U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
X Quarterly report under to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 1997
Transition report under to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transitional period from to
Commission File Number 0-24622
TELSCAPE INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)
TEXAS 75-2433637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
4635 SOUTHWEST FREEWAY, SUITE 800, HOUSTON, TEXAS 77027
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code -- 713/968-0968
________________________________________________________________
(Former name, former address and former fiscal year if changed
since last report)
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
3,972,797 shares of Registrant's common stock ($.001 Par Value) were
outstanding as of November 12, 1997.
Transitional Small Business Disclosure Format (Check One): Yes No X
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Telscape International, Inc.
Table of Contents
Form 10-QSB
September 30, 1997
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 2
Consolidated Statements of Operations -
Three Months and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
(a) Exhibits
(b) Reports on Form 8-K
Signatures 20
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Telscape International, Inc.
Consolidated Balance Sheet
ASSETS September 30, 1997 December 31,
Current: (unaudited) 1996
Cash and cash equivalents $ 5,757,839 $ 494,781
Accounts receivable, less allowance
for doubtful accounts of $506,000
and $57,000, respectively 4,829,641 2,034,728
Inventories 2,378,895 2,045,195
Prepaid expenses and other 1,709,213 90,216
Total current assets 14,675,588 4,664,920
Property and equipment, net of accumulated
depreciation and amortization 1,928,505 983,102
Goodwill, net of accumulated amortization 4,645,235 3,173,759
Deferred income taxes 466,692 192,167
Other assets 321,126 357,090
Total assets $ 22,037,146 $ 9,371,038
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,535,187 $ 1,756,016
Accrued expenses 1,243,002 317,973
Customer deposits 285,549 405,859
Deferred income taxes 437,534 371,948
Current portion of notes payable 2,088,525 ---
Current portion of capital lease
obligations 104,017 ---
Total current liabilities 11,693,814 2,851,796
Long term notes payable 2,530,465 ---
Long term capital lease obligations 163,245 ---
Minority interests 737,549 754,398
Commitments and contingencies:
Series B non-voting preferred stock,
$.001 par value, 380,000 shares
authorized, issued and outstanding 380 380
mandatorily redeemable upon achievement
of certain performance measures
Shareholders' equity:
Preferred stock, $.001 par value,
5,000,000 shares authorized; without
defined preference rights --- ---
Series A preferred stock, $.001 par value,
1,000,000 shares authorized --- ---
Common stock, $.001 par value,
25,000,000 shares authorized; 3,952,797
shares issued in 1997; and 3,935,969
issued and outstanding in 1996 3,953 3,936
Additional paid-in capital 11,911,852 11,883,719
Treasury stock (83,359 shares at cost in 1997) (296,966) ---
Capital subscriptions receivable (600,000) (600,000)
Accumulated deficit (4,107,146) (5,523,191)
Shareholders' equity 6,911,693 5,764,464
Total liabilities and
shareholders' equity $ 22,037,146 $ 9,371,038
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<TABLE>
Telscape International, Inc.
Consolidated Statements of Operations
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues $12,192,390 $ 1,255,059 $22,133,691 $ 2,824,497
Cost of revenues 8,454,888 551,983 14,448,750 1,437,566
Gross profit 3,737,502 703,076 7,684,941 1,386,931
Selling, general and
administrative 2,568,226 1,089,052 6,205,835 2,225,047
Operating income (loss) 1,169,276 (385,976) 1,479,106 (838,116)
Other income (expense):
Interest, net (44,248) 22,965 (43,967) 88,984
Foreign exchange gain (loss) (29,407) 45,020 (2,215) 52,576
Other 14,504 4,842 45,032 50,004
Write-off of investment
in operating venture --- --- (196,462) ---
Litigation settlement --- --- (128,034) ---
Total other income (expense), net (59,151) 72,827 (325,646) 191,564
Income (loss) before income tax
benefit (expense) and minority
interests 1,110,125 (313,149) 1,153,460 (646,552)
Income tax benefit (expense) 79,079 (4,940) 245,736 (32,539)
Income (loss) before minority
interests 1,189,204 (318,089) 1,399,196 (679,091)
Minority interests in subsidiaries 12,944 (7,475) 16,849 (7,601)
Net income (loss) $ 1,202,148 $ (325,564) $ 1,416,045 $ (686,692)
Primary earnings per share $ 0.25 $ (0.09) $ 0.33 $ (0.24)
Fully diluted earnings
per share (1) $ 0.17 --- $ 0.23 ---
(/TABLE)
(1) Inclusion of additional shares under a fully diluted analysis in 1996
is inapproporiate due to the anti-dilutive result.
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<CAPTION>
Telscape International, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<S> <C> <C>
Nine Months Ended September 30,
1997 1996
Cash Flow From Operating Activities:
Net income (loss) $ 1,416,045 $ (686,692)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 449,500 ---
Depreciation and amortization 430,501 76,450
Deferred income taxes (208,939) 19,436
Write-off of investment in operating venture 196,462 ---
Litigation settlement expense 3,034 ---
Imputed interest on non interest bearing notes 68,076 ---
Minority interest in subsidiaries' income (losses) (16,849) 7,601
Changes in operating assets and liabilities:
Accounts receivable (1,248,621) (134,067)
Inventory 96,449 (585,225)
Prepaid and other assets (1,715,849) (47,937)
Accounts payable 5,788,803 218,797
Accrued expenses and customer deposits 681,699 (260,060)
Net cash provided by (used in) operating activities 5,940,311 (1,391,697)
Cash Flow From Investing Activities:
Purchase of short term investments --- (4,898,790)
Redemption of short term investments --- 6,812,426
Purchases of property and equipment (926,877) (216,501)
Proceeds from asset sale leaseback 119,457 ---
Acquisition of subsidiary, net of cash acquired --- (412,884)
Cash acquired in acquisition, net of purchase price 177,038 ---
Organization costs (25,000)
Investment in operating venture --- (196,462)
Net cash provided by (used in) investment activities (630,382) 1,062,789
Cash Flow From Financing Activities:
Capital lease payments (61,723) (5,635)
Proceeds from issuance of common stock 14,852 563,622
Net cash provided by (used in) financing activities (46,871) 557,987
Net increase in cash and cash equivalents 5,263,058 229,079
Cash and cash equivalents at beginning of period 494,781 173,255
Cash and cash equivalents at end of period $ 5,757,839 $ 402,334
</TABLE)
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Telscape International, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended September 30,
1997 1996
Supplemental disclosure
of cash flow information:
Interest paid $ 83,536 $ 30,323
Taxes paid 450,667 32,539
Supplemental disclosure of non-cash
investing and financing activities:
Property and equipment acquired by
execution of capital lease obligation:
Property and equipment (328,985) ---
Capital lease financing 328,985 ---
Issuance of notes and acquisition of
treasury shares in litigation settlement:
Litigation settlement (3,034) ---
Treasury stock (296,966) ---
Notes payable 300,000 ---
Issuance of preferred and common stock
in exchange for shares of common stock
in connection with reverse triangular merger:
Excess of cost over net assets acquired --- 2,857,280
Common stock --- (1,605)
Preferred stock --- (380)
Additional paid-in capital --- (2,855,295)
Issuance of promissory notes in connection
with the acquisition of Integracion: 2,555,401 ---
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TELSCAPE INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements include the
accounts of Telscape International, Inc. and its subsidiaries (collectively,
the "Company").
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and the instructions to quarterly reports on Form 10-QSB and
Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results
for the three and nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997. For further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report on Form
10-KSB for the year ended December 31, 1996.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reported period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the
effect of any necessary adjustments prior to their issuance. The actual
results could differ from those estimates.
ECONOMIC CONDITIONS
The devaluation of the Mexican peso in late 1994 caused Mexico
to experience an economic crisis characterized by exchange rate instability,
increased inflation, high domestic interest rates, reduced consumer
purchasing power and high unemployment. Consequently, the Mexican government
has exercised, and continues to exercise, significant influence over the
Mexican economy. Accordingly, Mexican governmental actions could have a
significant effect on Mexican companies, including the Company's customers,
and overall market conditions.
The Company's foreign currency risk is mitigated in Mexico due to the
fact that many of the Company's customers are multinational firms that pay
in U.S. dollars. In addition, most of the customers that do pay in pesos
pay at the spot exchange rate in effect at the time of payment as opposed
to the exchange rate at the time the receivable is created. Nevertheless,
significant adverse effects from any downturns in the Mexican economy could
result in an adverse effect on the Company's operations. The Company also
has a significant amount of its payables denominated in pesos which exposes
the Company to exchange rate risk.
Statement of Financial Accounting Standards No. 128, "EARNINGS PER SHARE,"
simplifies E.P.S. by eliminating Primary E.P.S. and common stock equivalents,
replacing them with basic E.P.S., which reflects no dilution. This Statement
is effective for financial statements for both interim and annual periods
ending after December 15, 1997. The Company does not believe this statement
will have a material impact on its financial statements.
Statement of Financial Accounting Standards No. 130, "REPORTING
COMPREHENSIVE INCOME," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, "DISCLOSURE ABOUT
SEGMENTS OF A BUSINESS ENTERPRISE," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers.
SFAS 130 and 131 are effective for financial statements for the periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
NOTE 2 - BUSINESS COMBINATIONS
On May 17, 1996, the Company acquired all of the common stock of
Telereunion, Inc. ("Telereunion"), a privately-owned Delaware corporation.
Telereunion, through Vextro de Mexico, S.A. de C.V. ("Vextro"), is a
telecommunications equipment and service company with operations in Mexico.
The acquisition was accounted for under the purchase method of accounting. The
consolidated operations of Telereunion and Vextro have been included in the
Company's financial statements since the date of the acquisition.
Effective July 1, 1997, pursuant to a stock purchase agreement, the
Company acquired all of the outstanding shares of Integracion de Redes,
S.A. de C.V. ("Integracion") and Lan and Wan S.A. de C.V. ("Lan"), both
Mexican corporations based in Mexico City. Integracion distributes data
and network integration equipment in Mexico and represents certain
manufacturers and also provides the value-added service of systems
integration. Lan provides labor and management services to Integracion.
Under the terms of the acquisition, the Company paid cash of $10,000
to the shareholders of Lan. As consideration for Integracion, the Company
paid the following to the shareholders of Integracion: i) the sum of $120,000
in cash, ii) an aggregate of $2,201,000 in non-interest bearing promissory
notes maturing at various dates through January 1, 2001, iii) an aggregate of
$999,000 in non-interest bearing convertible notes maturing on September 1,
1999, which are convertible into 333,000 shares of common stock of the
Company at an exercise price of $3.00 per share, representing the quoted
market price of the Company's common stock at the date of the transaction,
iv) warrants for the purchase of up to 100,000 shares of common stock of
the Company based on Integracion meeting certain performance requirements
and v) a covenant by the Purchasers to pay $280,000 in the event that
Integracion meets certain performance requirements over the cumulative
periods beginning January 1, 1997 and ending December 31, 2000. The
$10,000 and $120,000 paid at closing for Lan and Integracion, respectively,
was funded from working capital. The acquisition was accounted for under
the purchase method of accounting. The consolidated operations of Lan and
Integracion have been included in the Company's financial statements since
the date of the acquisition.
The following presents the unaudited pro forma results of operations
of the Company for the year ended December 31, 1996 and the nine months
ended September 30, 1997, as if the acquisitions of Telereunion/Vextro
and Integracion/Lan had occurred on January 1, 1996:
Twelve Months Ended Nine Months Ended
December 31, 1996 September 30, 1997
(unaudited)
Pro forma revenues $ 11,554,291 $ 26,779,808
Pro forma operating income (1,581,457) 2,170,311
(loss)
Pro forma net income (loss) (1,923,285) 1,621,299
Pro forma primary net income (loss) (0.61) 0.39
per share
Pro forma fully dilutive net income $ - $ 0.27
(loss) per share
The unaudited pro forma consolidated financial statements of
Telereunion/Vextro and Integracion/Lan have been prepared as if the business
combinations had been consummated as of January 1, 1996. The information is
not necessarily indicative of the results of operations and financial position
of the Company as they may be in the future or as they might have been had the
business combinations been consummated as of January 1, 1996. The pro forma
consolidated financial data should be read in conjunction with the audited
historical consolidated financial data and related notes in the Company's
annual report on Form 10-KSB for the year ended December 31, 1996 and the
pro forma financial statements included in the Company's report on Form
8-K/A dated October 6, 1997.
NOTE 3 - NET INCOME (LOSS) PER SHARE
Primary net income (loss) per common share is based on the weighted
average number of shares of common and common equivalent shares outstanding.
Common stock equivalents include the number of shares issuable upon exercise
of stock options, non performance-based warrants and shares to be issued upon
the conversion of convertible debt, less the number of shares that could have
been repurchased with the exercise proceeds using the treasury stock method.
As the Company's options and warrants exceed 20% of the common shares
outstanding at September 30, 1997, all options and warrrants outstanding are
assumed to be exercised including both those that are individually dilutive and
anti-dilutive. A portion of the proceeds from this assumed exercise of options
and warrants are assumed to be utilized to repurchase treasury shares equal to
20% of the Company's outstanding shares at September 30, 1997. The balance of
the proceeds is assumed to be utilized to pay off debt and then invested in
U.S. Government securities. These assumed interest savings and earnings are
added back to net income as reported in calculating earnings per share. The
interest savings created from the assumed conversion of convertible debt is
also added back to net income as reported.
In addition to common stock and common stock equivalents, fully diluted
earnings per share also include the effect of performance-based warrants issued
in connection with the Telereunion/Vextro and Integracion/Lan acquisitions.
The Company has 2,595,000 warrants outstanding issued in connection with the
acquisition of Telereunion/Vextro. These warrants have an exercise price of
$2.19 and are exercisable at stated percentages upon the achievement of certain
operating performance measures or vest fully if the Company's common stock
price exceeds $12.00 for ninety consecutive trading days. The Company has
100,000 warrants outstanding issued in connection with the Integracion/Lan
acquisition. These warrants are exercisable at $3.00 per share and vest
upon the achievement of certain operating performance measures relating to
the Company's data and networking equipment business. The Company believes
that it is reasonably possible that the vesting requirements relating to all
2,695,000 performance-based warrants will be achieved and has thus included
such warrants in the calculation of weighted average fully diluted shares
outstanding. The Company did not report fully diluted earnings per share
for 1996 as such number would have understated the loss per share due to
the anti-dilutive effect of additional shares being included in the
calculation. Following is a summary of the primary and fully diluted
earnings per share calculations:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Primary earnings per share:
Net income as reported $1,202,148 $ (325,564) $1,416,045 $ (686,692)
Interest savings/earnings
for earnings per share purposes 163,856 --- 316,454 ---
Net income (loss) applicable
to common stockholders $1,366,004 $ (325,564) $1,732,499 $ (686,692)
Net income (loss) per common $ 0.25 $ (0.09) $ 0.33 $ (0.24)
share
Weighted average common and
common equivalent shares 5,495,884 3,723,394 5,260,366 2,822,867
outstanding
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
Fully diluted earnings per
share: (1)
Net income as reported $ 1,202,148 $ 1,416,045
Interest savings/earnings for
earnings per share purposes 170,395 400,322
Net income applicable to $ 1,372,543 $ 1,816,367
common stockholder
Net income per share $ 0.17 $ 0.23
Weighted average number of 8,190,884 7,888,578
fully diluted shares
(1) Inclusion of additional shares under a fully diluted analysis in 1996
is inappropriate due to the anti-dilutive result.
NOTE 4 - INVESTMENT IN OPERATING VENTURE
During 1996, the Company invested $196,462 for a 7.21% equity interest
in a venture with Elterix, a Polish company developing a private network for
70,000 telephone lines. During the quarter ended June 30, 1997, a tentative
sales agreement for the sale of the Company's equity interest was not
consummated and as a result of Elterix's financial and operational condition,
the Company evaluated the carrying value of its investment and recorded a
write off of $196,462 at June 30, 1997.
NOTE 5 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The Company's notes payable and capital lease obligations consist of
the following:
As of September 30, 1997
Notes Payable Capital Lease
Non-interest bearing promissory notes, $ 1,805,753
imputed interest at 10%, unamortized
discount of $395,247, issued in connection
with Integracion acquisition, maturing at
various dates through January 1, 2001 (See
Note 2)
Non-interest bearing promissory note, 817,722
imputed interest at 10%, unamortized
discount of $188,277, issued in connection
with Integracion acquisition, convertible
into 333,000 shares of common stock, and
maturing on September 1, 1999 (See Note 2)
Promissory note issued to repurchase common 300,000
stock, payable in six semi-annual
installments through May 20, 2000, and
bearing interest at 6%
Promissory note issued to a vendor, 1,695,515
denominated in Mexican pesos, payable in
four semi-monthly installments, and bearing
interest at 18.5%
Capital lease obligation payable in monthly
installments of $11,244 including principal 267,262
and interest maturing February 28, 2000
Total notes payable and capital leases 4,618,990 267,262
Current portion $ 2,088,525 $ 104,017
Long term portion
$ 2,530,465 $ 163,245
NOTE 6 - COMMITMENTS AND CONTINGENCIES
MARK VANCE V. TELSCAPE INTERNATIONAL, INC.
As previously disclosed in the Company's 10-KSB for the period ended
December 31, 1996, on or about January 17, 1997, Mark Vance, a former officer
of the Company, filed a lawsuit against the Company, styled Case No. 9-02268;
Mark Vance v. Telscape International, Inc.; in the 295th District Court of
Harris County, Texas. The plaintiff has prayed for relief of $350,000 in
damages plus pre-judgment and post-judgment interest. The plaintiff alleged
breach of contract, breach of fiduciary duty, breach of a duty of good faith
and fair dealing and fraud in connection with the termination of his employment
with the Company which occurred on January 10, 1997.
On June 19, 1997, the Company filed a motion for summary judgment on the
plaintiff's claims. On July 17, 1997, after a hearing on the motion, the
presiding judge granted the motion for summary judgment in part and denied
it in part. As to the plaintiff's claims for breach of fiduciary duty and
the duty of good faith and fair dealing, the presiding judge granted the
motion for summary judgment. As to the plaintiff's breach of contract claim,
the court granted the Company's motion as to damages for a three year period.
On April 15, 1997, the plaintiff abandoned his fraud claim in a Rule 11
Agreement.
The Company intends to vigorously defend itself against any remaining
claims that the plaintiff may have and believes it has meritorious defenses
thereto, although there can be no assurances as to the successful defense of
these claims. In addition, whether or not the Company were to prevail in
litigation, such litigation is time consuming and costly.
IN RE: THE ESTATE OF NINA JEAN OBEL, DECEASED ET AL V. TELSCAPE INTERNATIONAL,
INC. ET AL
Effective May 23, 1997, the Company entered into a compromise and
settlement agreement ("Agreement") with respect to the above-referenced
lawsuit ("Lawsuit") which was disclosed in the Company's 10-KSB and 10-QSB
for the periods ended December 31, 1996 and March 31, 1997, respectively.
The Agreement was subject to court approval and dismissal of the case, both of
which have occurred.
Pursuant to the Agreement, the Company agreed to repurchase all of the
83,359 shares of Company common stock owned by the plaintiffs for total
consideration of $425,000. The consideration was paid $125,000 in cash upon
the execution of the Agreement and the balance is to be paid out over three
years in six semi-annual payments of $50,000 each. The outstanding principal
balance accrues simple interest at 6% per annum. In return for this
consideration, the plaintiffs have agreed to release the Company and the other
defendant from any and all claims in connection with the Lawsuit.
SERIES B NON-VOTING, NON-PARTICIPATING PREFERRED STOCK
The Series B Non-Voting, Non-Participating Preferred Stock issued in
connection with the Telereunion acquisition is mandatorily redeemable by
the Company upon the achievement of certain operating performance requirements
at a price of $1.00 per share, or $380,000. Management believes that the
achievement of these performance measures is reasonably possible in the
near term requiring the redemption of these preferred shares.
NOTE 7 - SUBSEQUENT EVENTS
On October 1, 1997, pursuant to a stock purchase agreement the Company
acquired all of the outstanding shares of N.S.I., S.A. de C.V. ("NSI"),
a Mexican corporation based in Mexico City. NSI distributes data and
network integration equipment in Mexico and represents such manufacturers
as 3Com and Newbridge Networks and also provides the value-added service of
systems integration.
Under the terms of the acquisition, the company paid cash of $1,000
USD to the shareholders of NSI and agreed to guarantee the repayment of
approximately $260,000 USD to one of the sellers. The $1,000 paid at
closing for NSI was funded out of working capital.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein are not based on historical facts,
but are forward-looking statements that are based upon numerous assumptions
about future conditions that could prove not to be accurate. Actual events,
transactions and results may materially differ from the anticipated events,
transactions or results described in such statements. The Company's ability
to consummate such transactions and achieve such events or results is subject
to certain risks and uncertainties. Such risks and uncertainties include,
but are not limited to, the existence of demand for and acceptance of the
Company's products and services, regulatory approvals and developments,
economic conditions (including foreign currency exchange risk), the impact
of competition and pricing, the Company's reliance on its permit from the
Mexican government, the Company's reliance on certain key vendors, the
Company's reliance on certain key customers, the Company's credit risk due
to a limited number of customers in the international long distance business,
results of financing efforts and other factors affecting the Company's business
that are beyond the Company's control. The Company undertakes no obligation and
does not intend to update, revise or otherwise publicly release the results
of any revisions to these forward-looking statements that may be made to
reflect future events or circumstances.
OUTLOOK
The quarter ended September 30, 1997 further demonstrated the Company's
shift in strategic focus to Mexico, Latin America and an increased emphasis
on service revenues to complement its telecommunications equipment sales.
The Company increased its revenues from the international long distance and
telecommunications services business as well as its core telecommunications
equipment business.
Since the quarter ended June 30, 1997, the Company completed two strategic
acquisitions in Mexico in the data and network equipment market. Both
acquisitions are expected to contribute to revenue and profitability growth
in the near term.
Future trends for the revenues and profitability of the Company are
difficult to predict. However, management anticipates continued growth in
each of the markets in which the Company competes. The Company expects growth
in the sales of its telecommunications equipment and services in Mexico.
The Company expects continued success in its efforts to compete in the
international long distance business and expects to have an increase in
revenues as a result thereof.
REVENUES. In addition to the Company's efforts to expand in the
international long distance business, there will be a continuing effort
to expand the revenues generated from the Company's core telecommunications
equipment business in both Mexico and Poland. The Company will continue
to focus on increasing the value-added services component of the Mexican
business.
GROSS MARGIN. Due to the change in strategic focus of the Company and
the dramatic reduction of Polish revenues as a percentage of overall
revenues, comparison of gross margins from 1997 to 1996 are not meaningful.
In the third quarter ended September 30, 1997, the Company's cost of revenues
as a percentage of revenues increased from the second quarter ended
June 30, 1997 due principally to the sale of lower margin equipment at
Vextro and Integracion. In the near term, barring any unanticipated change
in cost structure, Management expects cost of revenues as a percentage of
revenues to remain flat or improve somewhat. The Company's gross margins in
the future will be influenced by the mix of lower margin equipment sales
relative to higher margin services sales (including international long
distance). The Company expects that it will face certain pricing pressures
in the international long distance market it serves, which may result in higher
cost of revenues as a percentage of sales. The Company intends to expand its
offering of international long distance to countries which may realize lower
gross margins than the present international long distance sales. Management
will continue to pursue ways to reduce costs.
OPERATING MARGIN. Operating income as a percentage of revenues has been
improving as the Company's revenue growth has outpaced the growth in operating
expenses and the Company has realized efficiencies in integrating acquisitions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES increased from $1,255,059 in 1996 to $12,192,390 in 1997.
This increase of $10,937,331, or 871%, was due principally to the acquisitions
of Integracion and the revenues generated from the sale of international long
distance. In addition, the Company experienced higher sales at Vextro.
COST OF REVENUES increased from $551,983 in 1996 to $8,454,888 in 1997,
or $7,902,905. The 1,432% increase in cost of revenues was due principally
to the additional cost of revenues associated with the increase in the sale
of international long distance and the incremental cost of revenues
attributable to the acquisition of Integracion. In addition, cost of revenues
increased due to the higher sales generated at Vextro. The cost of revenues as
a percentage of revenues increased from 44.0% to 69.3%, or 25.3%, due
principally to a significant change in the mix of the Company's products to
lower margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from
$1,089,052 in 1996 to $2,568,226 in 1997, or $1,479,174. The 136% increase
in SG&A was due principally to the incremental SG&A attributable to the
operations of Integracion and, to a lesser extent, the merger of Orion.
Overall SG&A as a percentage of revenues decreased from 86.8% to 21.1%,
or 65.7%. This decrease was due principally to the growth in revenues
rapidly outpacing the growth in operating expenses and, to a lesser extent,
the inclusion of the lower operating expenses as a percentage of revenues of
Integracion in the Company's results.
OTHER INCOME (EXPENSE) decreased from $72,827 in 1996 to $(59,151) in
1997, or $131,978. This decrease is due to interest expense in 1997,
relating to the amortization of interest expense on notes issued in
connection with the Integracion acquisition, as compared to interest income
in 1996 and a foreign exchange loss in 1997 as compared to a foreign exchange
gain in 1996.
INCOME TAX BENEFIT (EXPENSE) changed from an income tax expense of
$(4,940) in 1996 to a tax benefit of $79,079 in 1997 due principally to the
Company's utilization of its loss carryforwards to offset taxable income.
NET INCOME (LOSS). The Company experienced a net loss of $(325,564) in
1996 as compared to a net income of $1,202,148 in 1997 due to a combination
of the factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES increased from $2,824,497 in 1996 to $22,133,691 in 1997.
This increase of $19,309,194, or 684%, was due principally to the acquisitions
of Integracion and the revenues generated from the sale of international long
distance. In addition, the Company experienced higher sales at Vextro.
COST OF REVENUES increased from $1,437,566 in 1996 to $14,448,750 in
1997, or $13,011,184. The 905% increase in cost of revenues was due
principally to the additional cost of revenues associated with the increase
in the sale of international long distance and the incremental cost of revenues
attributable to the acquisition of Integracion. In addition, cost of revenues
increased due to the higher sales generated at Vextro. The cost of revenues as
a percentage of revenues increased from 50.9% to 65.3%, or 14.4%, due
principally to a significant change in the mix of the Company's products
to lower margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from
$2,225,047 in 1996 to $6,205,835 in 1997, or $3,980,788. The 179% increase
in SG&A was due principally to the incremental SG&A attributable to the
operations of Telereunion and Integracion and, to a lesser extent,
the merger of Orion.
Overall SG&A as a percentage of revenues decreased from 78.8% to 28.0%,
or 50.8%. This decrease was due principally to the growth in revenues
rapidly outpacing the growth in operating expenses and, to a lesser extent,
the inclusion of the lower operating expenses as a percentage of revenues
of Integracion in the Company's results.
OTHER INCOME (EXPENSE) decreased from $191,564 in 1996 to $(325,646) in
1997, or $517,210. The decrease in Other Income was due principally to the
$196,462 write off of the Company's investment in Elterix and a litigation
settlement expense of $128,034. In addition, the Company incurred interest
expense in 1997, relating to the amortization of interest expense on notes
issued in connection with the Integracion acquisition, as compared to interest
income in 1996, and a foreign exchange loss in 1997 as compared to a foreign
exchange gain in 1996.
INCOME TAX BENEFIT (EXPENSE) changed from an income tax expense of
$(32,539) in 1996 to a tax benefit of $245,736 in 1997 due principally to
the Company's utilization of its loss carryforwards to offset taxable income
and the recognition of a portion of the deferred tax benefits related to the
Company's tax loss carryforward.
NET INCOME (LOSS). The Company experienced a net loss of $(686,692) in
1996 as compared to a net income of $1,416,045 in 1997 due to a combination
of the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating activities was $5,940,311 and
($1,391,697) for the nine months ended September 30, 1997 and September 30,
1996, respectively. The increase in net cash provided by operations in 1997
as compared to 1996 was due primarily to a significant improvement in working
capital and higher revenues and operating income for the period.
Net cash provided by (used in) investing activities was ($630,382) and
$1,062,789 for the nine months ended September 30, 1997 and September 30,
1996, respectively. The decrease in net cash provided from investing
activities was primarily from the purchase of certain property and equipment
in 1997 coupled with the net proceeds from the redemption in short-term
investments in 1996.
Net cash provided by (used in) financing activities was ($46,871) and
$557,987 for the nine months ended September 30, 1997 and September 30, 1996,
respectively. The Company had significant proceeds from the issuance of its
common stock in 1996. In 1997, the main use of cash for financing activities
was to service capital lease obligations.
As of September 30, 1997, the Company had cash and cash equivalents
of $5,757,839 and positive working capital of $2,981,774. The Company's
cash requirements for fiscal 1997 and beyond will depend primarily upon
the cash generated from its operations to meet its capital expenditures,
working capital requirements and financing requirements of any acquisitions.
The Company does not have a revolving credit facility or any other
commercial lending relationship. The Company has been successful in
financing the purchase of certain capital expenditures. During the quarter
ended March 31, 1997, the Company executed an equipment lease in the amount
of $325,000 payable at approximately 13.5%, which expires in February, 2000.
In May 1997, Vextro signed a three year equipment lease in the amount of
$250,000 payable at approximately 9%, which expires in May 2000. The Company
intends to finance its growth principally through cash flow from operations
and additional capital lease financing as appropriate; however, there can be
no assurance that this cash flow will be sufficient or that the Company will
be able to obtain lease financing on commercially reasonable lease terms,
if at all.
The Series B Non-Voting, Non-Participating Preferred Stock issued in
connection with the Telereunion acquisition is mandatorily redeemable by the
Company upon the achievement of certain operating performance requirements at
a price of $1.00 per share, or $380,000. Management believes that the
achievement ofthese performance measures may be met in the near term requiring
the redemption of these preferred shares. In connection with the acquisition
of Integracion, the Company incurred certain debt, portions of which are
maturing in the next 12 months. The Company believes that this debt and the
redemption of the Series B Non-Voting, Non-Participating Preferred Stock can
be repaid from cash flow from operations of the Company; however, there can
be no assurance that this cash flow will be sufficient to meet these
obligations.
The Company believes that its current cash position, available vendor
financing and cash flow from operations will be sufficient to fund the
Company's capital expenditures and other cash needs for the next 12 months,
absent any acquisitions; however, there can be no assurance that such will
be the case. Additional funding through the incurrence of debt or sale of
additional equity (or a combination of both) in all likelihood will be
required to meet the Company's growth plans, although there can be no
assurance that such additional funds can be obtained on acceptable terms,
if at all. If necessary funds are not available, the Company's business and
results of operations and the future expansion of the business could be
materially adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, "EARNINGS PER SHARE,"
simplifies E.P.S. by eliminating Primary E.P.S. and common stock equivalents,
replacing them with basic E.P.S., which reflects no dilution. This Statement is
effective for financial statements for both interim and annual periods
ending after December 15, 1997. The Company does not believe this statement
will have a material impact on its financial statements.
Statement of Financial Accounting Standards No. 130, "REPORTING
COMPREHENSIVE INCOME," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS, 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, "DISCLOSURE ABOUT
SEGMENTS OF A BUSINESS ENTERPRISE," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers.
SFAS 130 and 131 are effective for financial statements for the periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may
have on future financial statement disclosures.
UNCERTAINTIES
The Company continues to face many risks and uncertainties, including
general and specific market economic risks. The exploitation of the
opportunities presented by the Mexican market are expected to require
substantial capital. Vextro and Integracion had a positive cash flow from
operations during the nine months ended September 30, 1997; however, to the
extent Vextro, Integracion and the recently acquired N.S.I. do not have
a positive net cash flow from operations in 1997, it can be expected that
the Company would have to fund any shortfalls from its working capital.
In addition, any capital expenditures needed to expand the operations of
Vextro, Integracion and N.S.I. would likely be funded from the working
capital of the Company. Any such fundings would reduce the funds available
to finance and expand the Company's operations as well as the Company's
strategy to compete in the international long distance services business.
Also, any economic crises in Mexico could result in the need to fund any
cash flow shortfalls of Vextro, Integracion and N.S.I.
As in any recently deregulated market, drastic changes and adjustments
of regulations or changes in government policies may occur from time to time
that will directly affect the Company. The Company's competitive position
in the telecommunications services and long distance markets depends heavily
on the license granted by the Mexican government. Should this permit be revoked
for whatever reason, the Company would be severely impaired or unable to
provide many of its telecommunications services. In addition, the Company
relies on other carriers to complete the transmission of certain
telecommunications services. To the extent that any of these carriers was
to no longer do business with the Company, the Company would either have
to find an alternate source or not be able to provide those services.
In Poland, the Company faces a number of risks, including the risks
associated with the continuing conversion of the Polish economy from a
communist economy to a market economy, competitive factors, the risks of
its customers being able to obtain financing for their purchases of the
Company's products, risks of the collectibility of accounts receivable
generally and the availability of products that will be approved for use
in the Company's foreign markets. In addition, the Company believes
that the markets in which it participates could be subject to numerous
factors that will contribute to the slow growth of its business in those
markets, such as the lack of capital for the creation of infrastructure,
lack of governmental support for the telecommunication industry and intense
competition from other vendors with substantially greater resources and name
recognition than the Company. Also, many of the products or components of
the products manufactured by the Company are subject to price fluctuations
which are beyond the Company's control and can affect the Company's ability
to price its products competitively and, thus, the overall profitability of
the Company. Furthermore, the Company faces the challenge of maintaining
product lines that reflect the rapidly improving and changing technology
of the telecommunications industry.
The international long distance market, although large and rapidly
growing, is also very competitive. The Company will compete in this
market with companies that have greater experience and substantially
greater resources, both financial and otherwise. In addition, the Company
will face certain additional risks in competing in this market, including
changes in U.S. and foreign government regulations and telecommunications
standards, dependence on strategic partners, tariffs, taxes and other trade
barriers, the potential for nationalization and economic downturns and
political instability in foreign countries. In addition, the Company could
be adversely affected by a reversal in the trend toward deregulation of
telecommunication carriers. The Company's international long distance
business is heavily dependent upon a strategic marketing relationship with
a third party for much of its international long distance business.
To the extent that this strategic relationship were to terminate for
any reason, the Company would have to find an alternate source of customers
which would have a material adverse affect on the Company's operations.
Furthermore, this strategic relationship creates a credit concentration risk
for the Company. The Company will be increasingly exposed to these risks as
it expands its presence in this market.
The Company is also pursuing a strategy of growth through selective
acquisitions. However, there can be no assurance that any acquisition will
be completed, financing will be available, attractive candidates will be
identified in the future, or if completed, any acquisition will be beneficial
to the Company.
FOREIGN CURRENCY RISK
The general economic conditions of Poland and Mexico are greatly
affected by the fluctuations in exchange rates and inflation. The Company's
foreign currency risk is mitigated in Mexico due to the fact that many of
the Company's customers are multinational firms that pay in U.S. dollars.
In addition, most of the customers that do pay in pesos pay at the spot
exchange rate in effect at the time of payment as opposed to the exchange
rate at the time the receivable is created. The Company's functional
currency in both Poland and Mexico is the U.S. dollar because the majority
of its transactions are in such currency. However, the Company transacts
in the local currency and thus faces foreign currency risk with respect
to these transactions. For instance, a significant portion of the Company's
payables are denominated in pesos thus exposing the Company to exchange
rate risk. In the international long distance services business, the
U.S.-originated calls will be paid in U.S. dollars; however, the Company
also expects to derive a certain portion of its revenues from calls originated
outside of the U.S. thus exposing the Company to additional exchange rate risk.
The Company may choose to limit its exposure to foreign currency risk through
the purchase of forward foreign exchange contracts or similar hedging
strategies. There can be no assurance that any foreign currency hedging
strategy would be successful in avoiding exchange-related losses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See Index to Exhibits on page 21.
(b) Reports on Form 8-K.
On August 5, 1997, the Company filed a report on Form 8-K reporting
that the Company had entered into an agreement to acquire all of the
outstanding shares of Integracion de Redes, S.A. de C.V. ("Integracion")
and Lan and Wan, S.A. de C.V. ("Lan").
On October 6, 1997, the Company filed a report of Form 8-K/A providing
financial statements and pro forma financial information required to be
filed in connection with the Integracion/Lan acquisition.
On October 15, 1997, the Company filed a report on Form 8-K reporting
that the Company had acquired all of the outstanding shares of N.S.I.,
S.A. de C.V. ("NSI").
On November 5, 1997, the Company filed a report on Form 8-K/A
indicating that financial statements and pro forma financial information
relating to the NSI acquisition were not required.
<PAGE>
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the issuer
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Telscape International, Inc.
(Registrant)
Date: November 12, 1997 By: /S/ E. SCOTT CRIST
E. Scott Crist
President and Chief Executive Officer
Date: November 12, 1997 By: /S/ TODD M. BINET
Todd M. Binet
Executive Vice President and Chief Financial
(Principal Financial and Chief Accounting
Officer)
<PAGE>
<PAGE>
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 - Articles of Incorporation of the
Registrant, as amended (filed as Exhibit 3.1 to
the Company's Registration Statement No. 33-80542-
D and incorporated herein by reference)
3.2 - Bylaws of the Registrant, as amended
(filed as Exhibit 3.2 to the Company's
Registration Statement No. 33-80542-D and
incorporated herein by reference)
4.1 - Form of Certificate evidencing Common Stock
(filed as Exhibit 4.1 to the Company's Registration
Statement No. 33-80542-D and incorporated herein by
reference)
4.2 - Form of Warrant Agreement between
American Stock Transfer & Trust Company and the
Company (filed as Exhibit 4.2 to the Company's
Registration Statement No. 33-80542-D and
incorporated herein by reference)
4.3 - Form of Warrant Certificate evidencing
the Warrants (filed as Exhibit 4.3 to the
Company's Registration Statement No. 33-80542-D
and incorporated herein by reference)
4.4 - Form of Statement of the establishment of
the Series B non-voting, non-participating Preferred
Stock (filed as Exhibit 4.1 to the Company's Report
on Form 10-QSB for the quarter ended June 30, 1996
and incorporated herein by reference)
*11.1 - Statement regarding computation of per share earnings
*27.1 - Financial Data Schedule
_________________
*Filed herewith
</TABLE>
<PAGE>
[CAPTION]
TELSCAPE INTERNATIONAL, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
PRIMARY EARNINGS PER SHARE:
Weighted Average Common Shares Outstanding 3,868,724 3,646,255 3,904,574 2,747,974
Plus: Common stock equivalents assumed to be 2,068,048 91,867 2,018,680 91,866
exercised into common stock
Less: Treasury shares assumed to be repurchased (773,888) (14,728) (773,888) (16,973)
with the proceeds from exercise (2)
Plus: Convertible debt assumed to be converted 333,000 111,000
into common stock
Weighted Average Common and Common 5,495,884 3,723,394 5,260,367 2,822,867
Equivalent Shares outstanding
Net income (loss) for the period $ 1,202,148 $ (325,564) $ 1,416,045 $ (686,692)
Interest on convertible notes $ 21,128 $ - $ 21,128 $ -
Interest savings on excess proceeds from $ 142,728 (2) (2) $ 295,326 (2) (2)
option and warrant conversion
Net income (loss) as adjusted $ 1,366,004 $ (325,564) $ 1,732,499 $ (686,692)
Net income (loss) per share $ 0.25 $ (0.09) $ 0.33 $ (0.24)
FULLY DILUTED EARNINGS PER SHARE: (1)
Weighted Average Common Shares Outstanding 3,868,724 3,904,574
Plus: Options and warrants assumed to be 4,763,048 4,646,892
exercised into common stock
Less: Treasury shares assumed to be repurchased (2) (773,888) (773,888)
with the proceeds from exercise
Plus: Convertible debt assumed to be converted 333,000 111,000
into common shares
Weighted Average Shares Utilized in Fully Diluted 8,190,884 7,888,578
Earnings Per Share
Net income for the period $ 1,202,148 $ 1,416,045
Interest on convertible notes $ 21,128 $ 21,128
Interest savings on excess proceeds from $ 149,267 (2) $ 379,194 (2)
option and warrant conversion
Net income as adjusted $ 1,372,543 $ 1,816,367
Net income per share $ 0.17 $ 0.23
(/TABLE)
(1) Fully diluted earnings per share for 1996 are not provided as they were
anti-dilutive.
(2) As the Company's options and warrants exceed 20% of the common shares
outstanding at period end, the number of shares assumed to be repurchased
under the treasury stock method is limited to the 20% amount. Excess
proceeds realized from the assumed exercise of these options and warrants
is assumed to be utilized to retire outstanding debt or to be invested in
U.S. Government securities.
<PAGE>
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,757,839
<SECURITIES> 0
<RECEIVABLES> 5,335,641
<ALLOWANCES> (506,000)
<INVENTORY> 2,378,895
<CURRENT-ASSETS> 14,675,588
<PP&E> 2,656,753
<DEPRECIATION> (728,248)
<TOTAL-ASSETS> 22,037,146
<CURRENT-LIABILITIES> 11,693,814
<BONDS> 2,693,710
380
0
<COMMON> 3,953
<OTHER-SE> 6,907,740
<TOTAL-LIABILITY-AND-EQUITY> 22,037,146
<SALES> 22,133,691
<TOTAL-REVENUES> 22,133,691
<CGS> (14,448,750)
<TOTAL-COSTS> (6,205,835)
<OTHER-EXPENSES> (281,679)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (43,967)
<INCOME-PRETAX> 1,153,460
<INCOME-TAX> 245,736
<INCOME-CONTINUING> 1,416,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,416,045
<EPS-PRIMARY> .33
<EPS-DILUTED> .23
</TABLE>
