consolidated subsidiaries 23,310 (115)
------------ ------------
Net loss (1,495,297) (3,382,059)
Preferred stock dividends (636,436) (1,495,060)
------------ ------------
Net loss applicable to common stock $ (2,131,733) $ (4,877,119)
============ ============
Loss per share applicable to common stock $ (0.19) $ (0.38)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 35
TESCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years Ended March 31, 1996 and 1997
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
Series 1990 Series 1995
Convertible Convertible Common stock
preferred stock preferred stock par value $.02
-------------------------- -------------------------- --------------------------
Shares Amount Shares Amount Shares Amount
------------- ----------- ------------ ------------ -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1995 693,864 $ 693,864 -- $ -- $ 7,147,433 $ 142,949
Net loss
Private placement of Series 1995
preferred stock 148,500 148,500
Private placement of common stock 4,800,000 96,000
Conversion of minority interests 534,616 10,692
Distribution of shares of common
stock to holders of the Series 1995
preferred stock electing to receive
dividends in the form of common stock 13,042 261
Dividends on convertible preferred stock
------- ----------- ------- ---------- ---------- -----------
Balances at March 31, 1996 693,864 $ 693,864 148,500 $ 148,500 12,495,091 $ 249,902
Net loss
Exercise of stock purchase warrants 434,102 8,682
Issuance of common stock and warrants
for debt placement fee 22,500 450
Distribution of shares of common
stock to holders of the Series 1995
preferred stock electing to receive
dividends in the form of common stock 51,881 1,037
Dividends on convertible preferred stock
Conversion of preferred stock (9,250) (9,250) 296,000 5,920
Repurchase and retirement of common stock (21,567) (431)
Retirement of treasury stock (100,000) (2,000)
------- ----------- ------- ---------- ---------- -----------
Balances at March 31, 1997 693,864 $ 693,864 139,250 $ 139,250 13,178,007 $ 263,560
======= =========== ======= ========== ========== ===========
<CAPTION>
------------------------------------------------------------
Additional Total
paid-in Accumulated Treasury stockholders'
capital deficit stock equity
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Balances at March 31, 1995 $ 41,270,000 $ (26,827,704) $ (69,500) $15,209,609
Net loss (1,495,297) (1,495,297)
Private placement of Series 1995
preferred stock 13,850,018 13,998,518
Private placement of common stock 8,596,992 8,692,992
Conversion of minority interests
Distribution of shares of common
stock to holders of the Series 1995
preferred stock electing to receive
dividends in the form of common stock 49,462 49,723
Dividends on convertible preferred stock (636,436) (636,436)
------------ ------------- ------------ -----------
Balances at March 31, 1996 $ 65,359,628 $ (28,959,437) $ (69,500) $37,422,957
Net loss (3,382,059) (3,382,059)
Exercise of stock purchase warrants 681,604 690,286
Issuance of common stock and warrants
for debt placement fee 273,599 274,049
Distribution of shares of common
stock to holders of the Series 1995
preferred stock electing to receive
dividends in the form of common stock 190,323 191,360
Dividends on convertible preferred stock (1,495,060) (1,495,060)
Conversion of preferred stock 3,330 --
Repurchase and retirement of common stock (80,445) (80,876)
Retirement of treasury stock (67,500) 69,500 --
------------ ------------- ------------ -----------
Balances at March 31, 1997 $ 66,508,484 $ (33,984,501) -- $33,620,657
============ ============= ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 36
TESCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended March 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,495,297) $ (3,382,059)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation expense 1,909,646 3,603,230
Amortization of franchise costs 1,075,379 1,413,654
Amortization of debt issuance costs and debt discount 137,670 38,778
Deferred income tax expense (293,320) (30,141)
Minority interest in the income (loss) of consolidated subsidiaries (23,310) 115
Changes in operating assets and liabilities excluding effects of acquired
businesses:
Accounts receivable from subscribers (397,682) (27,898)
Prepaid expenses and other assets (1,222,598) 961,080
Accounts payable 110,903 (298,534)
Accrued expenses and other liabilities 655,074 1,501,091
------------ ------------
Net cash provided by operating activities 456,465 3,779,316
------------ ------------
Cash flows from investing activities:
Proceeds from the sale of fixed assets 182,471 --
Property additions (2,136,022) (2,713,903)
Proceeds from principal repayment on mortgage receivable 26,037 11,226
Acquisition of cable television systems, net of cash acquired (11,854,415) (13,967,834)
------------ ------------
Net cash used in investing activities (13,781,929) (16,670,511)
------------ ------------
Cash flows from financing activities:
Issuance of debt -- 7,087,592
Principal payments on debt (2,944,659) (273,006)
Decrease in cash overdraft (84,138) --
Dividends paid on preferred stock (586,713) (1,303,700)
Distribution to minority shareholder of subsidiary -- (215,702)
Private placement proceeds, net of issuance costs 22,691,510 --
Exercise of warrants -- 690,286
------------ ------------
Net cash provided by financing activities 19,076,000 5,985,470
------------ ------------
Net increase (decrease) in cash and cash equivalents 5,750,536 (6,905,725)
Cash and cash equivalents at beginning of year 2,778,564 8,529,100
------------ ------------
Cash and cash equivalents at end of year $ 8,529,100 $ 1,623,375
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE> 37
TESCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996 and 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and principles of consolidation
Tescorp, Inc. ("Tescorp") is a Texas corporation that was organized in
1980. The accompanying consolidated financial statements include the accounts
of Tescorp, its subsidiaries and companies in which it holds majority joint
venture interests (referred to herein collectively as the "Company").
All significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company is engaged in the business of acquiring and developing
cable television systems and communications properties in Latin America. During
the fiscal years ended March 31, 1996 and 1997, the Company continued to
concentrate its operations in Argentina. The Company presently provides cable
television service to eleven Argentine cities in six provinces.
Effective as of April 1994, the Company entered into a contractual
Joint Venture (the "Joint Venture") to acquire cable television and
communications properties in Latin America. The Company utilized the Joint
Venture structure to comply with Argentine regulatory policies in effect prior
to March 31, 1995. The Company organized two new subsidiaries to facilitate the
Company's participation in the Joint Venture: Austral Communications Corp.
("Austral"), a Delaware corporation which is a wholly owned subsidiary of the
Company, and Comunicaciones Austral S.A. ("CASA"), an Argentine Sociedad
Anonima which is a 97 percent owned subsidiary of Austral. Additionally, the
Company and its Argentine partners in the Joint Venture (the "Joint Venture
Partners") organized two new Argentine Sociedades Anonimas both of which are 97
percent owned by Austral: Cabledifusion S.A. ("Cabledifusion") and SMR S.A.
("SMR"). Hereinafter, Cabledifusion, SMR and CASA are collectively referred to
as the Argentine Joint Venture Companies. The Joint Venture Partners hold the
remaining 3% ownership of the Argentine Joint Venture Companies.
The Joint Venture is managed by CASA as Managing Venturer.
Cabledifusion is responsible for the management of the cable television systems
in Argentina. SMR, which was originally organized to pursue licenses to own and
operate businesses deploying Enhanced Specialized Mobile Radio and/or related
technologies in Argentina, and CASA hold direct ownership interests in certain
Argentine cable companies.
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<PAGE> 38
During the time period from April 1, 1994 through March 31, 1996, the
Joint Venture Partners acquired pursuant to the Joint Venture the following
Argentine companies which own and operate cable television systems in
Argentina: Televisora Austral S.A. ("Televisora Austral"), CableMax S.A.
("CableMax") which was formerly known as Canal 2 TV Austral S.A., ARTV S.A.
("ARTV") which was formerly known as Reconquista Televisora Color S.A.,
Avellaneda Video Cable S.A. ("AVC") which was merged into ARTV in December
1996, Cable Vision Gallegos S.A. ("CVG"), BTC S.A. ("BTC") which was formerly
known as Teveca S.R.L., CablePlus Bariloche S.A. ("CablePlus"), and SIR TV
S.R.L. ("SIR TV").
In fiscal 1997, Televisora Austral acquired all of the outstanding
equity of TV Nieve, S.A. ("TV Nieve"), a company which provides MMDS television
service in the city of Ushuaia, Tierra del Fuego Province. Additionally, the
Company and the Joint Venture Partners formed Transcable, S.A. ("Transcable")
to own and operate cable television systems in Argentina. Transcable is
effectively 97 percent owned by the Company. During fiscal 1997: Transcable
acquired substantially all of the assets of a cable television system in
Rawson, Chubut Province and certain cable television assets of Comodoro
Rivadavia Sociedad Comercial Colectiva de Television y Radiofusion ("Comodoro")
which operated a cable television system located in Comodoro Rivadavia, Chubut
Province; ARTV acquired substantially all of the assets of TV SIS, S.R.L. ("TV
SIS") which operated a competing cable television system in Reconquista and
Avellaneda, Santa Fe Province; CASA acquired all of the equity interests in
Cable Viedma S.R.L. ("Cable Viedma") and Televiedma, S.R.L. ("Televiedma")
which operate cable television systems in Viedma, Rio Negro Province and Carmen
de Patagones, Buenos Aires Province; and BTC acquired Vision Codificada S.A.
("Vision") a company which operates a UHF wireless system in San Carlos de
Bariloche, Rio Negro Province (the same city in which BTC provides cable
television service). (See Note 3).
Hereinafter, the companies operating cable television systems in the
locations listed below are referred to as the Argentine Cable Companies.
<TABLE>
<CAPTION>
Name of Company Location (City - Province)
- --------------- --------------------------
<S> <C>
Televisora Austral/TV Nieve Ushuaia - Tierra del Fuego
CableMax/CVG Rio Gallegos - Santa Cruz
ARTV Reconquista - Santa Fe
Avellaneda - Santa Fe
BTC/CablePlus/Vision San Carlos de Bariloche - Rio Negro
SIR TV Trelew, Rawson and Puerto Madryn - Chubut
Transcable Rawson - Chubut
Comodoro Rivadavia - Chubut
Cable Viedma/Televiedma Carmen de Patagones - Buenos Aires
Viedma - Rio Negro
</TABLE>
38
<PAGE> 39
Acquisitions of cable television properties prior to December 31, 1995
were funded by the Company through loans (the "Partner Loans") to the Joint
Venture Partners. Historically, the ownership of Cabledifusion, SMR and the
Argentine Cable Companies was held subject to the Joint Venture by the Joint
Venture Partners or nominees of the Company. After December 31, 1995,
acquisitions of cable television properties were funded by the Company through
loans to the Argentine Joint Venture Companies or the Argentine Cable
Companies. Amounts advanced under these loans and the Partner Loans bear
interest at the rate of 12% per annum. In addition to acquisitions, these funds
provided for the payment of the debts of and capital improvements to the
operations of the Argentine Cable Companies and provided financing for the
formation and initial costs of the Argentine Joint Venture Companies. During
the three year period ended March 31, 1997, the Company had advanced to the
Joint Venture Partners, the Argentine Joint Venture Companies and the Argentine
Cable Companies an aggregate of approximately $38.9 million and earned the
right to a preferred return equal to the accrued interest in the amount of
approximately $6.8 million (together, the "Priority Amount").
Upon commencement of the Joint Venture, the Company held through
Austral a 90 percent Joint Venture interest in the Argentine Cable Companies,
Cabledifusion and SMR. The Company granted to two domestic partners an
aggregate 6.6 percent profits interest in its portion of the Joint Venture
after the Company has received distributions equal to the Priority Amount.
Thus, the Company initially held an indirect 84 percent interest in the
economic benefits of the Argentine Cable Companies and Argentine Joint Venture
Companies which were obligated to repay the Partner Loans plus accrued
interest. The effect of this arrangement was to provide the Company with an
opportunity to recoup all funds invested through the repayment of the principal
of the loans, a return equal to the interest accrued and paid on the loans and
84 percent of all remaining economic benefits associated with the Argentine
Cable Companies and Argentine Joint Venture Companies.
In fiscal 1996, the Company increased to 97 percent its Joint Venture
interest in the Argentine Cable Companies, Cabledifusion and SMR and modified
the terms of the profits interest agreements to provide only one domestic
partner with an approximate 1% participation in the Joint Venture after
distributions to the Company equal to the Priority Amount. To effect these
changes in ownership, the Company issued 534,616 shares of newly issued common
stock and 3 percent of the stock of CASA. Following the recovery of its
investment plus a 12% return, the Company will have a 96 percent interest in
all remaining economic benefits associated with the Argentine Joint Venture
Companies and the Joint Venture's interest in the Argentine Cable Companies.
Cash and cash equivalents
For purposes of the consolidated statements of cash flows, the Company
considers cash equivalents to include time deposits, certificates of deposit
and highly liquid debt instruments with original maturities of three months or
less.
39
<PAGE> 40
Fair value of financial instruments
Fair value estimates are made at discrete points in time based on
relevant market information. These estimates may be subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision.
The Company believes that the carrying amounts of its current assets,
current liabilities and debt approximate the fair value of such items.
Allowance for doubtful accounts
The allowance for doubtful accounts totaled $446,831 and $421,178 at
March 31, 1996 and 1997, respectively.
Plant and equipment
Plant and equipment are stated at historical cost, including
acquisition costs allocated to tangible assets acquired. Improvements or
betterments of a permanent nature are capitalized.
Depreciation is computed using the straight-line method over the
estimated useful life of the asset, ranging from 5 to 20 years.
Expenditures for maintenance and repairs are charged to earnings as
incurred. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of
disposal. Gains or losses resulting from property disposals are credited or
charged to operations.
Franchise costs
Franchise costs consist of the value of the license to own and operate
the cable television system and the value of the cable television subscribers
that existed as of the acquisition date. Franchise costs include the difference
between the cost of acquiring cable television systems and amounts assigned to
their tangible assets. The amounts assigned to tangible assets were determined
based upon an appraisal of such assets conducted by an independent, third party
engineer with expertise in the cable television and communications industries.
The franchise costs are amortized on a straight-line basis over their estimated
life, not to exceed 20 years.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-lived Assets to Be Disposed Of ("SFAS 121"), effective for
fiscal years beginning after December 15, 1995. SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles (including but not limited to goodwill) related to those assets to
be held and used in its operations. The Company adopted this policy effective
April 1, 1996. Such adoption did not have a significant effect on the financial
position or results of operations of the Company.
40
<PAGE> 41
It is the Company's policy to periodically evaluate the franchise
costs to determine whether there has been any impairment in value in accordance
with SFAS 121. This evaluation includes, among other things, a review of the
fair market, going concern value of the cable television systems and the value
of the tangible and intangible assets of such systems.
Fair market, going concern value is usually estimated by applying the
cash flow multiple or price per subscriber valuation methods commonly used in
the cable television industry. The valuation method is applied based upon the
type and amount of information available regarding the sale of comparable cable
television companies owned by independent third parties. Using the cash flow
method, the Company determines the fair market, going concern value of its
cable television companies by calculating the product of the aggregate amount
of undiscounted cash flow provided by the operations of the cable television
systems and the estimated average multiple of cash flow paid by independent
third parties for cable television systems which are comparable to those in
which the Company has an ownership interest. Using the price per subscriber
method, the Company determines the fair market, going concern value of the
cable television companies by calculating the product of the number of
subscribers served by the cable television systems which are comparable to
those in which the Company has ownership interests.
Franchise costs are net of accumulated amortization in the amount of
$1,075,378 and $2,489,033 at March 31, 1996 and 1997, respectively.
Minority Interests
Recognition of minority interests' share of income or loss of
consolidated subsidiaries is limited to the amount of such minority interests'
allocable portion of the common equity of those consolidated subsidiaries.
Revenue recognition
Monthly cable service revenue is recognized in the period in which
services are provided. Cable installation revenue is recognized in the period
the related services are provided to the extent of direct selling costs. Any
remaining amount is deferred and recognized over the average period that
subscribers are expected to remain connected to the cable television system.
Income taxes
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are
expected to be recovered or settled.
41
<PAGE> 42
Loss per common and common equivalent share
Loss attributable to common shareholders was calculated by dividing
net loss applicable to common stock (this is calculated by deducting preferred
stock dividends from net loss) by the weighted average number of common shares
outstanding. Common stock equivalents were not used in the calculation, since
their inclusion would cause an anti-dilutive effect. Fully diluted earnings per
share amounts are not presented for fiscal 1996 or 1997 because they do not
materially differ from primary earnings per share.
For the fiscal years ending March 31, 1996 and 1997, the weighted
average number of common shares outstanding was 11,573,696 and 12,880,261,
respectively. The weighted number of common stock and common stock equivalent
shares for the fiscal years ending March 31, 1996 and 1997, was 12,126,385 and
13,498,815, respectively.
Foreign currency translation
Foreign currency assets and liabilities are translated into U. S.
dollars at current rates in effect at the balance sheet date. Since April 1991,
the Argentine government has maintained an exchange rate of one Argentine peso
to one U. S. dollar, therefore there are no recognized transaction gains or
losses.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain reclassifications have been made to the fiscal year 1996
amounts to conform to the fiscal year 1997 presentation.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock Based Compensation" ("FAS 123"), which
establishes financial accounting and reporting standards for stock-based
employee compensation plans as well as transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees. As
allowed by FAS 123, the Company continues to account for stock-based employee
compensation pursuant to APB Opinion No. 25. The Company has included the
disclosures required by FAS 123 in Note 9. The adoption of this standard, in
the opinion of management, did not have a material impact on the Company's
results of operations, financial position or cash flows.
42
<PAGE> 43
NOTE 2 - SUPPLEMENTAL CASH FLOW INFORMATION
During the fiscal years ending March 31, the Company had the following
significant non-cash investing and financing activities:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Issuance of common stock and warrants as a
placement fee for debt $ -- $274,049
Distribution of common stock to holders of Series 1995 preferred
stock electing to receive dividends in the form of common stock $ 49,723 $191,360
Acquisition of Company's common stock in satisfaction of an
outstanding obligation $ -- $ 80,876
Granting of minority interest to joint venture
partners $1,207,412 $ --
Common stock issued for conversion of minority
interests $1,603,848 $ --
</TABLE>
Cash payments for income taxes and interest for the years ended March 31 were
as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Income tax $ 51,547 $ 5,000
Interest expense $218,209 $188,532
</TABLE>
NOTE 3 - ACQUISITIONS
1996 Acquisitions
BTC/CablePlus. In July 1995, Austral committed to loan to the Joint
Venture Partners $6.6 million to acquire pursuant to the Joint Venture 80
percent of the outstanding equity of BTC and CablePlus, the companies that
provide cable television service to San Carlos de Bariloche which is located in
the Argentine Province of Rio Negro. Using proceeds from the loan, the Joint
Venture Partners acquired the 80 percent interest in BTC and CablePlus pursuant
to the Joint Venture for approximately $6.6 million including the assumption of
certain liabilities, of which approximately $5.3 million has been identified as
franchise costs. In addition to the $6.6 million purchase price, the Joint
Venture Partners paid approximately $125,000 of closing costs. The assets of
CablePlus have been contributed to BTC and CablePlus is being liquidated.
43
<PAGE> 44
BTC, which is the only provider of cable television service in San
Carlos de Bariloche, had competed against Vision, a local UHF which provides a
service similar to cable television. BTC acquired Vision in March 1997 (see
"1997 Acquisitions").
SIR TV. In December 1995, Austral committed to loan to the Joint
Venture Partners $6.7 million to acquire pursuant to the Joint Venture the
outstanding equity of SIR TV which provides cable television service to Trelew,
Rawson and Puerto Madryn, all of which are located in the Argentine Province of
Chubut. Using proceeds from the loan, the Joint Venture Partners acquired SIR
TV pursuant to the Joint Venture for approximately $6.5 million including the
assumption of certain liabilities, of which approximately $4.2 million has been
identified as franchise costs. In addition to the $6.5 million purchase price,
the Joint Venture has paid approximately $200,000 of closing costs.
The cable television markets in Trelew, Rawson and Puerto Madryn are
highly competitive, and SIR TV has multiple cable television competitors in
each market. Subsequent to the close of fiscal 1996, Transcable acquired
substantially all of the assets of Canal 4 Rawson which had provided cable
television service in competition to SIR TV in Rawson.
1997 Acquisitions
TV Nieve. On April 1, 1996, the Company agreed to transfer to
Televisora, an option (the "TV Nieve Option") to purchase for approximately
$174,000 a minority interest in the equity of TV Nieve, a company which
provides MMDS television service in the city of Ushuaia, Argentina. On the same
day, Televisora purchased the remaining majority interest in the equity of TV
Nieve for approximately $1.15 million less the outstanding balance of the TV
Nieve liabilities. Accordingly, Televisora now owns all of the outstanding
equity of TV Nieve.
The aggregate purchase price for TV Nieve was approximately $1.3
million including the price paid for the TV Nieve Option, of which
approximately $500,000 has been identified as franchise costs. The Company
advanced to Televisora the funds necessary to consummate the acquisition of TV
Nieve. In addition to the purchase price, Televisora incurred approximately
$50,000 of closing costs relating primarily to the payment of legal and
accounting fees.
Canal 4 Rawson. Transcable acquired substantially all of the assets of
Canal 4 Rawson for approximately $500,000 on May 31, 1996. Canal 4 Rawson
provides cable television service to the city of Rawson in the Chubut Province,
Argentina. The Company currently provides cable television services to the
tri-city area of Trelew, Rawson and Puerto Madryn. In addition to the purchase
price, Transcable incurred approximately $15,000 of closing costs in connection
with this transaction.
44
<PAGE> 45
TV SIS. Effective August 30, 1996, the Company closed its purchase of
substantially all of the assets of TV SIS S.R.L. ("TV SIS"), for approximately
$1.45 million, of which approximately $925,000 has been identified as franchise
costs. The Company has paid approximately $804,000 of the aggregate purchase
price, and the balance will be paid upon the fulfillment of certain conditions
of the purchase agreement, and incurred approximately $25,000 of closing costs
in connection with this transaction.
Comodoro. On December 23, 1996, Transcable acquired substantially all
of the assets of Comodoro, a company that provides cable television service to
approximately 5,000 subscribers in the Argentine city of Comodoro Rivadavia,
which is located in the Chubut Province. The purchase price was approximately
$3.5 million, of which approximately $2.62 million has been identified as
franchise costs. In addition to the purchase price, the Company incurred
approximately $50,000 of closing costs.
Televiedma. On February 11, 1997, the Company acquired the stock of
Televiedma S.R.L., a company that provides cable television service to
approximately 3,500 subscribers in the Argentine cities of Viedma, Rio Negro
Province and Carmen de Patagones, Buenos Aires Province. The purchase price was
approximately $2.2 million, subject to certain adjustments.
Cable Viedma. On February 28, 1997, the Company acquired the stock of
Cable Viedma S.R.L., a company that provides cable television service to
approximately 6,000 subscribers in the Argentine cities of Viedma, Rio Negro
Province and Carmen de Patagones, Buenos Aires Province. The purchase price was
approximately $4.0 million, subject to certain adjustments. In connection with
the Cable Viedma and Televiedma acquisitions, the Company incurred
approximately $120,000 of closing costs in addition to the purchase price and
approximately $4.32 million has been identified as franchise costs. The
acquisitions of Cable Viedma and Televiedma were funded from the proceeds of
$6.0 million of senior debt issued by the Company in February 1997 (see Note
6). The Company plans to merge the operations of Televiedma and Cable Viedma as
both companies operate in the same market.
Vision. In March 1997, BTC entered into an agreement to acquire 100%
of the stock of Vision Codificada, a company which operates a UHF television
system in San Carlos de Bariloche. On April 2,1997 but effective March 1,1997,
BTC acquired the stock of Vision for approximately $1.2 million, of which
approximately $850,000 has been identified as franchise costs. The acquisition
of Vision was financed from a loan in the amount of approximately $1.1 million
from the minority partner of BTC (see Note 6). In addition to the purchase
price, the Company incurred approximately $10,000 of closing costs.
45
<PAGE> 46
The 1996 Acquisitions and the 1997 Acquisitions were completed for
approximately $26.65 million less net liabilities assumed. All of the 1996
Acquisitions and 1997 Acquisitions were accounted for using the purchase method
of accounting and in all cases the sellers were not affiliated with the
Company. Accordingly, the assets and liabilities have been recorded at their
estimated fair value at the date of acquisition, which resulted in franchise
costs of approximately $18.7 million that will be amortized over a 20 year
period from the date of acquisition. The allocation of the purchase price below
is, in certain instances, based on preliminary information and is therefore
subject to revision when additional information concerning asset and liability
valuations is obtained. The determination of the final fair values of the
assets and liabilities of the 1995 acquisitions resulted in adjustments in 1996
to increase other assets by approximately $300,000, decrease other liabilities
by approximately $600,000 and to reduce franchise cost by approximately
$900,000. In the opinion of the Company's management, the asset and liability
valuation for the purchases discussed above should not be materially different
than the allocations shown below. A summary of the purchase price allocation is
as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Accounts receivable and other assets $ 952,000 $ 847,000
Property and equipment 4,610,000 5,396,000
Franchise costs 8,420,000 9,313,000
Accounts payable and other liabilities (1,573,000) (1,139,000)
Bank debt (8,000) --
Deferred income taxes (247,000) (365,000)
Minority interest (307,000) (84,000)
------------ ------------
$ 11,847,000 $ 13,968,000
============ ============
</TABLE>
The following unaudited condensed consolidated pro forma statements of
operations present the results of operations for the years ended March 31, 1996
and 1997, as if the 1996 Acquisitions and 1997 Acquisitions had occurred on
April 1, 1995. However, the pro forma results do not include adjustments for
the acquisition of Canal 4 Rawson, TV SIS, Comodoro and Vision, as these
acquisitions were not significant. The revenues included in the results of
operations for the year ended March 31, 1997 for these cable television systems
totaled approximately $1.2 million. Additionally, the pro forma results are not
necessarily indicative of the financial results that might have occurred had
the transaction included in the pro forma statements actually taken place on
April 1, 1995, or of future results of operations.
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------
1996 1997
------------ ------------
<S> <C> <C>
Revenues $ 25,416,150 $ 26,130,251
Net loss (2,399,490) (3,803,377)
Net loss applicable to common stock (3,035,926) (5,298,437)
Loss per share applicable to common stock (0.26) (0.41)
</TABLE>
46
<PAGE> 47
NOTE 4 - PLANT AND EQUIPMENT
Plant and equipment at March 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Cable systems and related assets $ 7,148,848 $ 14,616,807
Support equipment 352,974 619,235
Leasehold improvements 978,513 1,207,931
Office furniture and equipment 579,086 701,743
------------ ------------
9,059,421 17,145,716
Less: Accumulated depreciation (1,926,483) (5,506,435)
------------ ------------
$ 7,132,938 $ 11,639,281
============ ============
</TABLE>
NOTE 5 - OTHER LIABILITIES
Other liabilities at March 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Due to sellers under the terms of
purchase agreements $ -- $1,069,876
Net deferred tax liability 275,472 435,686
Advances from subscribers 180,892 183,951
Accrued preferred stock dividends 86,734 86,734
Other accrued liabilities 395,723 453,367
---------- ----------
$ 938,821 $2,229,614
========== ==========
</TABLE>
47
<PAGE> 48
NOTE 6 - DEBT
The debt of the Company at March 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Senior notes payable to a group
of investors bearing interest at a rate of
13% per annum ("Senior Notes"). Semi-annual
interest payments begin in August 1997. The
notes mature in February 1998 $ -- $6,000,000
Note payable to minority shareholder of a
subsidiary, bearing interest at the rate of
12% per annum, payable in monthly installments
of $50,000 plus interest -- 1,087,592
Note payable to an individual in monthly
installments of $2,000, increasing to $3,000 in
March 1998, including principal and imputed
interest, maturing in March 2000. Interest has
been imputed at the rate of 10% per annum 112,875 100,724
Note payable to an individual in monthly installments
of $15,000 including principal and imputed interest,
maturing in July 1997. Interest has been imputed at
the rate of 10% per annum 259,520 73,161
Note payable to a bank, bearing interest at the
rate of 16% per annum, payable in monthly installments
of $380 plus interest and maturing in May 1997 5,304 760
Note payable to a bank, bearing interest at the
rate of 18% per annum, payable in monthly installments
of $965 including interest and maturing in June 1999 28,337 --
Note payable to a bank, bearing interest at the rate of
17.4% per annum, payable in monthly installments of $5,000
plus interest and maturing in September 1996 30,000 --
Note payable to a bank, bearing interest at the
rate of 21.7% per annum, payable in monthly installments
of $1,340 plus interest and maturing in December 1996 11,615 --
---------- ----------
$ 447,651 $7,262,237
========== ==========
</TABLE>
48
<PAGE> 49
The debt of the Company is unsecured. The terms of the Senior Notes
restrict the Company from incurring any indebtedness secured by assets existing
at the date of issuance or any debt senior to the Senior Notes. Aggregate
maturities on debt are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
- -----------------
<S> <C>
March 31, 1998 $6,640,787
March 31, 1999 566,508
March 31, 2000 54,942
March 31, 2001 --
March 31, 2002 --
</TABLE>
NOTE 7 - INCOME TAXES
Total income tax expense for the fiscal years ended March 31 consisted
of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
United States
Current $ 19,090 $ --
Deferred (157,000) 175,000
--------- ---------
(137,910) 175,000
--------- ---------
Foreign
Current 391,832 928,692
Deferred (136,320) (205,141)
--------- ---------
255,512 723,551
--------- ---------
Total $ 117,602 $ 898,551
========= =========
</TABLE>
The provision for income taxes for the fiscal years ended March 31
differs from that computed at the federal statutory corporate tax rate as
follows:
<TABLE>
<CAPTION>
1996 1997
----------- ---------
<S> <C> <C>
Tax benefit computed at statutory rates $ (476,000) $(904,000)
Loss of consolidated foreign subsidiaries not
subject to tax 1,075,000 529,000
Differential in foreign and U. S. tax rates (58,000) (25,000)
Amortization of franchise costs 366,000 481,000
Amortization of deferred tax credit (55,000) (98,000)
Other non-taxable items (178,000) 265,000
Change in the valuation allowance (544,000) 650,000
Other (12,398) 551
----------- ---------
$ 117,602 $ 898,551
=========== =========
</TABLE>
49
<PAGE> 50
The components of and changes in the net deferred tax asset as of March 31 were
as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Federal regular tax operating loss carryforwards $ 3,124,000 $ 3,600,000
Allowance for doubtful accounts 85,000 84,000
Foreign tax credit 84,000 84,000
Alternative minimum tax 35,000 35,000
Other -- --
----------- -----------
3,328,000 3,803,000
Valuation allowance (3,153,000) (3,803,000)
Deferred tax asset -- --
----------- -----------
175,000 --
Deferred tax liability-plant and equipment (275,472) (435,686)
----------- -----------
Net deferred tax liability $ (100,472) $ (435,686)
=========== ===========
</TABLE>
At March 31, 1997, the Company had net operating loss carryforwards
that could be utilized to offset future taxable income of an estimated $10.6
million for federal income tax purposes. These carryforwards expire in 1999
through 2012. However, as a result of a change in control in prior years as
defined under Section 382 of the Internal Revenue Code, the annual utilization
of the net operating loss carryforward is estimated to be limited to
approximately $1.3 million of annual taxable income per year. During the year
ended March 31, 1997, the valuation allowance related to the deferred tax
assets was increased by $650,000 primarily due to the realization of additional
net operating losses and other deferred tax assets that are not more likely
than not to be actually realized.
NOTE 8 - CAPITAL STOCK
Series 1990 Preferred Stock
Annual dividends of $0.50 per share on the Series 1990 10% Convertible
preferred stock ("1990 Preferred Stock") are payable on a quarterly basis. Each
share of 1990 Preferred Stock is convertible into shares of the Company's
common stock determined by dividing $5.00 by a conversion price of $3.99 per
share.
50
<PAGE> 51
Shares of 1990 Preferred Stock are redeemable at the option of the
Company at a price equal to $5.00 per share plus any accrued and unpaid
dividends. Terms of the 1990 Preferred Stock provide that the Company may
redeem no fewer than 70,000 shares at any one time unless all outstanding
shares are being redeemed. Only one redemption per quarter is permitted and the
Company is precluded from making a partial redemption if there are fewer than
200,000 shares of 1990 Preferred Stock outstanding. Holders of 1990 Preferred
Stock shares are entitled to one vote per share on all matters for which
holders of common stock may vote (voting as a single class with the shares of
common stock) and are entitled to a liquidation preference of $5.00 per share
plus any accrued or unpaid dividends.
An escrow account arrangement was created at the time of the issuance
of the 1990 Preferred Stock to provide an alternative source of funds for
payment of dividends and liquidation preferences in the event of a default by
the Company. The escrow account arrangement included cash, a $500,000
irrevocable letter of credit, 100,000 shares of the Company's common stock, and
a first lien mortgage on certain real restate owned by the Company. Effective
as of April 1, 1996, under the terms of the Escrow Agreement, the Company was
able to have all items of collateral released from the escrow.
Series 1995 Preferred Stock
The 139,250 outstanding shares of Series 1995 8% Convertible preferred
stock ("1995 Preferred Stock") were issued in a private placement transaction
for $100 per share and carry annual dividends of $8.00 per share payable on a
quarterly basis, except that holders who have so elected may have such
dividends paid in shares of common stock. In the event of liquidation, the
holders of 1995 Preferred Stock are entitled to receive $100 plus accrued and
unpaid dividends before the holders of common stock are entitled to receive any
of the liquidation proceeds. Each share of 1995 Preferred Stock is convertible
into shares of the Company's common stock by dividing $100.00 by a conversion
price of $3.125 per share, subject to certain adjustments (the "Conversion
Rate"). Holders of the 1995 Preferred Stock are entitled to vote as if they had
converted into common stock. However, the 1995 Preferred Stock votes as a class
(separate from the common stockholders).
In the event that the quoted price of the common stock exceeds
$4.6875, subject to certain adjustments, for a period of twenty trading days
beginning on any trading day on or after December 15, 1998, the Company shall
have the right to compel the conversion of all but not less than all of the
1995 Preferred Stock into common stock at the Conversion Rate. Subject in all
respects to this provision, the holders of shares of 1995 Preferred Stock shall
have the right, at their option to convert all or any part of such shares into
common stock.
Common Stock
In May 1995, the Company completed a $9.6 million private placement of
4,800,000 common stock at $2.00 per share. In December 1995, the Company issued
534,616 shares of common stock in connection with the conversion of the
minority interests. In February 1997, the Company issued 22,500 shares of its
common stock as a placement fee on the Senior Debt.
51
<PAGE> 52
NOTE 9 - STOCK OPTIONS AND WARRANTS
The Company accounts for its Stock Option Plans in accordance with
Accounting Principles Board ("APB") Opinion No. 25 and the related
interpretations thereof. The following paragraphs summarize the outstanding
options and warrants of the Company. Unless otherwise stated, the exercise
price was equal to or greater than the fair market price of the stock at the
date of grant.
Pursuant to the Company's 1991 Incentive Plan and upon the
recommendation of the compensation committee of the Board of Directors, the
Company may grant stock options and limited stock appreciation rights with
respect to an aggregate of 2,000,000 shares of common stock. The 1991 Incentive
Plan permits the granting of incentive stock options, non-qualified stock
options, limited stock appreciation rights ("LSARs"), restricted stock, reload
options, and other miscellaneous provisions within each stock option grant.
Grants of options under the 1991 Incentive Plan shall be for terms specified by
the Committee, except that the term shall not exceed 10 years. Provisions of
the 1991 Incentive Plan generally provide that in the event of a change of
control the LSAR provision of the option grant (if included in an option grant)
would become immediately exercisable for the period of 60 days following the
change of control.
In September 1995, 50,000 options were granted at an exercise price of
$2.75 per share, and are exercisable based on a two year vesting schedule. In
December 1995, 550,000 options were granted at an exercise price of $3.00 per
share and are exercisable based on a three year vesting schedule. In March
1997, 600,000 options were granted at an exercise price of $3.5625 per share.
None of the options granted pursuant to the 1991 Incentive Plan were exercised
during fiscal 1996 and 1997. At March 31, 1997, 1,850,000 options were
outstanding, and 695,837 were exercisable with exercise prices ranging from
$1.25 to $3.00.
Pursuant to the Company's 1993 Non-Employee Director Stock Option Plan
("NEDSOP"), the Company may grant options with respect to an aggregate of
150,000 shares of common stock. The terms of the NEDSOP provide that each
non-employee director receives a grant of 8,333 options to purchase common
stock upon election or appointment to the Board of Directors. On the first and
second anniversary on the Board, the non-employee director is entitled to
receive another grant of 8,333 options to purchase common stock. Upon adoption,
all non-employee directors who had served at least 2 years on the Board
received a grant of 25,000 options to purchase common stock. A non-employee
director who had served only one year, received a grant of 16,666 options to
purchase common stock .
Additionally, pursuant to the terms of the NEDSOP, effective as of
July 8, 1995 and 1996, 8,333 and 8,333 options were granted at an exercise
price of $3.63 and $3.25 per share, respectively. All of the options granted
are exercisable based on a three year vesting schedule. None of the options
granted pursuant to the NEDSOP were exercised during fiscal 1996 and 1997. At
March 31, 1997, 66,666 options were outstanding and 50,000 shares were
exercisable with exercise prices ranging from $1.21 to $3.25.
52
<PAGE> 53
In May 1995, the Company issued stock warrants to purchase 288,000
shares of common stock that expire in May 2000 and have an exercise price of
$2.00 per share. Also in May 1995, the Company issued stock warrants to
purchase 120,000 shares of common stock that expire in May 1998. The exercise
price for these warrants is as follows: (i) 30,000 shares @ $2.00; (ii) 30,000
shares @ $2.50; (iii) 30,000 shares @ $3.00 and (iv) 30,000 shares @ $3.50.
In December 1995, the Company issued stock warrants to purchase
178,200 shares of common stock (the "December 1995 Warrants") that expire in
December 2000. The December 1995 Warrants have an exercise price of $3.125 per
share.
In connection with the issuance of the Senior Notes in February 1997,
the Company issued detachable warrants to purchase 210,000 shares of common
stock. Additionally, for professional services provided in connection with the
placement of the Senior Notes, the Company issued warrants to purchase 90,000
shares of common stock. The stock warrants have an exercise price of $4.00 per
share and expire in February 2002. In accordance with FAS No. 123, the Company
calculated the fair market value of the stock warrants issued for professional
services provided as approximately $184,000 and capitalized the cost as
additional debt issuance cost to be amortized over the term of the debt.
The Company has additional stock options which were issued prior to
the fiscal 1991 recapitalization of the Company. These stock options were
issued to certain employees to purchase shares of the Company's common stock at
$6.18 per share and expire in 1998. At March 31, 1997, 24,270 options were
outstanding and exercisable. In connection with the recapitalization of the
Company, the number of shares of common stock issuable upon exercise of these
options and the related exercise price have been adjusted to reflect the
exchange of $.01 par value common stock for $.02 par value common stock.
The estimated fair values noted below are based on the Black-Scholes
model and are stated in current annualized dollars on a present value basis.
The key assumptions used in the model for purposes of these calculations
include the following: (a) a discount rate equal to the 10-year Treasury rate
on the date of grant; (b) a volatility factor; (c) the term of the option or
warrant; (d) the closing price of the respective common stock on the date of
grant; and (e) an expected dividend rate of zero. The actual value that the
warrant or option holders may realize will depend upon the extent to which the
stock price exceeds the exercise price on the date the options are exercised.
Accordingly, the value realized by such holders will not necessarily be the
value determined by the model.
53
<PAGE> 54
A summary of Options and Warrants outstanding as of and for the fiscal years
ended March 31 is as follows:
<TABLE>
<CAPTION>
1996 1997
---------------------- ------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
& Warrants Price & Warrants Price
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year 1,647,052 $ 2.25 2,841,585 $2.46
Granted 1,194,533 $ 2.74 908,333 $3.71
Exercised -- -- 434,102 $1.59
Forfeited -- -- 488,680 $4.05
--------- ---------
Outstanding at
end of year 2,841,585 $ 2.46 2,827,136 $2.72
========= =========
Options and Warrants
exercisable at year end 1,888,808 1,659,085
Weighted-average fair value
of options granted during
the year $ 1.58 $ 2.36
</TABLE>
The following table summarizes information about fixed stock options and stock
purchase warrants outstanding at March 31,1997.
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
-------------------------------------------- --------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Outstanding Life Exercise Exercisable Exercise
Exercise Prices at 3/31/97 (In Years) Price at 3/31/97 Price
--------------- ---------- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C>
$1.21 to $1.63 700,000 6.732 $ 1.2521 537,500 $ 1.2528
$2.00 to $2.75 398,000 3.486 $ 2.1319 373,000 $ 2.0905
$3.00 to $3.5625 1,404,866 8.297 $ 3.2708 424,311 $ 3.0895
$4.00 to $6.18 324,270 4.580 $ 4.1632 324,270 $ 4.1632
--------- ---------
$1.21 to $6.18 2,827,136 $ 2.7130 1,659,081 $ 2.4797
========= =========
</TABLE>
54
<PAGE> 55
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
in these financial statements. Had compensation cost for the Company's option
and warrant grants, since April 1, 1995, been determined on the fair value at
the grant dates for awards under those plans consistent with the method of FAS
No. 123, the Company's net loss per share for the fiscal years ended March 31
would have been adjusted to the pro forma amounts indicated below, which may
not necessarily be indicative of pro forma adjustments in future years.
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Net loss applicable to common stock:
As reported $ (2,131,733) $ (4,877,119)
------------ ------------
Pro forma $ (2,323,028) $ (5,320,795)
------------ ------------
Earnings per share:
As reported $ (0.19) $ (0.38)
------------ ------------
Pro forma $ (0.20) $ (0.41)
------------ ------------
</TABLE>
NOTE 10 - RELATED PARTY TRANSACTIONS
Certain expenses have been allocated to the Company for administrative
and other services provided by an entity affiliated with the Company's
principal stockholder. Such expenses totaled approximately $130,000 and
$174,000 during fiscal 1996 and 1997, respectively.
The Company currently leases office space in a six story office
building in downtown Austin. The office building has been acquired by a
partnership in which an officer of the Company serves as a trustee for a trust
that is a limited partner in the partnership.
A former employee of the Company and current member of the board of
directors was indebted to the Company in the amount of approximately $84,000
including accrued and unpaid interest. In March 1996, the Company reached an
agreement with this individual to satisfy his obligation by taking title to
21,567 shares of the outstanding common stock at a price of $3.75 per share and
cash of approximately $5,000. This transaction occurred during the first
quarter of fiscal 1997 and the Company retired the shares of common stock.
In June 1995, the Company loaned $174,000 to its Joint Venture
Partners for the purpose of acquiring an option to acquire an indirect economic
interest in the outstanding equity of TV Nieve S. A., the Company that provides
MMDS service in Ushuaia, Argentina. At March 31, 1996, the Company had not yet
elected to exercise this option to include this interest in the Joint Venture.
Accordingly, the Company included the notes receivable in the amount of
$174,000 in other assets on its balance sheet at March 31, 1996.
55
<PAGE> 56
NOTE 11 - OPERATING LEASES
The Company leases various buildings, equipment and office facilities
under operating leases ranging from one year to 12 years. The total minimum
future lease payments under these non-cancelable operating leases having an
initial term of one year or more are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Lease Expense
- ----------------- -------------
<S> <C>
March 31, 1998 $ 554,253
March 31, 1999 417,308
March 31, 2000 220,196
March 31, 2001 141,964
March 31, 2002 122,664
Thereafter 334,577
----------
Total $1,790,962
==========
</TABLE>
Total rental expense under operating leases for the years ended March
31, 1996 and 1997 was approximately $270,000 and $608,000, respectively.
NOTE 12 - SEGMENT INFORMATION
The Company's operations by geographic area for the fiscal years ended
March 31 are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Revenues
Argentina $ 16,009,116 $ 22,580,466
United States -- --
------------ ------------
$ 16,009,116 $ 22,580,466
============ ============
Operating income (loss)
Argentina $ 25,832 $ (545,369)
United States (1,496,123) (1,846,079)
------------ ------------
$ (1,470,291) $ (2,391,448)
============ ============
Identifiable assets
Argentina $ 35,491,909 $ 48,706,226
United States 8,752,736 920,736
------------ ------------
$ 44,244,645 $ 49,626,962
============ ============
</TABLE>
56
<PAGE> 57
NOTE 13 - COMMITMENTS AND CONTINGENCIES
From time to time, the Company may have contingent liabilities
resulting from claims and commitments incident to the ordinary course of
business. Management believes that the probable resolution of any such
contingencies will not materially affect the financial position or results of
operations of the Company.
The Comite Nacional de Radiodifusion ("COMFER"), an Argentine
governmental agency which is similar to the Federal Communications Commission
in the United States, licenses and regulates cable television operations in
Argentina. Effective October 20, 1994, the United States and Argentina ratified
the Bi-Lateral Trade Agreement which provided, among other things, for the
ownership of Argentine cable television systems by companies domiciled in the
United States. Effective March 27, 1995 COMFER promulgated regulations relating
to the licensure and approval of companies domiciled in the United States to
own and operate Argentine cable television systems, and a representative of
COMFER has indicated to the Company's management that COMFER no longer will
distinguish between Argentine and U.S. applicants in the licensure process.
Based on advice it has received, management is of the opinion that
U.S. companies will be licensed to own and operate Argentine cable television
systems. To date and to the best knowledge of the management of the Company,
COMFER has formally approved or licensed two U.S. companies; however, the
Company has no assurance that COMFER will approve its licensure. Management is
currently seeking licensure of the Company or its subsidiaries with the
assistance of the Joint Venture Partners and local counsel. A decision by
COMFER to deny the licensure of the Company or its affiliated entities to own
and operate cable television systems in Argentina could have a material adverse
impact on the operations and value of the Company.
57
<PAGE> 58
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
58
<PAGE> 59
================================================================================
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors, executive officers and key employees of the Company as of
August 12, 1997 are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jack R. Crosby 71 Chairman of the Board and Chief Executive
Officer
Jack S. Gray, Jr. 40 President, Chief Operating Officer and Director
Neil R. Austrian, Jr. 32 Senior Vice President and Chief Financial
Officer
David Justice 47 Chief Financial Officer of Latin America
John D. Becker 33 Controller
Osvaldo Rossi 43 Chief Executive Officer of Cabledifusion S.A.*
Carlos Saba 42 Chief Operating Officer of Cabledifusion S.A.*
Winston J. Churchill 56 Director
J. Kelly Elliott 66 Director
Lee A. Lahourcade 40 Director
</TABLE>
*Cabledifusion S.A. is a subsidiary of Tescorp that manages its cable
operations in Argentina.
All directors hold office until the next annual meeting of shareholders
and until their successors have been duly elected and qualified. Executive
officers are elected by and serve at the discretion of the Board of Directors.
Jack R. Crosby has been Chairman of the Board of Directors of the
Company since its inception in 1980, and became Chief Executive Officer in
1991. Mr. Crosby is the General Partner of Rust Group, L.P., a Texas limited
partnership holding certain of Mr. Crosby's business assets, and he is the
president of Rust Capital, Ltd. ("Rust Capital"), a small business investment
corporation with its headquarters in Austin, Texas. Mr. Crosby has been
involved in the cable television industry since its infancy, and he was in the
first group of cable television executives recognized by the National Cable
Television Association as a pioneer of the industry. Mr.
59
<PAGE> 60
Crosby has been involved in the development of cable television systems in the
United States, Mexico and Switzerland. Mr. Crosby presently serves as a
director of Prime Cable, Inc. ("Prime Cable") of Austin, Texas. Prime Cable
and its affiliates own and operate cable television systems in Chicago,
Illinois, Las Vegas, Nevada, Anchorage, Alaska and other markets. A former
Director and Chairman of the National Cable Television Association, Mr. Crosby
has provided cable television consulting services to the governments of West
Germany, Austria and Holland. Mr. Crosby also serves as a director of two
other publicly traded companies: National Dentex Corporation, a manufacturer
of dental appliances, and DSI Toys, Inc., a toy manufacturer and distributor.
Jack S. Gray, Jr. has been a director of the Company since 1989. Since
April 1992, Mr. Gray has been the President and Chief Operating Officer of the
Company. From August 1991 until April 1992, Mr. Gray was President of J&J
Mercantile, an investment firm in Austin, Texas. From April 1991 until August
1991, Mr. Gray was Deputy Director of Appointments in the Office of the
Governor, State of Texas. From 1985 to 1991, he was the Chief Financial
Officer of the "Rust Group" (which collectively refers to the business
activities of Mr. Crosby), and in this capacity, he served as an officer or
director of numerous entities in which Mr. Crosby held direct and indirect
ownership interests. Prior to 1985, Mr. Gray was an investment banker with
Duncan, Smith & Co., San Antonio, Texas.
Neil R. Austrian, Jr. has been a Vice President of the Company since
1994 and was named Senior Vice President and Chief Financial Officer in July
1997. Mr. Austrian has worked in association with Mr. Crosby for the past
seven years and, prior to joining Tescorp, was an Associate with Rust Capital.
Mr. Austrian serves on the Board of Directors of Software Publishing
Corporation.
David Justice has been Chief Financial Officer - Latin America since
joining the Company in September 1995. Mr. Justice is a ten year veteran of
the cable television industry. Prior to joining the Company, Mr. Justice was
employed by Prime Cable, which he joined in 1981 as Controller, and then served
as Treasurer. During his tenure, Prime Cable grew from approximately 25,000
subscribers to 600,000 subscribers, and provided cable television service to
customers in Alaska, New York, Georgia, Texas, Maryland, Nevada, North
Carolina, Indiana and Wyoming. Mr. Justice worked for Seidman & Seidman and
Coopers & Lybrand as a Certified Public Accountant before joining Prime Cable.
John D. Becker has been the Controller of the Company since 1990. Mr.
Becker is a Certified Public Accountant and a member of the American Institute
of Certified Public Accountants, and the Texas Society of Certified Public
Accountants.
Osvaldo Rossi has acted as Chief Executive Officer of Cabledifusion S.A.
since 1995. Mr. Rossi is a native of Argentina who resides in Buenos Aires.
Mr. Rossi is the former Engineering and Technology Advisor to the ATVC, the
Argentine cable television trade association, and is the author of Cable and
Satellite TV, which was published in Argentina in 1990. He has also authored
approximately 60 articles regarding cable television and telecommunications
that have been published in various Latin American newspapers and trade
60
<PAGE> 61
publications. Mr. Rossi is a founder of Proyectos de Comunicaciones, S.A.
("Proyectos"), a company that provides engineering and operational consulting
services to cable television and telecommunications companies. Proyectos has
had as clients such Argentine firms as Clarin/Canal 13, Cablevision, Video
Cable Comunicaciones, S.A., and Telintar. Prior to forming Proyectos, Mr.
Rossi served at Video Cable Comunicacion, S.A., one of the largest cable
television operators in Argentina, in several capacities including Vice
President of Engineering and Technology. Mr. Rossi earned an Electronics
Engineer certification from the National University of Technology (Argentina)
in 1979.
Carlos Saba has acted as Chief Operating Officer of Cabledifusion S.A.
since 1995. Mr. Saba is a native of Argentina who resides in Buenos Aires.
Mr. Saba is also a founder of Proyectos. Mr. Saba was a founder of Cabtec,
S.A. and Cabtec Industria Eletronica L.T.D.A., companies which designed and
manufactured cable television equipment in Argentina and Brazil under license
from C-Cor Electronics, Inc. Mr. Saba is the founder of several cable
television systems in Argentina and Brazil and from 1981 to 1988 Mr. Saba
worked in various capacities, including Chief Engineer, with Video Cable
Comunicaciones, S.A.. Mr. Saba earned a Masters of Business Administration
degree from Belgrano University (Argentina) in 1988 and an Electronics Engineer
certification from the National University of Technology (Argentina) in 1980.
Winston J. Churchill has been a director of the Company since July 1995.
Mr. Churchill formed Churchill Investment Partners, Inc. in 1989 and CIP
Capital, Inc. in 1990, each an investment and venture capital fund, and
continues to be a principal of each. From 1989 to 1993 he served as Chairman
of the Finance Committee of the $24 billion Pennsylvania Public School
Employees' Retirement System.
J. Kelly Elliott has served as a director of the Company since 1983.
Since 1990, Mr. Elliott has been Chairman of the Board and Chief Executive
Officer of Sigma Electronics, a manufacturer and distributor of electrical
transformers. Mr. Elliott has also served since 1992 as Chairman and Chief
Executive Officer of Omnicomp Graphics, Inc., a computer graphics company, and
Seaboard-Avval, Inc., an oil field equipment manufacturer. From 1983 through
1989 Mr. Elliott was President and Chief Executive Officer of the Company.
From 1976 to 1983, Mr. Elliott served as President and Chief Executive Officer
of several wholly-owned subsidiaries of Hughes Tool Company, including Brown
Oil Tools and BJ-Hughes, each of which was engaged in oil field services. In
June of 1993, Mr. Elliott was elected Chairman of the Board of Grant Tensor
Geophysical Corporation, a publicly traded oil field service company, and he
served in that capacity through November 1995.
Lee A. Lahourcade has been a director of the Company since March 1992.
Mr. Lahourcade was president of Rust Capital from June 1988 to June 1992.
Since then, Mr. Lahourcade has served as a principal at Vaughn, Nelson,
Scarborough, McConnell, L.P., a money management firm. Prior to joining Rust
Capital, Mr. Lahourcade was a vice president of Merrill Lynch & Co. in the
investment banking area.
61
<PAGE> 62
ITEM 10. EXECUTIVE COMPENSATION
Compensation of Directors. Each director who is not an employee of the
Company receives $1,000 for each board meeting attended, plus $500 for each
committee meeting attended. Employees of the Company are not paid directors'
fees. No member of the Board of Directors was paid any compensation in the
Company's 1997 fiscal year for his service as a director of the Company other
than pursuant to the standard compensation arrangement for directors.
At the annual meeting of shareholders held in October 1993, the 1993
Non-Employee Directors Stock Option Plan (the "NEDSOP") was approved. Pursuant
to the NEDSOP, non-employee directors are entitled to receive one option to
purchase 8,333 shares of Company Common Stock upon becoming director, a second
option to purchase an additional 8,333 shares at the completion of one year of
service, and a third option to purchase an additional 8,334 shares at the
completion of two years of service.
The NEDSOP was adopted to further the goal of attracting and retaining
highly qualified non-employee directors of the Company and to motivate them to
assert their best efforts for the Company. As a result of changes effected at
last year's annual meeting, non-employee directors are eligible to participate
in the Company's 1991 Incentive Plan. As employees, neither Mr. Gray nor Mr.
Crosby is eligible to participate in the NEDSOP.
62
<PAGE> 63
Compensation of Executive Officers The following table sets forth
certain information for the fiscal years ended March 31, 1997, 1996 and 1995,
with respect to the Chief Executive Officer (Mr. Crosby) and the President and
Chief Operating Officer (Jack S. Gray, Jr.) at March 31, 1997. There were no
other executive officers of the Company who earned annual compensation that
exceeded $100,000 during fiscal 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
========================================================================================================================
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
(SECURITIES
FISCAL ------------------------------ UNDERLYING ALL OTHER
YEAR NAME PRINCIPAL POSITION SALARY BONUS OTHER OPTIONS)* COMPENSATION
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 Jack R. Crosby Chairman and CEO $150,000 -- -- 275,000 --
Jack S. Gray, Jr. President and COO $125,000 -- -- 225,000 --
- ------------------------------------------------------------------------------------------------------------------------
1996 Jack R. Crosby Chairman and CEO $112,500 -- -- 250,000 --
Jack S. Gray, Jr. President and COO $125,000 -- -- 175,000 --
- ------------------------------------------------------------------------------------------------------------------------
1995 Jack R. Crosby Chairman and CEO $100,000 -- -- (c) --
Jack S. Gray, Jr. President and COO $125,000 -- -- (c) --
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Options granted include a limited stock appreciation right that becomes
exercisable at the employee's option only if there is a change in
control of the Company.
63
<PAGE> 64
Stock Option Grants in 1997. The Company maintains an incentive stock
option plan, pursuant to which 2,000,000 shares of Common Stock are issuable to
employees of the Company. The following table shows information concerning
individual grants of stock options during fiscal 1997 to the named executive
officers.
<TABLE>
<CAPTION>
====================================================================================================
NO. OF % OF TOTAL
NAME SECURITIES OPTIONS EXERCISE PRICE EXPIRATION
UNDERLYING GRANTED TO DATE
OPTIONS EMPLOYEES
GRANTED*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack R. Crosby 275,000 45.8 $3.5625 3/11/07
- ----------------------------------------------------------------------------------------------------
Jack S. Gray, Jr. 225,000 37.5 $3.5625 3/11/07
====================================================================================================
</TABLE>
* All options shown are exercisable in three equal annual installments
beginning March 31, 1998.
Stock Option Exercises and Holdings. The following table shows
information regarding stock option exercises and unexercised options held as of
the end of fiscal 1997 by the named executive officers.
<TABLE>
<CAPTION>
============================================================================================================
AT MARCH 31, 1997
---------------------------------------------------------------------
NUMBER OF UNEXERCISED OPTIONS VALUE OF IN-THE-MONEY OPTIONS
---------------------------------------------------------------------
NAME OPTIONS EXERCISABLE UNEXERCISABLE EXERCISABLE* UNEXERCISABLE*
EXERCISED
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Jack R. Crosby 0 327,083 522,917 $590,104 $266,146
Jack S. Gray, Jr. 0 302,083 197,917 $577,604 $241,146
============================================================================================================
</TABLE>
* Based on closing price of $3.50 on March 31, 1997.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation decisions for executive officers are made by the
Compensation Committee of the Board of Directors, which currently consists of
Lee A. Lahourcade, J. Kelly Elliott and Winston J. Churchill. Mr. Elliott
served as the President and Chief Executive Officer of the Company from 1983
through 1989. See "Certain Relationships and Related Transactions."
64
<PAGE> 65
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of the Company's common
stock, and preferred stock that may be deemed beneficially owned on March 31,
1997 by each person known to the Company to be the beneficial owner of more
than 5% of the Company's outstanding voting securities, along with information
with respect to each of the nominees for director and all directors and
officers as a group as of March 31, 1997.
<TABLE>
<CAPTION>
Common Stock 1990 Preferred Stock 1995 Preferred Stock
--------------------------- ------------------------- ------------------------------------
Amount and Amount and Amount and
Nature of Percent Percent Nature of Percent Nature of Percent
Beneficial of of Beneficial of Beneficial of
Beneficial Owner Ownership Class (1) Class (2) Ownership Class (3) Ownership Class (4)
- ----------------------------------- ------------- ---------- ---------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BEA Associates 2,250,000 (5) 15.5 12.1 -- -- 40,000 28.7
153 East 53rd Street
One Citicorp Center
New York, NY 10022
Argentina Equity Investment 1,855,000 (6) 13.1 10.0 -- -- 30,000 21.5
Partnership
c/o BEA Associates
153 East 53rd Street
One Citicorp Center
New York, NY 10022
K-G, L.P. 1,265,192 (7) 9.6 6.8 -- -- 1,250 *
Winston J. Churchill
Frederick M. Danziger
John Fletcher
W&M Management Company, Inc.
641 Lexington Avenue
29th Floor
New York, NY 10022
Fred Lieberman 1,163,060 (8) 8.8 6.3 -- -- -- --
6251 B Park of Commerce Blvd.
Boca Raton, FL 33487
Arnhold & S. Bleichroeder, Inc. 1,133,850 (9) 8.0 6.0 -- -- 16,750 12.0
1345 Avenue of the Americas
New York, NY 10022.
Harvey Sandler 928,200(10) 7.0 5.0 -- -- -- --
c/o Sandler Capital
767 Fifth Avenue, 45th Floor
New York, NY 10153
Banque Nationale de Paris 691,673(11) 5.0 3.7 -- -- 20,000 14.4
(Switzerland) Ltd.
c/o Arnhold & S. Bleichroeder
1345 Avenue of the Americas
New York, NY 10022
SC Fundamental, Inc. 640,000(12) 4.6 3.5 -- -- 20,000 14.4
Gary N. Siegler
Peter M. Collery
712 Fifth Avenue, 19th Floor
New York, NY 10019
The SC Fundamental Value Fund, L.P 416,000(12) 3.1 2.2 -- -- 13,000 9.3
712 Fifth Avenue, 19th Floor
New York, NY 10022.
</TABLE>
65
<PAGE> 66
<TABLE>
<CAPTION>
Common Stock 1990 Preferred Stock 1995 Preferred Stock
--------------------------- ------------------------- ------------------------------------
Amount and Amount and Amount and
Nature of Percent Percent Nature of Percent Nature of Percent
Beneficial of of Beneficial of Beneficial of
Beneficial Owner Ownership Class (1) Class (2) Ownership Class (3) Ownership Class (4)
- ----------------------------------- ------------- ---------- ---------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
The South America Fund N.V. 395,000(13) 2.9 2.1 -- -- 10,000 7.2
c/o BEA Associates
153 East 53rd Street
New York, NY 10022 .
Clarex Limited 337,500(14) 2.5 1.8 -- -- 10,000 7.2
Scotiabank Bldg., 3rd Floor
Rawson Square
Nassau, N.P., Bahamas
First Eagle Fund N.V. 320,000(15) 2.4 1.7 -- -- 10,000 7.2
c/o Arnhold & S. Bleichroeder, Inc.
1345 Avenue of the Americas
New York, NY 10022.
Mervyn L. Lapin 311,475(16) 2.4 1.7 46,534 6.7 -- --
232 W. Meadow Drive
Vail, Co 81657
Kenneth Pasternak 305,125(17) 2.3 1.6 40,000 5.8 -- --
525 Washington Blvd. Suite 2401
Jersey City, NJ 07310
SC Fundamental Value BVI, Inc. 224,000(12) 1.7 1.2 -- -- -- --
712 Fifth Avenue, 19th Floor
New York, NY 10022
72,055 * * 57,500 8.3 -- --
Special Situation Fund, L. P. III
153 East 53rd Street
New York, NY 10022
Jack R. Crosby 463,544(18) 3.4 2.5 -- -- -- --
327 Congress Avenue, Suite 200
Austin, Texas 78701
J. Kelly Elliott 58,664(19) * * -- -- -- --
327 Congress Avenue, Suite 200
Austin, Texas 78701
Jack S. Gray, Jr. 557,056(20) 4.1 3.0 9,850 1.4 -- --
327 Congress Avenue, Suite 200
Austin, Texas 78701
Lee A. Lahourcade 26,880(21) * * 1,500 * -- --
327 Congress Avenue, Suite 200
Austin, Texas 78701
All directors and officers as a 1,517,986 10.9 7.9 11,350 1.6 1,250 *
group (five persons)
</TABLE>
- ---------------------
* Less than one percent
66
<PAGE> 67
(1) Calculated as the fraction of which the numerator is the total number of
common stock shares or common stock equivalent shares owned by the
director, officer or holder of 5% or more of the Company's shares (the
"Beneficial Owner") which is calculated as the sum of the number of
shares of common stock owned, the number of shares of common stock into
which the preferred stock owned could be converted, and the number of
shares of common stock which could be acquired within 60 days by the
exercise of warrants or options, and the denominator of which is the sum
of the total number of shares of common stock outstanding, the number of
shares of common stock into which the preferred stock owned by the
Beneficial Owner could be converted, and the number of shares of common
stock which could be acquired by the Beneficial Owner within 60 days by
the exercise of warrants and options.
(2) Calculated as the fraction of which the numerator is the total number of
common stock shares or common stock equivalent shares owned by the
Beneficial Owner which is calculated as the sum of the number of shares
of common stock owned, the number of shares of common stock into which
the preferred stock owned could be converted, and the number of shares
of common stock which could be acquired within 60 days by the exercise
of warrants or options, and the denominator of which is the sum of the
total number of shares of common stock outstanding, the total number of
shares of common stock into which the aggregate outstanding preferred
stock could be converted, and the number of shares of common stock which
could be acquired by the Beneficial Owner within 60 days by the exercise
of warrants or options.
(3) Based on 693,864 shares outstanding.
(4) Based on 139,250 shares outstanding.
(5) BEA Associates filed a Schedule 13G dated January 15, 1996, as an
Investment Adviser registered under Section 208 of the Investment
Advisers Act of 1940 pursuant to Rules 13d-1(b) or 13d-2(b). This
filing reported the beneficial ownership of the shares owned by
Argentina Equity Investment Partnership. Additionally, in its filing it
stated that CS Holding indirectly owns 80% of the partnership units in
BEA Associates. CS Holding and its direct and indirect subsidiaries, in
addition to BEA Associates, may beneficially own shares of the Company
and such shares were not reported on the Schedule 13G filing. However,
the Company believes that under certain conditions, shares owned by The
South America Fund, N.V. may be deemed to be beneficially owned by BEA,
and are included in the shares beneficially owned by BEA Associates.
(6) Includes 895,000 shares of common stock held directly and 960,000 shares
issuable upon conversion of the Series 1995 preferred stock held
directly.
67
<PAGE> 68
(7) K-G, L.P., John Fletcher, W&M Management Company, Inc., Frederick M.
Danziger and Winston J. Churchill, Jr. filed an amended Schedule 13D on
July 1, 1995 in which they indicated they were members of a "group" for
the purposes of Section 13(d) of the Securities Exchange Act of 1934 and
the regulations promulgated thereunder. Includes 1,215,414 shares held
directly, 9,778 shares subject to currently exercisable options held by
Winston J. Churchill, and 40,000 shares issuable upon conversion of the
Series 1995 preferred stock (which is held directly by Winston J. and
Barbara G. Churchill), 299,342 of such shares are held by Mr.
Churchill and his wife, Barbara G. Churchill, 62,500 shares are held by
the Winston J. Churchill Retirement Plan of which Mr. Churchill is a
beneficiary. The Sharpe Irrevocable Intervivos Trust, of which Jack R.
Crosby's wife is the sole beneficiary, holds a limited partnership
interest in 853,572 of such shares (see note 18).
(8) Mr. Lieberman filed a Schedule 13D dated March 17, 1992 in which he
stated that he has no current definitive plan to gain control of the
Company or to cause the Company to change its current board of directors
or management, capitalization, dividend policy, business or corporate
structure.
(9) Arnhold and S. Bleichroeder, Inc. filed a Schedule 13G on February 13,
1997, in which they indicated that they disclaimed beneficial ownership
of 621,700 shares of common stock reflected in the table. Includes
486,150 shares subject to warrants, 536,000 shares issuable upon
conversion of the Series 1995 preferred stock and 111,700 shares held in
discretionary accounts as to which Bleichroeder acts as investment
advisor.
(10) Mr. Sandler, 21st Century Communications Partners, L.P., 21st Century
Communications T-E Partners, L.P., 21st Century Communications Foreign
Partners, L.P., Sandler Investment Partners, L.P., Sandler Capital
Management and ARH Media Corp. filed a Schedule 13D dated May 5, 1995 in
which they indicated that they were members of a "group" for the
purposes of Section 13(d) of the Securities Exchange Act of 1934 and the
regulations promulgated thereunder.
(11) Consists of 34,173 shares of common stock held directly, 640,000 shares
issuable upon conversion of the Series 1995 preferred stock held
directly and 17,500 shares subject to warrants.
(12) The SC Fundamental Value Fund, L.P., S.C. Fundamental Value BVI, Inc.,
S.C. Fundamental, Inc., Gary N. Siegler and Peter M. Collery filed a
Schedule 13D dated May 2, 1995 in which they indicated that The SC
Fundamental Value Fund, L.P. and S.C. Fundamental, Inc. were members of
a "group," and that Mr. Siegler and Mr. Collery may, without so
admitting, be members of a "group," in each case, for the purposes of
Section 13(d) of the Securities Exchange Act of 1934 and the regulations
promulgated thereunder.
(13) Includes 40,000 shares of common stock held directly, 320,000 shares
issuable upon conversion of the Series 1995 preferred stock held
directly and 35,000 shares subject to currently exercisable warrants.
(14) All such shares are held directly in a discretionary account over which
Arnhold and S. Bleichroeder, Inc. exercises voting and investment
control. Arnhold and S. Bleichroeder,
68
<PAGE> 69
Inc. disclaims beneficial ownership of such shares, all of which are
reflected in their holdings. See note (9) above.
(15) Consists of shares issuable upon conversion of the Series 1995 preferred
stock held directly.
(16) Includes 253,162 shares of common stock held directly and 46,534 shares
of the Series 1990 preferred stock which can be converted into 58,313
shares of common stock.
(17) Includes 255,000 shares held directly and 50,125 shares of common stock
issuable upon the conversion of the shares of Series 1990 preferred
stock held directly.
(18) Excludes 172,043 shares held by the Jack R. Crosby Intervivos Trust as
to which members of Mr. Crosby's immediate family are the beneficiaries
and as to which Mr. Crosby disclaims any voting or investment power.
Excludes 853,752 shares held through a limited partnership interest by a
partnership in which the Sharpe Irrevocable Intervivos Trust, in which
Mr. Crosby's wife is the sole beneficiary and as to which Mr. Crosby
disclaims any voting or investment power. See footnote (7) above.
Includes 136,460 shares held directly by Mr. Crosby and 327,084 shares
subject to currently exercisable options.
(19) Includes 9,394 shares held directly and 49,270 shares subject to
currently exercisable options.
(20) Calculated as the sum of the number of shares of common stock owned
directly (242,628), plus the following number of shares of common stock
into which the shares of preferred stock could be converted: 11,341
shares held by Mr. Gray directly and 1,003 shares held in trust for the
benefit of Mr. Gray's child. Mr. Gray holds options to acquire 302,084
shares which are currently exercisable.
(21) Includes 1,880 shares into which shares of preferred stock held directly
by Mr. Lahourcade may be converted and 16,666 shares subject to options
granted to Mr. Lahourcade on October 4, 1994, and 8,334 shares subject
to options granted March 1994, pursuant to the NEDSOP.
69
<PAGE> 70
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1996, J. Kelly Elliott, a director of the Company, was
indebted to the Company in the amount of approximately $84,000, including
accrued and unpaid interest by virtue of a loan that had been made in 1989. In
March 1996, the Company agreed that Mr. Elliott could satisfy his obligation by
assigning to the Company 21,567 shares of outstanding Common Stock, which was
then trading at approximately $3.75 per share, and cash of approximately
$5,000. The note was satisfied on these terms during the first quarter of
fiscal 1997 and the Company retired the Common Stock.
Rust Management Services, Inc., a Texas corporation ("RMSI") of which
Jack R. Crosby, Chairman and Chief Executive Officer of the Company, is the
sole shareholder, has provided the part-time services of several of its
employees to the Company. Pursuant to this arrangement, the Company's pro rata
share of the expenses associated with RMSI's employment of these individuals is
reimbursed by the Company at RMSI's cost. During the fiscal year ended March
31, 1997, payments to RMSI pursuant to this arrangement were approximately
$174,000.
The Company leases its executive offices in Austin, Texas in a six-story
office building from a limited partnership that includes as a minority interest
limited partner a trust for which Jack S. Gray, Jr., President and Chief
Operating Officer of the Company, is the trustee. Mr. Gray is not a
beneficiary of the trust and serves without compensation. The limited
partnership purchased the building in June 1996.
In February 1997, the Company sold $6.0 million in principal amount of
the Acquisition Notes, and detachable warrants to purchase an aggregate of
210,000 shares of Common Stock for $4.00 per share, to a group of investors
that included a director and other beneficial holders of over 5% of the
Company's capital stock. As a result of the placement: (i) Winston J.
Churchill, a director of the Company and the beneficial owner of over 5% of the
outstanding Common Stock, and his wife purchased $200,000 in principal amount
of the Acquisition Notes and warrants to purchase 7,000 shares of Common Stock;
(ii) The South America Fund N.V., the beneficial owner of over 5% of a class of
the Company's voting securities, purchased $1,000,000 in principal amount of
the Acquisition Notes and warrants to purchase 35,000 shares of Common Stock;
(iii) Clarex Limited, the beneficial owner of over 5% of a class of the
Company's voting securities, purchased $500,000 in principal amount of the
Acquisition Notes and warrants to purchase 17,500 shares of Common Stock; and
(iv) Banque Nationale de Paris (Paris), the beneficial owner of over 5% of a
class of the Company's voting securities, purchased $500,000 in principal
amount of the Acquisition Notes and warrants to purchase 17,500 shares of
Common Stock. The Acquisition Notes and warrants received by The South America
Fund N.V. may be deemed to be owned by BEA Associates, the beneficial owner of
over 5% of the outstanding Common Stock.
In addition, in connection with the placement of the Acquisition Notes
and warrants, Arnhold S. & Bleichroeder, Inc., which may be deemed to be the
beneficial owner of over 5% of the outstanding Common Stock, received 22,500
shares of Common Stock and warrants to purchase an additional 90,000 shares of
Common Stock for $4.00 per share as a placement fee and for other professional
services provided in connection with the placement.
70
<PAGE> 71
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(Asterisk indicates exhibits previously filed with the
Securities and Exchange Commission which are incorporated
herein by reference to this Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1997. Double asterisks
indicates exhibits previously filed with this report.)
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
* 3.1 Restated Articles of Incorporation of Tescorp, Inc. filed July 11, 1990 [EXHIBIT
3.1 TO FORM 10 DATED JUNE 27, 1990, AS AMENDED BY THAT FORM 8 DATED JULY
18, 1990]
** 3.2 Articles of Amendment of the Articles of Incorporation for Tescorp, Inc. dated
February 28, 1996
* 3.3 Bylaws of Tescorp, Inc. filed July 11, 1990 [EXHIBIT 3.2 TO FORM 10 DATED JUNE
27, 1990, AS AMENDED BY THAT FORM 8 DATED JULY 18, 1990]
* 4.1 Statement of Resolution Establishing and Designating the Series 1990 10%
Convertible preferred stock of Tescorp, Inc. filed July 11, 1990 [EXHIBIT 4.1 TO
FORM 10 DATED JUNE 27, 1990, AS AMENDED BY THAT FORM 8 DATED JULY 18,
1990]
* 4.2 Statement of Resolution Establishing and Designating the Series 1995 8%
Convertible preferred stock of Tescorp, Inc. filed December 18, 1995 [EXHIBIT 4.1
(B) TO FORM S-3 FILED FEBRUARY 29, 1996]
*10.01 Option Agreement between Tescorp, Inc. and John C. Kerr [EXHIBIT 10.5 TO
FORM 10 DATED JUNE 27, 1990, AS AMENDED BY THAT FORM 8 DATED JULY 18,
1990]
*10.02 Warrant dated July 11, 1990 issued to National City Venture
Corporation [EXHIBIT 10.7 TO FORM 10 DATED JUNE 27, 1990, AS
AMENDED BY THAT FORM 8 DATED JULY 18, 1990]
*10.03 Warrant dated July 11, 1990 issued to Mid West Holdings
Limited Partnership [EXHIBIT 10.8 TO FORM 10 DATED JUNE 27,
1990, AS AMENDED BY THAT FORM 8 DATED JULY 18, 1990]
*10.04 Warrant dated July 11, 1990 issued to Jack A. Morgan, Jr. [EXHIBIT 10.9 TO FORM
10 DATED JUNE 27, 1990, AS AMENDED BY THAT FORM 8 DATED JULY 18, 1990]
</TABLE>
71
<PAGE> 72
<TABLE>
<S> <C>
*10.05 Asset Purchase Agreement among Input/Output, Inc., Tescorp Seismic Products,
Inc. and Tescorp, Inc. dated February 4, 1994 [EXHIBIT 10.19 TO FORM 10-QSB
DATED FEBRUARY 11, 1994]
*10.06 Asset Purchase Agreement among Tescorp, Inc. Clif Mock Company, Metserco
Corporation, Wheatly*TXT Corp. and Mock Holdings, Inc. dated July 8, 1993
[EXHIBIT 2 TO FORM 8-K DATED JULY 21, 1993]
*10.07 Tescorp, Inc. 1993 Non-Employee Directors Stock Option Plan [EXHIBIT 10.21 TO
FORM 10-KSB DATED JULY 1, 1994]
*10.08 Form of Stock Option Agreements between Tescorp, Inc. and Non-Employee
Directors Stock Option Plan Participants [EXHIBIT 10.22 TO FORM 10-KSB DATED
JULY 1, 1994]
*10.09 Tescorp, Inc. Amended and Restated 1991 Incentive Plan [EXHIBIT 4.1(B) TO
FORM S-8 DATED NOVEMBER 5, 1996]
*10.10 Form of Incentive Stock Option Agreements between Tescorp, Inc. and Tescorp,
Inc. 1991 Incentive Plan Participants [EXHIBIT 10.3 TO FORM 10 DATED JUNE 27,
1990, AS AMENDED BY THAT FORM 8 DATED JULY 18, 1990]
*10.11 Form of Term Loan Agreement dated July 3, 1995 between Osvaldo Rossi and
Carlos Jose Saba and Austral Communications Corp. [EXHIBIT 99.1 TO FORM 8-K
DATED JULY 18, 1995]
*10.12 Form of Term Loan Agreement dated December 20, 1995 between Osvaldo Rossi
and Carlos Jose Saba and Austral Communications Corp. [EXHIBIT 99.1 TO FORM
8-K DATED JANUARY 4, 1996]
*10.13 Form of Subscription Agreement between Tescorp, Inc. and subscribers of
common stock, $0.02 par value, of Tescorp, Inc. [EXHIBIT 4.1 TO FORM 8-K DATED
MAY 8, 1995]
*10.14 Form of Subscription Agreements between Tescorp, Inc. and subscribers of the
Series 1995 preferred stock $100.00 par value, of Tescorp, Inc. [EXHIBIT 4.4(B) TO
FORM S-3 DATED FEBRUARY 29, 1996]
*10.15 Form of letter confirming subscription dated December 15, 1995 between
Tescorp, Inc. and subscribers of the Series 1995 preferred stock $100.00 par
value, of Tescorp, Inc. [EXHIBIT 4.4(C) TO FORM S-3 DATED FEBRUARY 29, 1996]
*10.16 Note and Warrant Purchase Agreement [EXHIBIT 10.28 TO POST EFFECTIVE
AMENDMENT NO. 4 TO THE FORM S-2, FILED APRIL 10, 1997]
</TABLE>
72
<PAGE> 73
<TABLE>
<S> <C>
*10.17 First Amended and Restated Joint Venture Agreement
dated December 9, 1994 to be effective April 7, 1994
[EXHIBIT 99.1 TO FORM 8-K FILED JULY 18, 1995]
*10.18 Second Amended and Restated Joint Venture Agreement dated
February 28, 1996 to be effective as of December 31, 1995
[EXHIBIT 10.24(B) TO FORM S-3 FILED FEBRUARY 29, 1996]
*10.19 First Amendment to the Second Amended and Restated Joint
Venture Agreement dated February 28, 1996 to be effective as
of December 31, 1995 [EXHIBIT 10.24(B) TO FORM S-3 FILED
FEBRUARY 29, 1996]
*10.20 Form of Stock Purchase Warrant dated as of December 21, 1995 issued to
Arnhold and S. Bleichroeder, Inc. and assigns [EXHIBIT 10.27
TO AMENDMENT NO. 1 TO FORM S-2 FILED MARCH 29, 1996]
22.1 Subsidiaries of the registrant [EXHIBIT 22.1 TO FORM S-2
FILED AUGUST 13, 1997]
23.1 Independent Auditors' Consent - KPMG Peat Marwick LLP
**27. 1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
73
<PAGE> 74
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.
TESCORP, INC.
Date: August 13, 1997 By: /s/ JACK S. GRAY, JR.
---------------------------------
Jack S. Gray, Jr., President and
Chief Operating Officer
74
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
* 3.1 Restated Articles of Incorporation of Tescorp, Inc. filed July 11, 1990 [EXHIBIT
3.1 TO FORM 10 DATED JUNE 27, 1990, AS AMENDED BY THAT FORM 8 DATED JULY
18, 1990]
** 3.2 Articles of Amendment of the Articles of Incorporation for Tescorp, Inc. dated
February 28, 1996
* 3.3 Bylaws of Tescorp, Inc. filed July 11, 1990 [EXHIBIT 3.2 TO FORM 10 DATED JUNE
27, 1990, AS AMENDED BY THAT FORM 8 DATED JULY 18, 1990]
* 4.1 Statement of Resolution Establishing and Designating the Series 1990 10%
Convertible preferred stock of Tescorp, Inc. filed July 11, 1990 [EXHIBIT 4.1 TO
FORM 10 DATED JUNE 27, 1990, AS AMENDED BY THAT FORM 8 DATED JULY 18,
1990]
* 4.2 Statement of Resolution Establishing and Designating the Series 1995 8%
Convertible preferred stock of Tescorp, Inc. filed December 18, 1995 [EXHIBIT 4.1
(B) TO FORM S-3 FILED FEBRUARY 29, 1996]
*10.01 Option Agreement between Tescorp, Inc. and John C. Kerr [EXHIBIT 10.5 TO
FORM 10 DATED JUNE 27, 1990, AS AMENDED BY THAT FORM 8 DATED JULY 18,
1990]
*10.02 Warrant dated July 11, 1990 issued to National City Venture
Corporation [EXHIBIT 10.7 TO FORM 10 DATED JUNE 27, 1990, AS
AMENDED BY THAT FORM 8 DATED JULY 18, 1990]
*10.03 Warrant dated July 11, 1990 issued to Mid West Holdings
Limited Partnership [EXHIBIT 10.8 TO FORM 10 DATED JUNE 27,
1990, AS AMENDED BY THAT FORM 8 DATED JULY 18, 1990]
*10.04 Warrant dated July 11, 1990 issued to Jack A. Morgan, Jr. [EXHIBIT 10.9 TO FORM
10 DATED JUNE 27, 1990, AS AMENDED BY THAT FORM 8 DATED JULY 18, 1990]
</TABLE>
<PAGE> 76
<TABLE>
<S> <C>
*10.05 Asset Purchase Agreement among Input/Output, Inc., Tescorp Seismic Products,
Inc. and Tescorp, Inc. dated February 4, 1994 [EXHIBIT 10.19 TO FORM 10-QSB
DATED FEBRUARY 11, 1994]
*10.06 Asset Purchase Agreement among Tescorp, Inc. Clif Mock Company, Metserco
Corporation, Wheatly*TXT Corp. and Mock Holdings, Inc. dated July 8, 1993
[EXHIBIT 2 TO FORM 8-K DATED JULY 21, 1993]
*10.07 Tescorp, Inc. 1993 Non-Employee Directors Stock Option Plan [EXHIBIT 10.21 TO
FORM 10-KSB DATED JULY 1, 1994]
*10.08 Form of Stock Option Agreements between Tescorp, Inc. and Non-Employee
Directors Stock Option Plan Participants [EXHIBIT 10.22 TO FORM 10-KSB DATED
JULY 1, 1994]
*10.09 Tescorp, Inc. Amended and Restated 1991 Incentive Plan [EXHIBIT 4.1(B) TO
FORM S-8 DATED NOVEMBER 5, 1996]
*10.10 Form of Incentive Stock Option Agreements between Tescorp, Inc. and Tescorp,
Inc. 1991 Incentive Plan Participants [EXHIBIT 10.3 TO FORM 10 DATED JUNE 27,
1990, AS AMENDED BY THAT FORM 8 DATED JULY 18, 1990]
*10.11 Form of Term Loan Agreement dated July 3, 1995 between Osvaldo Rossi and
Carlos Jose Saba and Austral Communications Corp. [EXHIBIT 99.1 TO FORM 8-K
DATED JULY 18, 1995]
*10.12 Form of Term Loan Agreement dated December 20, 1995 between Osvaldo Rossi
and Carlos Jose Saba and Austral Communications Corp. [EXHIBIT 99.1 TO FORM
8-K DATED JANUARY 4, 1996]
*10.13 Form of Subscription Agreement between Tescorp, Inc. and subscribers of
common stock, $0.02 par value, of Tescorp, Inc. [EXHIBIT 4.1 TO FORM 8-K DATED
MAY 8, 1995]
*10.14 Form of Subscription Agreements between Tescorp, Inc. and subscribers of the
Series 1995 preferred stock $100.00 par value, of Tescorp, Inc. [EXHIBIT 4.4(B) TO
FORM S-3 DATED FEBRUARY 29, 1996]
*10.15 Form of letter confirming subscription dated December 15, 1995 between
Tescorp, Inc. and subscribers of the Series 1995 preferred stock $100.00 par
value, of Tescorp, Inc. [EXHIBIT 4.4(C) TO FORM S-3 DATED FEBRUARY 29, 1996]
*10.16 Note and Warrant Purchase Agreement [EXHIBIT 10.28 TO POST EFFECTIVE
AMENDMENT NO. 4 TO THE FORM S-2, FILED APRIL 10, 1997]
</TABLE>
<PAGE> 77
<TABLE>
<S> <C>
*10.17 First Amended and Restated Joint Venture Agreement dated December 9, 1994 to
be effective April 7, 1994 [EXHIBIT 99.1 TO FORM 8-K FILED JULY 18, 1995]
*10.18 Second Amended and Restated Joint Venture Agreement dated February 28, 1996
to be effective as of December 31, 1995 [EXHIBIT 10.24(B) TO FORM S-3 FILED
FEBRUARY 29, 1996]
*10.19 First Amendment to the Second Amended and Restated Joint
Venture Agreement dated February 28, 1996 to be effective as
of December 31, 1995 [EXHIBIT 10.24(B) TO FORM S-3 FILED
FEBRUARY 29, 1996]
*10.20 Form of Stock Purchase Warrant dated as of December 21, 1995 issued to
Arnhold and S. Bleichroeder, Inc. and assigns [EXHIBIT 10.27 TO AMENDMENT NO.
1 TO FORM S-2 FILED MARCH 29, 1996]
22.1 Subsidiaries of the registrant [EXHIBIT 22.1 TO FORM S-2 FILED
AUGUST 13, 1997]
23.1 Independent Auditors' Consent - KPMG Peat Marwick LLP
**27. 1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Tescorp, Inc.:
We consent to incorporation by reference in the registration statements on Form
S-3 (File No. 33-94718), Form S-8 (File No. 333-39661) and Form S-8 (File No.
333-15565) of Tescorp, Inc. of our report dated June 3, 1997, relating to the
consolidated balance sheets of Tescorp, Inc. and subsidiaries as of March 31,
1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the two-year
period ended March 31, 1997, which report appears in the March 31, 1997, annual
report on Form 10-KSB/A (Amendment No. 1) of Tescorp, Inc.
Austin, Texas
August 11, 1997
