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 June 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
3,868,438 shares of Registrant's common stock ($.001 Par Value) were
outstanding as of August 12, 1997.
Transitional Small Business Disclosure Format (Check One): Yes _____ No X
Telscape International, Inc.
Table of Contents
Form 10-QSB
June 30, 1997
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 2
Consolidated Statements of Operations -
Three Months and Six Months Ended
June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows -
Six Months Ended June 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 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to Vote of
Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
(a) Exhibits
(b) Reports on Form 8-K
Signatures 16
Telscape International, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS June 30, 1997 December 31,
Current: (unaudited) 1996
<S> <C> <C>
Cash and cash equivalents $ 3,179,684 $ 494,781
Accounts receivable, less allowance for doubtful
accounts of $328,000 and $57,000, respectively 1,946,396 2,034,728
Inventories 1,708,689 2,045,195
Prepaid expenses and other 651,161 90,216
Total current assets 7,485,930 4,664,920
Property and Equipment, net of accumulated
depreciation and amortization 1,732,959 983,102
Goodwill, net of accumulated amortization 3,063,367 3,173,759
Deferred income taxes 409,710 192,167
Other assets 206,106 357,090
Total assets $ 12,898,072 $ 9,371,038
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,883,025 $ 1,756,016
Accrued expenses 343,940 317,973
Customer deposits 251,173 405,859
Deferred income taxes 311,778 371,948
Other liabilities 36,442 ---
Current portion of notes payable 100,000 ---
Current portion of capital lease obligations 100,460 ---
Total current liabilities 6,026,818 2,851,796
Long term notes payable 200,000 ---
Long term capital lease obligations 213,026 ---
Minority interests 750,493 754,398
Total liabilities 7,190,337 3,606,194
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 --- ---
Series B non-voting preferred stock, $ .001 par value
380,000 shares authorized, issued and outstanding 380 380
Common stock, $.001 par value, 25,000,000 shares
authorized; 3,951,797 shares issued in 1997; and
3,935,969 issued and outstanding in 1996 3,952 3,936
Additional paid-in capital 11,909,663 11,883,719
Treasury stock (83,359 shares at cost in 1997) (296,966) ---
Capital subscriptions receivable (600,000) (600,000)
Accumulated deficit (5,309,294) (5,523,191)
Shareholders' equity 5,707,735 5,764,844
Total liabilities and shareholders' equity $ 12,898,072 $ 9,371,038
</TABLE>
Telscape International, Inc.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
<S> <C> <C> <C> <C>
Revenues $ 6,170,381 $ 840,846 $ 9,941,301 $ 1,350,084
Cost of revenues 3,468,504 507,934 5,993,862 826,095
Gross profit 2,701,877 332,912 3,947,439 523,989
Selling, general and administrative 2,005,811 598,387 3,637,609 999,931
Operating income (loss) 696,066 (265,475) 309,830 (475,942)
Other income (expense):
Interest, net 2,584 24,242 281 64,067
Foreign exchange gain (loss) 20,369 10,484 27,192 7,556
Other 8,281 44,450 30,528 44,450
Write-off of investment in operating venture (196,462) --- (196,462) ---
Litigation settlement (128,034) --- (128,034) ---
Total other income (expense), net (293,262) 79,176 (266,495) 116,073
Income (loss) before income tax
benefit (expense) and minority interests 402,804 (186,299) 43,335 (359,869)
Domestic and foreign income
tax benefit (expense):
Current (54,522) --- (111,055) ---
Deferred 189,524 (20,451) 277,712 (27,599)
Total domestic and foreign income
tax benefit (expense) 135,002 (20,451) 166,657 (27,599)
Income (loss) before minority interests 537,806 (206,750) 209,992 (387,468)
Minority interests in subsidiaries 49 264 3,905 (126)
Net income (loss) $ 537,855 $ (206,486) $ 213,897 $ (387,594)
Net income (loss) per common share $ 0.13 $ (0.07) $ 0.05 $ (0.16)
Weighted average common and
common equivalent shares outstanding 3,988,549 2,779,313 3,998,660 2,372,598
</TABLE>
Telscape International, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Six Months Ended June 30,
1997 1996
Cash Flow From Operating Activities:
Net income (loss) $ 213,897 $ (387,594)
Adjustments to reconcile net income
(loss)to net cash provided by (used in)
operating activities:
Allowance for doubtful accounts 253,702 (5,630)
Depreciation and amortization 238,678 39,889
Allowance for inventory obsolescence --- (571)
Accrued employee benefits --- 661
Deferred income taxes --- 11,453
Issuance of common stock and warrants for services 24,380 ---
Loss on sale of assets 997 ---
Write-off of investment in operating venture 196,462 ---
Litigation settlement expense 3,034 ---
Interest amortized on discounted
short-term investments --- (8,196)
Minority interest in subsidiary's
income (losses) (3,905) 625
Decrease in minority interests subscriptions
receivable for equipment credits utilized --- 45,966
Changes in operating assets and liabilities:
Accounts receivable (182,959) (12,647)
Inventory 336,506 (194,952)
Prepaids and other assets (612,146) 93,566
Accounts payable 3,144,598 54,675
Accrued liabilities (62,757) 10,159
Other liabilities (277,712) 46,349
Net cash provided by (used in)
operating activities 3,272,775 (306,247)
Cash Flow From Investing Activities:
Purchase of short term investments --- (4,898,790)
Redemption of short term investments --- 6,370,895
Purchases of property and equipment (667,437) (76,472)
Proceeds from the sale of assets 3,550 ---
Proceeds from asset sale leaseback 119,457 ---
Acquisition of subsidiary, net of cash acquired --- (227,185)
Investment in operating venture --- (196,462)
Net cash provided by (used in) investment
activities (544,430) 971,986
Cash Flow From Financing Activities:
Capital lease payments (45,022) (2,558)
Proceeds from issuance of common stock 1,580 23,764
Net cash provided by (used in) financing
activities (43,442) 21,206
Net increase in cash and cash equivalents 2,684,903 686,945
Cash and cash equivalents at beginning of period 494,781 173,255
Cash and cash equivalents at end of period $ 3,179,684 $ 860,200
Supplemental disclosure of cash flow information:
Interest paid $ 7,762 $ ---
Taxes paid 213,839 ---
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 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)
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 six months ended June 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.
The Company has not yet adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share". This
Statement 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.
Both 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 - Foreign operations
The consolidated financial statements include amounts for
the Company's 90%-owned Polish subsidiary, DTS/ZWUT ("DTS/ZWUT"),
the Company's wholly-owned subsidiary, Telereunion, Inc.
("Telereunion") and Telereunion's 97%-owned Mexican subsidiary,
Vextro de Mexico, S.A. de C.V. ("Vextro") as follows:
DTS/ZWUT (unaudited):
As of June 30, 1997 and December 31, 1996, DTS/ZWUT had
total assets of $1,019,946 and $1,070,184, respectively, and net
assets of $794,964 and $823,715, respectively.
Six months ended June 30, Three months ended June 30,
1997 1996 1997 1996
Net sales $376,745 $679,196 $162,674 $169,958
Net loss (28,751) (6,252) (27,596) (10,156)
Telereunion (unaudited)(1):
As of June 30, 1997 and December 31, 1996, Telereunion had
total assets of $5,808,156 and $4,164,550, respectively, and net
assets of $407,619 and $465,668, respectively.
Six months ended June 30, Three months ended June 30,
1997 1996 1997 1996
Net sales $5,547,663 $2,958,478 $2,881,286 $1,341,775
Net income (loss) (41,666) (157,348) 87,056 50,049
(1) The unaudited pro forma consolidated financial
statements of Telereunion and Vextro have been prepared as if the
business combination, which was effected May 17, 1996, as
described in Note 5, had been consummated as of January 1, 1996.
The information is not necessarily indicative of the results of
operations and financial position of Telereunion and Vextro as
they may be in the future or as they might have been had the
business combination been consummated as of January 1, 1996. The
pro forma consolidated financial statements should be read in
conjunction with the audited historical consolidated financial
statements and related notes in the Company's annual report on
Form 10-KSB for the year ended December 31, 1996.
Note 3 - Net income (loss) per share
The net income (loss) per common and common equivalent share
is based on the weighted average number of shares of common stock
outstanding. For the quarters ended June 30, 1997 and 1996,
common equivalent shares include stock options and warrants for
80,605 and 81,962 shares, respectively, calculated by the
treasury stock method. The average market price during each of
the periods presented has been used in the calculation of
equivalent shares in all periods presented as this results in the
maximum dilutive effect.
The Board of Directors of the Company has recently
discovered that certain options have, by their express terms,
terminated. Accordingly, the Company is recognizing the
termination of 90,998 options at an exercise price of $0.80 per
share and the termination of 141,618 options at an exercise price
of $1.35 per share issued under certain of the Company's stock
option plans.
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 - Business combinations
On May 17, 1996, the Company acquired all of the stock of
Telereunion, a privately- owned Delaware corporation.
Telereunion, through Vextro, is a telecommunications equipment
and service company with operations primarily 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.
Note 6 - Subsequent events
On July 22, 1997, pursuant to a stock purchase agreement,
Telereunion and Telscape USA, a wholly-owned subsidiary of the
Company , (collectively, the "Purchasers"), 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. The acquisition was effective
July 1, 1997.
Under the terms of the acquisition, the Purchasers paid cash
of $10,000 to the shareholders of Lan. As consideration for
Integracion, the Purchasers 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, 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 acquistion will
be accounted for under the purchase method of accounting.
Since the Integracion and Lan acquisitions were completed in
the current quarter, the Company's Form 10-QSB for the quarter
ended September 30, 1997 will include certain financial
information on Integracion.
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, 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 June 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.
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. Management has within
the last year taken steps to reduce operating expenses, including
overhead, that should have the effect of increasing operating
margins, provided that the Company's revenues remain level or
increase.
Revenues. In addition to the efforts in the international
long distance area, 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 and will explore the value-
added services opportunities in Poland. As a result of the
acquisition of Integracion, the Company expects to generate
revenues in the data and networking market through equipment
sales and value-added services.
Gross Margin. Since the Polish operations have historically
had higher margin equipment sales than the Mexican operations,
gross margin comparisons for period over period will be affected
accordingly in the near term. See discussion of "Cost of
Revenues" below. As the Mexican operations account for more of
the Company's revenues, the gross margins may decline relative to
the gross margins prevalent while the Company only had Polish
operations; however, the Company's non-Polish revenues are
evolving to have proportionately more international long distance
and value-added services with proportionately less equipment
sales. As a result, Management expects the Company's gross
margins with respect to non-Polish revenues to improve.
Operating Margin. The Company's management team has taken a
number of steps to reduce operating expenses, including the
reduction in work force in Poland as well as international
headquarters. Management expects that these steps will improve
the operating margin of the Company. The Company has already
experienced a significant improvement in operating margins as the
growth in sales has exceeded the growth in operating expenses.
Results of Operations
Three Months Ended June 30, 1997 Compared to Three Months Ended
June 30, 1996
Revenues increased from $840,846 in 1996 to $6,170,381 in
1997. This increase of $5,329,535, or 634%, was due principally
to the acquisition of Telereunion and the revenues generated from
the sale of international long distance. Revenues for the Polish
operations were relatively flat.
Cost of Revenues increased from $507,934 in 1996 to
$3,468,504 in 1997, or $2,960,570. The 583% increase in cost of
revenues was due principally to the incremental cost of revenues
attributable to the acquisition of Telereunion and the additional
cost of revenues associated with the increase in the sale of
international long distance. This increase was offset partially
by a decrease in the cost of revenues associated with the Polish
operations. The cost of revenues as a percentage of revenues
decreased from 60.4% to 56.2%, or 4.2%. The decrease in cost of
revenues as a percentage of revenues was due principally to the
increase in the sales of international long distance and, to a
lesser extent, a decrease in the cost of revenues associated with
the Polish operations.
Selling, General and Administrative Expenses ("SG&A")
increased from $598,387 in 1996 to $2,005,811 in 1997, or
$1,407,424. The 235% increase in SG&A was due principally to the
incremental SG&A attributable to the acquisition of Telereunion
and, to a lesser extent, the merger of Orion.
Overall SG&A as a percentage of revenues decreased from
71.2% to 32.5%, or 38.7%. This decrease was due to the lower
SG&A as a percentage of revenues associated with Telereunion and
the increase in revenues rapidly outpacing the growth in
operating expenses.
Other Income (Expense) decreased from $79,176 in 1996 to
$(293,262) in 1997, or $372,438. The decrease in Other Income was
due principally to the $196,462 write off of the Company's
investment in Elterix, an operating joint venture, and a
litigation settlement expense of $128,034.
Income Tax Benefit (Expense) changed from an income tax
expense of $(20,451) in 1996 to a tax benefit of $135,002 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
$(206,486) in 1996 as compared to a net income of $537,855 in
1997 due to a combination of the factors discussed above.
Six Months Ended June 30, 1997 Compared to Six Months Ended June
30, 1996
Revenues increased from $1,350,084 in 1996 to $9,941,301 in
1997. This increase of $8,591,217, or 636%, was due principally
to the acquisition of Telereunion and the revenues generated from
the sale of international long distance. This increase in
revenues was partially offset by a decline in the revenues from
the Polish operations.
Cost of Revenues increased from $826,095 in 1996 to
$5,993,862 in 1997, or $5,167,767. The 626% increase in cost of
revenues was due principally to the incremental cost of revenues
attributable to the acquisition of Telereunion and the additional
cost of revenues associated with the increase in the sale of
international long distance. This increase was offset partially
by a decrease in the cost of revenues associated with the Polish
operations. The cost of revenues as a percentage of revenues
decreased from 61.2% to 60.3%, or .9%. The decrease in cost of
revenues as a percentage of revenues was due principally to the
increase in the sales of international long distance and, to a
lesser extent, a decrease in the cost of revenues associated with
the Polish operations.
Selling, General and Administrative Expenses ("SG&A")
increased from $999,931 in 1996 to $3,637,609 in 1997, or
$2,637,678. The 264% increase in SG&A was due principally to the
incremental SG&A attributable to the acquisition of Telereunion
and, to a lesser extent, the merger of Orion.
Overall SG&A as a percentage of revenues decreased from
74.1% to 36.6%, or 37.5%. This decrease was due to the lower
SG&A as a percentage of revenues associated with Telereunion and
the increase in revenues rapidly outpacing the growth in
operating expenses.
Other Income (Expense) decreased from $116,073 in 1996 to
$(266,495) in 1997, or $382,568. The decrease in Other Income was
due principally to the $196,462 write off of the Company's
investment in Elterix, a litigation settlement expense of
$128,034 and a decrease in net interest income of $63,786.
Income Tax Benefit (Expense) changed from an income tax
expense of $(27,599) in 1996 to a tax benefit of $166,657 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
$(387,594) in 1996 as compared to a net income of $213,897 in
1997 due to a combination of the factors discussed above.
Liquidity and Capital Resources
Net cash provided by (used in) operating activities was
$3,272,775 and ($306,247) for the six months ended June 30, 1997
and June 30, 1996, respectively. The increase in net cash
provided by operations in 1997 as compared to 1996 was due
primarily to an increase in working capital, primarily as a
result of an increase in accounts payable and a decrease in
inventory, and higher depreciation and amortization expense. In
addition, the Company had net income for the period in 1997
versus a loss in 1996 and had significantly higher non-cash
expenses in 1997 as compared to 1996.
Net cash provided by (used in) investing activities was
($544,430) and $971,986 for the six months ended June 30, 1997
and June 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
($43,442) and $21,206 for the six months ended June 30, 1997 and
June 30, 1996, respectively. The increase of $64,648 was due
principally to capital lease payments in 1997 coupled with the
issuance of capital stock in 1996.
As of June 30, 1997, the Company had cash and cash
equivalents of $3,179,684 and positive working capital of
$1,459,112. 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 and working capital
requirements. 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 nor that the Company will be
able to obtain lease financing on commercially reasonable lease
terms, if at all.
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 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.
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 had a
positive cash flow from operations during the six months ended
June 30, 1997; however, to the extent Vextro does not have a
positive net cash flow from its 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 and Integracion 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 in Poland 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 and Integracion.
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, from time to time the Company transacts in the local
currency and thus faces foreign currency risk with respect to
these transactions. 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 1. Legal Proceedings.
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 Telscape and the other defendant from any and all claims
in connection with the Lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on
June 16, 1997, to elect six members of the Board of Directors to
a one year term and to ratify the selection of BDO Seidman LLP as
the Company's independent accountants.
The votes were cast as follows:
Withhold
Number of Authority
Nominee Votes For to Vote
E. Scott Crist 2,941,453 12,850
Manual Landa 2,942,453 11,850
Oscar Garcia 2,942,453 11,850
Ricardo Orea 2,942 453 11,850
Todd M. Binet 2,941,013 13,290
Darrel O. Kirkland 2,941,452 12,850
With respect to the proposal to ratify the selection of BDO
Seidman LLP, the number of votes cast for, against and the number
of abstentions were 2,940,803, 10,500 and 3,000, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. See Index to Exhibits on page 17.
(b) Reports on Form 8-K.
On June 10, 1997, the Company filed a report on Form 8-K
reporting that the Company had entered into a compromise and
settlement agreement in the lawsuit In Re:The Estate of Nina Jean
Obel, Deceased et al v. Telscape International, Inc. et al which
had been previously disclosed in the Company's 10-KSB and 10-QSB
for the periods ended December 31, 1996 and March 31, 1997,
respectively.
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: August 14, 1997 By: /s/ E. SCOTT CRIST
E. Scott Crist
President and Chief Executive Officer
Date: August 14, 1997 By: /s/ TODD M. BINET
Todd M. Binet
Executive Vice President and
Chief Financial Officer (Principal Financial
and Chief Accounting Officer)
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 - Statements regarding computation of per
share earnings
*27.1 - Financial Data Schedule
_________________
*Filed herewith
Telscape International, Inc.
Earnings Per Share Calculation
Three Months Ended June 30, 1997
Treasury stock method - weighted average price 3.13
Period beginning date 4/1/97
Last day in period 6/30/97
Number of days in period 91
Weighted
Total Outstanding No. of Average
Description Shares From To Days Shares
Common Stock:
Balance at 1/1/97 3,935,969 4/1/97 5/22/97 52 2,249,125
Balance at 5/23/97 3,951,797 5/23/97 5/23/97 1 43,426
Balance after stock repurchase 3,868,438 5/24/97 6/30/97 38 1,615,392
Retroactive treatment
Options granted
Shares 16,205
x option price 0.80
/ average market price 3.13
Treasury shares 4,142
Equivalent shares 12,063 4/1/97 6/30/97 91 12,063
Shares 54,000
x option price 2.25
/ average market price 3.13
Treasury shares 38,818
Equivalent shares 15,182 4/1/97 6/30/97 91 15,182
Shares 75,000
x option price 1.35
/ average market price 3.13
Treasury shares 32,348
Equivalent shares 42,652 4/1/97 6/30/97 91 42,652
Shares 50,000
x option price 3.00
/ average market price 3.13
Treasury shares 47,923
Equivalent shares 2,077 4/1/97 6/4/97 65 1,483
Warrants outstanding
Shares 150,000
x exercise price 2.94
/ average market price 3.13
Treasury shares 140,775
Equivalent shares 9,225 4/1/97 6/30/97 91 9,225
Total average shares and equivalent shares outstanding 3,988,549
Net income for the period 537,855
Net income per average share outstanding 0.13
Telscape International, Inc.
Earnings Per Share Calculation
Six Months Ended June 30, 1997
Treasury stock method - weighted average price 3.088
Period beginning date 1/1/97
Last day in period 6/30/97
Number of days in period 181
Weighted
Total Outstanding No. of Average
Description Shares From To Days Shares
Common Stock:
Balance at 1/1/97 3,935,969 1/1/97 5/22/97 142 3,087,887
Balance at 5/23/97 3,951,797 5/23/97 5/23/97 1 21,833
Balance after stock repurchase 3,868,438 5/24/97 6/30/97 38 812,158
Retroactive treatment
Options granted
Shares 16,205
x option price 0.80
/ average market price 3.09
Treasury shares 4,198
Equivalent shares 12,007 1/1/97 6/30/97 181 12,007
Shares 54,000
x option price 2.25
/ average market price 3.09
Treasury shares 39,346
Equivalent shares 14,654 1/1/97 6/30/97 181 14,654
Shares 75,000
x option price 1.35
/ average market price 3.09
Treasury shares 32,788
Equivalent shares 42,212 1/1/97 6/30/97 181 42,212
Shares 50,000
x option price 3.00
/ average market price 3.09
Treasury shares 48,575
Equivalent shares 1,425 3/21/97 6/4/97 76 598
Warrants outstanding
Shares 150,000
x exercise price 2.94
/ average market price 3.09
Treasury shares 142,689
Equivalent shares 7,311 1/1/97 6/30/97 181 7,311
Total average shares and equivalent shares outstanding 3,998,660
Net income for the period 213,897
Net income per average share outstanding 0.05
Telscape International, Inc.
Earnings Per Share Calculation
Three Months Ended June 30, 1996
Treasury stock method - weighted average price 4.72
Period beginning date 4/1/96
Last day in period 6/30/96
Number of days in period 91
Weighted
Total Outstanding No. of Average
Description Shares From To Days Shares
Common Stock:
Balance at 12/31/95 1,890,442 4/1/96 6/30/96 91 1,890,422
Shares issued at 4/30/96 1,000 4/30/96 6/30/96 62 681
Shares issued at 5/17/96 16,205 5/17/96 6/30/96 45 8,013
Shares issued at 5/17/96 1,605,000 5/17/96 6/30/96 45 793,681
Shares issued at 5/29/96 12,500 5/29/96 6/30/96 33 4,533
Retroactive treatment
Options granted
Shares 98,689
x option price 0.80
/ average market price 4.72
Treasury shares 16,727
Equivalent shares 81,962 4/1/96 6/30/96 91 81,962
Shares 31,164
x option price 6.42
/ average market price 4.72
Treasury shares 0
Equivalent shares 0
Warrants outstanding
Shares 525,000
x exercise price 8.00
/ average market price 4.72
Treasury shares 0
Equivalent shares 0
Total average shares and equivalent shares outstanding 2,779,313
Net income for the period (206,486)
Net income per average share outstanding (0.07)
Telscape International, Inc.
Earnings Per Share Calculation
Six Months Ended June 30, 1996
Treasury stock method - weighted average price 3.95
Period beginning date 1/1/96
Last day in period 6/30/96
Number of days in period 182
Weighted
Total Outstanding No. of Average
Description Shares From To Days Shares
Common Stock:
Balance at 12/31/95 1,890,442 1/1/96 6/30/96 182 1,890,422
Shares issued at 4/30/96 1,000 4/30/96 6/30/96 62 341
Shares issued at 5/17/96 16,205 5/17/96 6/30/96 45 4,007
Shares issued at 5/17/96 1,605,000 5/17/96 6/30/96 45 396,841
Shares issued at 5/29/96 12,500 5/29/96 6/30/96 33 2,266
Retroactive treatment
Options granted
Shares 98,689
x option price 0.80
/ average market price 3.95
Treasury shares 19,988
Equivalent shares 78,701 1/1/96 6/30/96 182 78,701
Shares 31,164
x option price 6.42
/ average market price 3.95
Treasury shares 0
Equivalent shares 0
Warrants outstanding
Shares 525,000
x exercise price 8.00
/ average market price 3.95
Treasury shares 0
Equivalent shares 0
Total average shares and equivalent shares outstanding 2,372,598
Net income for the period (387,594)
Net income per average share outstanding (0.16)
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,179,684
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