U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly report under to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended JUNE 30, 1998
[ ] 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)
2700 POST OAK BLVD., SUITE 1000, HOUSTON, TEXAS 77056
(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 [ ]
5,637,393 shares of Registrant's common stock ($.001 Par Value) were outstanding
as of August 10, 1998.
<PAGE>
Telscape International, Inc.
Table of Contents
Form 10-Q
June 30, 1998
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Condensed Consolidated Balance Sheets -
As of December 31, 1997 and June 30, 1998 (unaudited) ...... 1
Unaudited Condensed Consolidated Statements of Operations -
Three Months and Six Months Ended June 30, 1997 and 1998 ... 2
Unaudited Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1998 .................... 3
Notes to Unaudited Condensed Consolidated Financial
Statements ............................................... 5
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 23
PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K ........................... 34
(a) Exhibits
(b) Reports on Form 8-K
Signatures ........................................................ 36
<PAGE>
TELSCAPE INTERNATIONAL, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1997 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS: ............................................. (unaudited)
Cash and cash equivalents ................................. $ 4,734,000 $ 4,939,000
Accounts receivable, less allowance for doubtful accounts
of $200,000 and $370,000 (unaudited), respectively ...... 6,276,000 12,841,000
Inventories ............................................... 4,305,000 3,803,000
Prepaid expenses and other ................................ 2,674,000 6,458,000
Deferred income taxes ..................................... 517,000 334,000
------------ ------------
Total current assets .................................... 18,506,000 28,375,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation ..... 2,679,000 13,084,000
GOODWILL AND OTHER INTANGIBLES, net of accumulated
amortization ................................................ 17,674,000 26,332,000
OTHER ASSETS ................................................ 776,000 1,254,000
------------ ------------
Total assets .................................. $ 39,635,000 $ 69,045,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................... $ 10,756,000 $ 17,694,000
Accrued expenses .......................................... 3,303,000 6,799,000
Current portion of notes payable and capital lease
obligations ............................................. 508,000 993,000
Convertible debentures .................................... -- 5,000,000
Deferred income taxes ..................................... 270,000 441,000
------------ ------------
Total current liabilities ............................... 14,837,000 30,927,000
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of current
portion ................................................... 2,676,000 4,463,000
CONVERTIBLE SUBORDINATED DEBENTURES ......................... -- 5,000,000
MINORITY INTERESTS .......................................... 34,000 63,000
COMMITMENTS AND CONTINGENCIES
SERIES B NON-VOTING PREFERRED STOCK, $.001 par value,
380,000 and 0 shares, respectively, authorized
issued and outstanding, mandatorily redeemable as
certain performance measures were achieved ................ -- --
STOCKHOLDERS' 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;
4,104,027 and 5,248,636 issued, respectively ............... 4,000 5,000
Additional paid-in capital ................................. 25,232,000 31,575,000
Accumulated deficit ........................................ (2,851,000) (2,359,000)
Treasury stock ............................................. (297,000) (629,000)
------------ ------------
Total stockholders' equity .................... 22,088,000 28,592,000
------------ ------------
Total liabilities and stockholders' equity .... $ 39,635,000 $ 69,045,000
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 6,170,000 $32,378,000 $9,941,000 $ 65,777,000
COST OF REVENUES 3,468,000 28,598,000 5,994,000 57,056,000
GROSS PROFIT 2,702,000 3,780,000 3,947,000 8,721,000
--------- --------- --------- ---------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,921,000 3,552,000 3,399,000 5,705,000
------------ ------------ ------------ -----------
OPERATING INCOME BEFORE DEPRECIATION
AND AMORTIZATION 781,000 228,000 548,000 3,016,000
DEPRECIATION AND AMORTIZATION 85,000 689,000 239,000 1,258,000
------------ ------------ ------------ -----------
OPERATING INCOME (LOSS) 696,000 (461,000) 309,000 1,758,000
OTHER INCOME (EXPENSE):
Interest income 21,000 54,000 26,000 91,000
Interest expense (18,000) (248,000) (26,000) (342,000)
Foreign exchange gain (loss) 20,000 (65,000) 27,000 (187,000)
Other, net (316,000) 48,000 (293,000) 96,000
------------ ------------ ------------ -----------
Total other expense, net (293,000) (211,000) (266,000) (342,000)
------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTERESTS 403,000 (672,000) 43,000 1,416,000
INCOME TAX BENEFIT (EXPENSE) 135,000 68,000 167,000 (895,000)
------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE MINORITY
INTERESTS 538,000 (604,000) 210,000 521,000
MINORITY INTERESTS IN SUBSIDIARIES - (18,000) 4,000 (29,000)
------------ ------------ ------------ ----------
NET INCOME (LOSS) $ 538,000 $(622,000) $ 214,000 $ 492,000
============== ======== ======= =============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.14 $ (0.13) $ 0.05 $ 0.11
Diluted (1) $ 0.13 $ n/a $ 0.05 $ 0.06
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 3,903,229 4,692,984 3,921,878 4,534,568
Diluted(1) 3,988,094 n/a 3,998,660 7,778,072
</TABLE>
(1) Inclusion of additional shares under a diluted analysis for the three months
ended June 30, 1998 is inappropriate due to the anti-dilutive effect.
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
TELSCAPE INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1997 1998
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 214,000 $ 492,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 254,000 556,000
Depreciation and amortization 239,000 1,258,000
Imputed interest on non-interest bearing notes payable - 142,000
Write-off of investment in operating venture 196,000 -
Deferred income taxes - 422,000
Minority interest in subsidiaries' income (loss) (4,000) 29,000
Equity in income from unconsolidated subsidiary - 49,000
Changes in assets and liabilities:
Accounts receivable (183,000) (4,957,000)
Inventories 337,000 1,292,000
Prepaid and other assets (461,000) (3,210,000)
Accounts payable 3,145,000 4,007,000
Accrued expenses (342,000) 361,000
-------------- ---------------
Net cash provided by operating activities 3,395,000 441,000
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (667,000) (5,696,000)
Acquisition of MSN, net of cash acquired - (2,325,000)
Acquisition of INTERLINK, net of cash acquired - (8,250,000)
-------------------------------
Net cash used in investing activities (667,000) (16,271,000)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations (45,000) (46,000)
Payments on notes payable - (444,000)
Purchase of treasury shares - (332,000)
Borrowings on line of credit, net - 1,948,000
Proceeds from exercise of options and warrants 2,000 4,909,000
Proceeds from issuance of convertible debt - 10,000,000
-------------- ---------------
Net cash provided by (used in) financing activities (43,000) 16,035,000
-------------- ---------------
Net increase in cash and cash equivalents 2,685,000 205,000
-------------- ---------------
Cash and cash equivalents at beginning of period 495,000 4,734,000
-------------- ---------------
Cash and cash equivalents at end of period $ 3,180,000 $ 4,939,000
============== ===============
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
<PAGE>
TELSCAPE INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
1997 1998
-------------- --------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 8,000 $ 105,000
Income taxes paid 214,000 600,000
NON-CASH TRANSACTIONS:
Property and equipment acquired by execution of
capital lease obligation 329,000
Issuance of common stock and promissory notes in
connection with
acquisition of MSN:
Promissory Notes 672,000
Common Stock 880,000
Issuance of notes and acquisition of treasury
shares in litigation
settlement :
Litigation settlement (3,000)
Treasury stock (297,000)
Notes payable 300,000
Issuance of common stock and warrants in exchange for
services provided in connection with severance
agreement 188,000
Issuance of warrants in connection with issuance of
convertible debentures 537,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
TELSCAPE INTERNATIONAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
include the accounts of Telscape International, Inc. and its subsidiaries
(collectively, the "Company"). The unaudited condensed consolidated financial
statements of the Company for the three and six months ended June 30, 1997 and
June 30, 1998 have been prepared without an audit pursuant to the rules and
regulations of the Securities and Exchange Commission. 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, which consist of normal recurring adjustments, considered necessary
to present fairly the financial position, results of operations and cash flows
for all periods presented have been made. Operating results for the three and
six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for the full year ending December 31, 1998. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.
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.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") 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
No. 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.
SFAS 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 No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that are evaluated regularly by the chief
operating decision makers in deciding how to allocate resources and in assessing
performance.
SFAS No. 132, "Employers' Disclosure about Pensions and other
Postretirement Benefits" standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. The statement
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
5
<PAGE>
SFAS No.'s 130, 131 and 132 are effective for financial statements for
the periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Adoption of these statements is
not expected to have a material effect on the Company's financial statement
disclosures.
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to have a material effect
on its financial statements.
NOTE 2 - MSN ACQUISITION
Effective January 1, 1998, the Company acquired all of the outstanding
common stock of MSN Communications, Inc. ("MSN"). MSN, through its TELEFIESTA
brand, markets prepaid telephone calling cards across the United States
primarily to the Hispanic community. Under the terms of the transaction, the
Company paid the following to the shareholders of MSN: i) the sum of $3,250,000
in cash, ii) $750,000 in non-interest bearing promissory notes payable in eight
equal quarterly installments, and iii) 100,000 shares of the Company's common
stock. In addition, the two selling shareholders were each granted 50,000
options to purchase the Company's common stock at $11.00 per share. The
acquisition was accounted for under the purchase method of accounting. The
financial position and results of operations of MSN are included in the
Company's financial statements from the effective date of the acquisition.
The consideration paid for MSN measured at the acquisition date was
$4,852,000 and consisted of cash of $3,250,000, non-interest bearing promissory
notes with a discounted value of $672,000, common stock valued at $880,000 and
transaction costs of $78,000. The purchase price was allocated to the acquired
company's assets and liabilities based upon an estimate of fair values at the
date of acquisition and resulted in $6,091,000 of goodwill, which is being
amortized over 15 years. The balances included in the Unaudited Condensed
Consolidated Balance Sheet related to the MSN acquisition are based on
preliminary information and are subject to change when additional information
concerning final asset and liability valuations are obtained. Management does
not expect that such adjustments will be material.
NOTE 3 - INTERLINK ACQUISITION
Effective June 1, 1998, pursuant to a stock purchase agreement, the
Company through its newly-formed subsidiary Interlink Communications Holding
Co., Inc., a Delaware Corporation ("INTERLINK"), acquired all of the outstanding
shares of California Microwave Services Division, Inc., a Delaware corporation,
from California Microwave, Inc., a Delaware corporation, which operates a
teleport and network operations facility located in Mountain View, California.
The acquisition was accounted for under the purchase method of accounting. The
financial position and results of operations of INTERLINK are included in the
Company's financial statements from the effective date of the acquisition.
The consideration paid for INTERLINK measured at the acquisition date
was $8,319,000 and consisted of cash of $8,154,000 and transaction costs of
$165,000. The acquisition price is subject to post-closing adjustments to the
purchase price based on changes in the closing date balance sheet. The purchase
6
<PAGE>
was financed with the Convertible Subordinated Debentures and Convertible
Debentures (see Note 5). The purchase price was allocated to the acquired
company's assets and liabilities based upon an estimate of fair values at the
date of acquisition; to a non-compete agreement in the amount of $250,000, which
is being amortized over 3 years; and the remainder to goodwill, in the amount of
$3,176,000, which is being amortized over 15 years. The balances included in the
Unaudited Condensed Balance Sheet related to the acquisition are based on
preliminary information and are subject to change when additional information
concerning final asset and liability valuations are obtained. Management does
not expect that such adjustments will be material.
NOTE 4 - EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, Earnings Per Share. SFAS 128 simplifies the standards
required under current accounting rules for computing earnings per share and
replaces the presentation of primary earnings per share and fully-diluted
earnings per share with a presentation of basic earnings per share ("basic EPS")
and diluted earnings per share ("diluted EPS"). Following is a summary of the
calculations:
<TABLE>
<CAPTION>
For the Three Months
-------------------------- For the Six Months
Ended June 30, Ended June 30,
-------------------------- ------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC
Net income (loss) as reported $538,000 $(622,000) $214,000 $492,000
Weighted average common shares
outstanding 3,903,229 4,692,984 3,921,878 4,534,568
Basic earnings (loss) per share $0.14 $(0.13) $ 0.05 $0.11
DILUTED
Net income (loss) as reported $538,000 $(622,000) $214,000 $492,000
Weighted average common shares
outstanding 3,903,229 4,692,984 3,921,878 4,534,568
Weighted average diluted potential
common shares outstanding 84,865 3,220,768 76,782 3,243,504
Weight average common and dilutive
potential common shares
outstanding 3,988,094 7,913,752 3,998,660 7,778,072
Diluted earnings (loss) per share $0.13 $(0.08) $ 0.05 $0.06
</TABLE>
Diluted EPS for the three months ended June 30, 1998 was not disclosed
on the Unaudited Condensed Consolidated Statement of Operations as the effect is
anti-dilutive. Certain performance based warrants issued in connection with the
Company's acquisitions vest upon the achievement of certain operating
performance measures. In accordance with SFAS No. 128, these contingently
issuable shares are included in the calculation of diluted EPS when all the
necessary conditions were met. If all the necessary conditions have not been
satisfied by the end of the period, the number of contingently issuable shares
that would have been issued if the reporting period was the end of the
contingency period are included in the calculation as if those shares were
issued at the beginning of that period. For year-to-date calculations,
contingent shares are weighted for the interim periods in which they are
included in the computation of diluted EPS. At June 30, 1998, there were 500,000
performance based warrants, respectively, which had not vested which were not
included in the calculation of diluted EPS. During July 1998, these performance
based warrants vested upon the achievement of certain operating performance
measures. These contingently issuable shares will be included in the calculation
of diluted EPS as if those shares were issued July 1, 1998. Additionally, for
purposes of the diluted EPS calculations for the three months and six months
ended June 30, 1998, there were 137,081 and 536,867 options and warrants
outstanding, respectively, which were not included in the calculation of diluted
EPS as their exercise prices were greater than the average market price of the
Company's common stock during the period and inclusion of these securities in
the calculation would result in an anti-dilutive effect.
NOTE 5 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The Company's notes payable and capital lease obligations consist of the
following:
<TABLE>
<CAPTION>
-------------------------------
December 31, June 30,
1997 1998
--------------- ---------------
<S> <C> <C>
Convertible Subordinated Debentures, bearing interest at 8%,
convertible into common stock, maturing three years from closing
(see discussion below) $ --- $ 5,000,000
Convertible Debentures, bearing interest at 8%, convertible into
common stock, maturing on May 29, 2000 (see discussion below) --- 5,000,000
Non-interest bearing promissory notes, imputed interest at 10%,
unamortized discount of $348,297 and $268,381, respectively,
issued in connection with Integracion acquisition, maturing at
various dates through January 1, 2001 1,853,000 1,633,000
Non-interest bearing promissory note, imputed interest at 10%,
unamortized discount of $140,851 and $98,596, respectively,
issued in connection with Integracion acquisition, converted into
333,000 shares of common stock in July 1998 839,000 881,000
Promissory note issued to repurchase common stock, payable in six
semi-annual installments through May 20, 2000, and bearing
interest at 6% 250,000 200,000
Capital lease obligation payable in monthly installments of
$11,244 including principal and interest maturing February 28,
2000 242,000 196,000
Non-interest bearing promissory note, imputed interest at 10%,
unamortized discount of $58,350, issued in connection with MSN
acquisition, payable in eight equal quarterly installments
beginning April, 1998 --- 598,000
Revolving credit facility maturing July 31, 1999 bearing interest
at prime plus 1%, secured by accounts receivable --- 1,948,000
--------------- ---------------
Total notes payable and capital leases 3,184,000 15,456,000
Current portion 508,000 5,993,000
--------------- ---------------
Long term portion $ 2,676,000 $ 9,463,000
=============== ===============
</TABLE>
The annual maturity of the debt indicated above for the five years
following June 30, 1998 are $198,000 in 1998, $8,825,000 in 1999, $629,000 in
2000, $5,775,000 in 2001 and $29,000 in 2002.
On May 1, 1998, the Company issued $3,000,000 in 8% Convertible
Subordinated Debentures (the "Convertible Subordinated Debentures") which mature
three years from closing (the "First Draw"). On May 28, 1998, the Company issued
an additional $1,000,000 of the Convertible Subordinated Debentures (the
8
<PAGE>
"Second Draw"). On June 30, 1998, the Company issued an additional $1,000,000 of
the Convertible Subordinated Debentures (the "Third Draw"). The Convertible
Subordinated Debentures are convertible by the holder into shares of Common
Stock at a price equal to $26 per share for the First Draw, $29 per share for
the Second Draw and $26 per share for the Third Draw, until November 1, 1998,
and thereafter, at the lesser of (i) $26 per share for the First Draw, $29 per
share for the Second Draw and $26 per share for the Third Draw or (ii) a price
equal to the average of the three highest of the five lowest closing prices of
the Common Stock for the 20 trading days preceding the conversion date. If the
Common Stock trades below $15 per share for the First Draw, $16.66 per share for
the Second Draw and $15 for the Third Draw for three consecutive trading days,
the Company may redeem all or part of such Convertible Subordinated Debentures
at 107% of face value plus any accrued interest in the event the holder elects
to convert. The Company's obligation to make interest payments on the
Convertible Subordinated Debentures terminates if the price of Common Stock
closes for twenty consecutive trading days at or above $30 per share for the
First Draw, at or above $33.50 per share for the Second Draw and at or above $30
per share for the Third Draw, adjusted, without limitation, for any stock splits
or combinations. In connection with the Convertible Subordinated Debentures, the
holder also received warrants to purchase an aggregate of 8,952 share of Common
Stock at an exercise price of $16.76 per share for the First Draw, warrants to
purchase an aggregate of 2,427 shares of Common Stock at $20.60 per share for
the Second Draw and warrants to purchase an aggregate of 6,382 shares of Common
Stock at $15.67 per share for the Third Draw. The warrants have a term of three
years from the effectiveness of a registration statement covering such warrants.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Convertible Subordinated Debentures
(the "Convertible Subordinate Exit Fee"). The Convertible Subordinate Exit Fee
varies depending upon the date of payment, and is equal to (i) 6.6% if the
payment is made within 90 days after the closing of each respective draw, (ii)
7.2% if payment is made after 90 days and up to 180 days after the closing of
each respective draw, (iii) 8.8% if payment is made after 180 days and up to 270
days after the closing of each respective draw and (iv) 10.0% if payment is made
after 270 days after the closing of each respective draw. The Convertible
Subordinate Exit Fee is adjusted on a pro rata basis to the extent that the
prepayment is made between periods except that a minimum Convertible Subordinate
Exit Fee of 6.6% is required if the prepayment is made prior to 90 days after
closing.
On May 29, 1998, the Company issued $5,000,000 in 8% Convertible
Debentures (the "Convertible Debentures") which mature one year from closing.
The Convertible Debentures are convertible by the holder into shares of Common
Stock at a price equal to $29.00 per share until November 1, 1998, and
thereafter, at the lesser of (i) $29.00 per share or (ii) a price equal to the
average of the three highest of the five lowest closing prices of the Common
Stock for the 20 trading days preceding the conversion date. If the Common Stock
trades below $16.66 for three consecutive trading days, the Company may redeem
all or part of such Convertible Debentures at 107% of face value plus any
accrued interest in the event the holder elects to convert. The Company's
obligation to make interest payments on the Convertible Debentures terminates
(i) in the event the Common Stock closes, for twenty consecutive trading days,
at or above $33.50 per share, adjusted, without limitation, for any stock splits
or combinations, (ii) when a registration statement covering the Convertible
Debentures is effective and (iii) if there exists no event of default under the
Convertible Debentures. The Convertible Debentures are secured by a pledge of
the Company's stock in Telereunion and the Company's preferred stock in
INTERLINK. In addition, the Convertible Debentures are guaranteed by INTERLINK
and such guaranty is collateralized by a security agreement covering all of
INTERLINK's assets. In connection with the Convertible Debentures, the holder
also received warrants to purchase an aggregate of 12,136 shares of Common Stock
at an exercise price of $20.60 per share. The warrants have a term of three
years from the effectiveness of the registration statement covering such
warrants.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Convertible Debentures (the
"Convertible Exit Fee"). The Convertible Exit Fee varies depending upon the date
of payment, and is equal to (i) 6.5% if the payment is made within 90 days after
May 29, 1998, (ii) 13.0% if payment is made after 90 days and up to 180 days
after May 29, 1998, (iii) 19.0% if
9
<PAGE>
payment is made after 180 days and up to 270 days after May 29, 1998 and (iv)
25.0% if payment is made after 270 days and up to 365 days after May 29, 1998.
The Convertible Exit Fee with respect to any payment made after May 28, 1999
shall be equal to (a) 25.0% plus (b) 25.0% multiplied by the number of days
elapsed from May 28, 1999 divided by 365. The Convertible Exit Fee is adjusted
on a pro rata basis to the extent that the prepayment is made between periods
during the first twelve months except that a minimum Convertible Exit Fee of
6.5% is required if the prepayment is made prior to 90 days after closing.
In connection with the issuance of the Convertible Subordinated
Debentures and the Convertible Debentures the Company issued to the placement
agent, warrants to purchase 65,722 shares of Common Stock with exercise prices
ranging from $15.81 to $20.00 per share, respectively. The warrants have a term
of two years.
Approximately $8.2 million of the proceeds from the Convertible
Subordinated Debentures and the Convertible Debentures were used to finance the
INTERLINK Acquisition and the remainder was utilized for capital investments and
general working capital purposes.
In March 1998, the Company entered into the Revolving Credit Facility
with a commercial bank which provided for borrowings up to $1.3 million subject
to adequate levels of eligible accounts receivable. Borrowings are secured by
the accounts receivable of Telscape USA and MSN. This facility provides that
borrowings will bear interest at floating rates of prime plus 1% and expires in
six months. The Company renegotiated the terms of the Revolving Credit Facility
to provide for borrowings of up to $2.5 million and extended the term of the
facility to July 31, 1999. As of June 30, 1998, the Company had drawn $1.9
million on this facility.
Telscape USA and MSN have obtained a waiver under the Revolving Credit
Facility to (i) permit the Guarantee of the Notes (see Note 9) by Telscape USA
and MSN and (ii) waive the defaults under the minimum current ratio, minimize
tangible net worth and prohibition on quarterly loss covenants.
The Company has also negotiated terms with certain of its equipment
vendors which call for extended payment terms and increased credit lines,
including two lines of credit each of up to $2.0 million, with 60 day and 90 day
payment terms, respectively.
In June 1998, the Company financed the purchase of $1.4 million of
equipment by entering into an equipment lease arrangement with a financing
company which provides for monthly lease payments of $27,500, including
principal and interest, through May 31, 2003. The lease obligation is secured by
the financed equipment. This financing company has also committed to finance
another $900,000 in equipment purchases.
In July 1998, the Company financed the purchase of $972,000 of equipment
by entering into two equipment lease arrangements with a financing company which
provide for monthly lease payments totaling $22,100, including principal and
interest through July 6, 2003. The lease obligations are secured by the financed
equipment.
In July 1998, the Company financed the purchase of $243,000 of equipment
by entering into an equipment lease arrangement with a financing company which
provides for monthly lease payments of $6,600, including principal and interest
through July 14, 2002. The lease obligation is secured by the financed
equipment.
In July 1998, the Company received a commitment from a financing company
to fund equipment purchases of up to $6.0 million dollars through May 1999. The
financing is structured as loans maturing three years from funding at interest
rates 550 basis points above the Federal Reserve Treasury Constant Maturity Rate
(as defined). The Company expects to close this transaction in August 1998.
10
<PAGE>
In July 1998, holders of the non-interest bearing convertible notes
issued in connection with the Integracion acquisition converted these notes into
333,000 shares of Common Stock.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
ESCROW AGREEMENT
Pursuant to the Texas Securities Act of 1957, the Texas State Securities
Commissioner has the discretion to require that an issuer offering and selling
securities to the residents of Texas in a public offering deposit certain
outstanding securities in escrow. In that regard, certain former officers and
directors of the Company, as well as two other individuals (collectively, the
"Escrow Shareholders"), are parties to a Stock Escrow Agreement (the "Escrow
Agreement") dated August 8, 1994. The Escrow Agreement was required by the Texas
State Securities Commissioner as a condition to the registration of securities
in Texas in connection with the Company's initial public offering. The Escrow
Agreement provides that a total of 415,503 shares of Common Stock ("Escrow
Shares") and 55,779 shares of Common Stock issuable upon the exercise of options
("Escrow Options") be held in escrow for a period of not less than two years and
not more than ten years. The terms of the Escrow Agreement provide further that
Escrow Shares and Escrow Options may be released from escrow provided certain
performance requirements of the Company ("Performance Requirements") are met.
For instance, if the Common Stock trades at a price per share of at least $11.81
for at least ninety (90) consecutive trading days then the Escrow Shares and
Escrow Options are automatically released from escrow.
During the first quarter of 1998, the Company and the Escrow
Shareholders entered into agreements, which resulted in (i) the early
termination of the Escrow Agreement in July 1998, (ii) the repurchase by the
Company of certain of the Escrow Shares at a significant discount to market and
(iii) the resolution of a disagreement with certain of the Escrow Shareholders
concerning the validity of the Escrow Options. The agreements called for the
Escrow Shareholders to sell a total of 101,417 Escrow Shares to the Company for
$985,580, or $9.72 per share, of which 25% was paid by the Company upon
execution of the agreements and 75% was scheduled to be paid on July 6, 1998. In
addition, the Escrow Shareholders signed a lock-up agreement ("Escrow Lock-Up"),
ending on July 6, 1998, for any Escrow Shares which were not sold to the
Company; provided, however, that if any of the Performance Requirements be met
during the Escrow Lock-Up, the Escrow Lock-Up would terminate automatically.
Finally, certain of the Escrow Shareholders agreed to the termination of
approximately 40,000 of the Escrow Options, which had an exercise price of $0.80
per share. On May 1, 1998, the Company agreed to reduce the number of Escrow
Shares required to be sold to the Company, resulting in a reduction in the total
number of Escrow Shares being repurchased to 86,417 Escrow Shares for total
consideration of $873,000, or $10.10 per share.
In July 1998, the Company assigned the rights to purchase 80,257 of the
Escrow Shares to Preferred Capital Markets, Inc. ("Preferred"). In return for
the assignment, Preferred paid the Company $725,000 for the assignment. The
Company has no further obligations in connection with the Escrow Shares.
NOTE 7 - LOSSES DUE TO ADDITIONAL PREPAID PHONE CARD SERVICES COSTS AND
BANKRUPTCY OF CUSTOMER
In May 1998, one of the Company's wholesale long distance customers
filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code.
Additionally, an affiliate of this customer provided switching services and the
Company's prepaid card platform and arranged for other carriers to provide
telecommunications services for the Company's prepaid cards. The Company had
paid the affiliate of the customer for the telecommunications services at the
time the prepaid cards were activated. After the bankruptcy, such affiliate was
unable to provide these services. Because the Company continued to provide
service to its prepaid card customers by working directly with the underlying
service providers, this resulted
11
<PAGE>
in the Company paying for certain of the telecommunications services a second
time. The overall impact of the bankruptcy filing to the operating income of the
Company for the second quarter 1998, including additional prepaid card service
costs, the write-off of uncollectible receivables and the lost margin
contribution from the loss of a wholesale long distance customer, is estimated
at approximately $2.0 million. This bankruptcy is not expected to have a
material impact on the Company's future operating results.
The Company has in the past entered into, and may in the future enter
into, arrangements with third parties whereby these parties provide, at a fixed
cost to the Company, the long distance telecommunications services for the
prepaid cards that the Company sells. The Company recognizes revenues from the
sale of prepaid cards under these agreements at the time of shipment. In other
cases, third parties provide telecommunications services for the prepaid cards
and bills the Company for such services based on customer usage. The Company
recognizes revenues from the sale of prepaid cards under these agreements at the
time of customer usage. The Company's arrangement with the affiliate of the
bankrupt customer was a fixed cost arrangement and as such, the Company
recognized revenues for cards sold on this platform at time of shipment. The
Company is currently shipping prepaid phone cards on two independent platforms
under arrangements based on customer usage and as such, recognizes revenues for
cards sold on these platforms as the cards are utilized. As a result, deferred
revenue of approximately $3.0 million is reflected on the June 30, 1998
Unaudited Condensed Balance Sheet.
NOTE 8 - MEXICAN CONCESSION
In June 1998, Telereunion S.A. de C.V. ("Telereunion S.A."), a Mexican
corporation and an affiliate of the Company, was granted a long distance
concession from the Mexican government. The concession is a 30-year facilities
based carrier license which allows it to construct and operate a network over
which the Company can carry long distance traffic in Mexico. Assuming the
Company is able to raise the capital described in Note 9, the Company, through
Telereunion S.A., intends to construct the Mexican Network, a 4,025-kilometer
combined fiber-optic and microwave long distance network connecting the United
States, the Gulf region of Mexico and targeted Mexican cities. Telereunion S.A.
is an affiliate of the Company in which the Company owns approximately 65% of
the economic interests and 49% of the voting interests. In addition, three
directors of the Company own an additional 18% of the voting interests and 2% of
the economic interests in Telereunion S.A., resulting in the Company and such
directors together controlling 67% of the economic interests and voting
interests of Telereunion S.A. Under Mexican law, foreign investors may own more
than a majority of the economic interests in a concessionaire but may not own
more than 49% of the voting ownership of any concessionaire.
NOTE 9 - REGISTRATION STATEMENTS
In July 1998, the Company filed two Registration Statements with the
Securities and Exchange Commission for the offering and sale of (i) $125.0
million in Senior Unsecured Notes (the "Notes") due 2008 and (ii) 3,400,000
shares of the Company's Common Stock. The consummation of each respective
offering is not a condition precedent to the consummation of the other offering.
The Company intends to utilize the net proceeds from the offerings, estimated at
$163.5 million, as follows: (i) approximately $137.0 million towards the
construction of the Mexican Network; (ii) approximately $15.0 million to acquire
international switching and transmission facilities; and (iii) the balance to
pursue joint ventures, strategic alliances or acquisitions and for working
capital and other general corporate purposes.
NOTE 10 - STOCK OPTION PLAN
During June 1998, the Company adopted the "1998 Stock Option and
Appreciation Rights Plan" (the "Plan"). Pursuant to the Plan, the Company may
grant the Company's employees, directors and consultants non-qualified options
to purchase up to 800,000 shares of Common Stock. The maximum number of shares
of Common Stock that may be granted to any individual under this plan may not
exceed 250,000 shares. The
12
<PAGE>
Plan also provides for grants of SARs in connection with the grant of options
under the plan. Incentive stock options must be granted at not less than the
fair market value of the Company's Common Stock at the date of grant as
determined by the Company's Board of Directors (110% of fair market value for
stockholders owning 10% or more of the Company's Common Stock). The terms of the
options are determined by the Company's Board of Directors. Any options granted
must be exercised within ten years of the date of grant or within five years
from the date of grant for options granted to stockholders owning 10% or more of
the Company's Common Stock. Unexercised vested and unvested options terminate
immediately if the employment or service of an option holder is terminated for
cause. Unvested options terminate if the employment or service of an option
holder is terminated without cause or for disability. The Company may also grant
SARs in connection with any option. SARs allow an option holder to surrender an
option and to receive the difference between the exercise price of the option
and the then fair market value of the Common Stock. The Company may also make
loans to any option holder in order in order to permit the option holder to pay
the purchase price upon exercise of the option.
NOTE 11 - WARRANTS VESTING
During July 1998, 500,000 warrants, issued in connection with the
Telereunion acquisition, vested as a result of certain operating performance
measures being achieved. As a result, the Company estimates that it will record
$6.2 million in additional consideration in connection with the Telereunion
acquisition.
13
<PAGE>
NOTE 12 - SEGMENT INFORMATION
The Company operates in two business segments, international long
distance and systems integration services. Long distance services operations are
conducted in the United States of America. Systems integration services are
performed in Mexico and Poland.
Revenues, operating information and identifiable assets by business
segment and location are as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
Revenues ---
Long distance services - United
States $ 5,669,000 $ 50,435,000
System Integration - Mexico 3,895,000 15,342,000
System Integration - Poland 377,000 -
----------- ------------
Total revenues $ 9,941,000 $ 65,777,000
Operating income (loss) ---
Long distance services - United
States 404,000 787,000
System Integration - Mexico (57,000) 971,000
System Integration - Poland (38,000) -
----------- ------------
Total operating
income (loss) $ 309,000 $ 1,758,000
----------- ------------
Capital Expenditures ---
Long distance services (United
States) $ 572,000 $ 2,909,000
System Integration - Mexico 87,000 2,787,000
System Integration - Poland 8,000 -
----------- ------------
Total capital
expenditures $ 667,000 $ 5,696,000
Depreciation and amortization ---
Long distance services (United
States) $ 46,000 $ 479,000
System Integration - Mexico 181,000 779,000
System Integration - Poland 12,000 -
=========== ============
Total depreciation
and amortization $ 239,000 $ 1,258,000
=========== ============
Six Months Ended
June 30,
---------------------------
1997 1998
----------- ------------
Identifiable assets ---
Long distance services (United States) $ 4,776,000 $ 34,237,000
System Integration - Mexico 7,102,000 34,808,000
System Integration - Poland 1,020,000 -
=========== ============
Total identifiable assets $ 12,898,000 $ 69,045,000
=========== ============
</TABLE>
NOTE 13 - SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's obligations under the Notes (See Note 9), are
unconditionally guaranteed by all of the Company's wholly-owned United States
subsidiaries (the "Guarantors"). The following condensed consolidating financial
statements are presented for purposes of complying with the reporting
requirements of the parent company and subsidiaries which are guarantors under
the Notes.
14
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
Telscape Non-
International Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ (201,000) 4,272,000 868,000 $ 4,939,000
Accounts receivable, net 335,000 1,898,000 10,608,000 - 12,841,000
Inventories (50,000) 43,000 3,810,000 3,803,000
Prepaid expenses and other 166,000 1,551,000 4,741,000 - 6,458,000
Deferred income taxes 263,000 71,000 - 334,000
Intercompany receivables
(payables), net 9,546,000 (732,000) (8,814,000) - -
------------ ------------ ------------- ------------ ------------
Total current
assets 9,796,000 7,295,000 11,234,000 - 28,375,000
Property and equipment, net 262,000 3,795,000 9,027,000 13,084,000
Goodwill and other
intangibles, net 9,348,000 16,984,000 - - 26,332,000
Investments in affiliates 19,987,000 - - (19,741,000) 246,000
Other assets 824,000 164,000 20,000 - 1,008,000
------------ ------------ ------------- ------------ ------------
Total assets $ 40,217,000 28,238,000 20,331,000 (19,741,000) $ 69,045,000
============ ============ ============= ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 304,000 2,600,000 14,790,000 - $ 17,694,000
Accrued Expenses 327,000 4,394,000 2,078,000 6,799,000
Current portion of note
payable and capital lease
obligations 515,000 478,000 993,000
Current portion of
convertible debentures 5,000,000 - 5,000,000
Deferred income taxes - 441,000 - 441,000
------------ ------------ ------------- ------------ ------------
Total current
liabilities 6,146,000 7,472,000 17,309,000 - 30,927,000
------------ ------------ ------------- ------------ ------------
Convertible Debentures 5,000,000 - - 5,000,000
Notes payable and capital
lease obligations 479,000 3,984,000 - - 4,463,000
Minority interests - 63,000 - 63,000
Commitments and
contingencies (Note 6) -
Series B Non-voting
preferred stock -
STOCKHOLDERS' EQUITY
Preferred Stock -
Series A preferred stock -
Common stock 5,000 31,000 152,000 (183,000) 5,000
Additional paid-in capital 31,575,000 12,712,000 3,028,000 (15,740,000) 31,575,000
Accumulated deficit (2,359,000) 3,976,000 (158,000) (3,818,000) (2,359,000)
Treasury stock (629,000) (629,000)
------------ ------------ ------------- ------------ ------------
Total stockholders'
equity 28,592,000 16,719,000 3,022,000 (19,741,000) 28,592,000
------------ ------------ ------------- ------------ ------------
Total liabilities
and stockholders'
equity $ 40,217,000 28,238,000 20,331,000 (19,741,000) $ 69,045,000
============ ============ ============= ============ ============
</TABLE>
15
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Telscape Non-
International Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,000 4,187,000 544,000 - $ 4,734,000
Accounts receivable, net - 1,219,000 5,057,000 - 6,276,000
Inventories - - 4,305,000 - 4,305,000
Prepaid expenses and other 275,000 163,000 2,236,000 - 2,674,000
Deferred income taxes - 517,000 - - 517,000
Intercompany receivables
(payables), net 2,975,000 291,000 (3,266,000) - -
------------ ------------ ------------- ------------ ------------
Total current
assets 3,253,000 6,377,000 8,876,000 - 18,506,000
Property and equipment, net 296,000 396,000 1,987,000 - 2,679,000
Goodwill and other
intangibles, net 63,000 17,611,000 - - 17,674,000
Investments in affiliates 19,010,000 - - (18,715,000) 295,000
Other assets 169,000 122,000 190,000 - 481,000
------------ ------------ ------------- ------------ ------------
Total assets $ 22,791,000 24,506,000 11,053,000 (18,715,000) $ 39,635,000
============ ============ ============= ============ ============
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 156,000 343,000 10,257,000 - $ 10,756,000
Accrued Expenses 54,000 1,906,000 1,343,000 - 3,303,000
Current portion of note
payable and capital lease
obligations 208,000 300,000 - - 508,000
Deferred income taxes - - 270,000 - 270,000
------------ ------------ ------------- ------------ ------------
Total current
liabilities 418,000 2,549,000 11,870,000 - 14,837,000
------------ ------------ ------------- ------------ ------------
Notes payable and capital
lease obligations 285,000 2,391,000 - - 2,676,000
Minority interests - 34,000 - - 34,000
Commitments and
contingencies (Note 6) - - - - -
Series B Non-voting
preferred stock - - - - -
STOCKHOLDERS' EQUITY
Preferred Stock - - - - -
Series A preferred stock - - - - -
Common stock 4,000 11,000 152,000 (163,000) 4,000
Additional paid-in capital 25,232,000 15,965,000 28,000 (15,993,000) 25,232,000
Accumulated deficit (2,851,000) 3,556,000 (997,000) (2,559,000) (2,851,000)
Treasury stock (297,000) - - - (297,000)
------------ ------------ ------------- ------------ ------------
Total
stockholders' equity 22,088,000 19,532,000 (817,000) (18,715,000) 22,088,000
------------ ------------ ------------- ------------ ------------
Total liabilities
and stockholders'
equity $ 22,791,000 24,506,000 11,053,000 (18,715,000) $ 39,635,000
============ ============ ============= ============ ============
</TABLE>
16
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Telscape Non-
International Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $ - 23,510,000 16,199,000 (7,331,000) $ 32,378,000
Cost of revenues - 22,911,000 13,018,000 (7,331,000) 28,598,000
------------ ------------ ------------- ------------ -----------
Gross profit - 599,000 3,181,000 - 3,780,000
Selling, general and
administrative expenses 374,000 987,000 2,191,000 3,552,000
------------ ------------ ------------- ------------ -----------
Operating income (loss) before
depreciation and amortization (374,000) (388,000) 990,000 - 228,000
Depreciation and amortization 150,000 339,000 200,000 689,000
------------ ------------ ------------- ------------ -----------
Operating income (loss) (524,000) (727,000) 790,000 - (461,000)
Other income (expense):
Interest, net (101,000) (32,000) (61,000) (194,000)
Foreign exchange gain (loss) - - (65,000) - (65.000)
Other, net - 37,000 11,000 - 48,000
Equity in income of
subsidiaries (232,000) - - 232,000 -
------------ ------------ ------------- ------------ -----------
Total other income
(expense), net (333,000) 5,000 (115,000) 232,000 (211,000)
------------ ------------ ------------- ------------ -----------
Income (loss) before income
taxes and minority interests (857,000) (722,000) 675,000 232,000 (672,000)
Income tax benefit (expense) 235,000 138,000 (305,000) 68,000
------------ ------------ ------------- ------------ -----------
Income (loss) before minority
interests (622,000) (584,000) 370,000 232,000 (604,000)
Minority interests in
subsidiaries - (18,000) - - (18,000)
------------ ------------ ------------- ------------ -----------
Net income (loss) $ (622,000) (602,000) 370,000 232,000 $ (622,000)
============ ============ ============= ============ ===========
</TABLE>
17
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Telscape Non-
International Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $ - 4,130,000 3,053,000 (1,013,000) $ 6,170,000
Cost of revenues - 2,594,000 1,887,000 (1,013,000) 3,468,000
------------ ------------ ------------- ------------ -----------
Gross profit 1,536,000 1,166,000 - 2,702,000
Selling, general and
administrative expenses 351,000 539,000 1,031,000 - 1,921,000
------------ ------------ ------------- ------------ -----------
Operating income (loss) before
depreciation and amortization (351,000) 997,000 135,000 781,000
Depreciation and amortization 16,000 29,000 40,000 - 85,000
------------ ------------ ------------- ------------ -----------
Operating income (loss) (367,000) 968,000 95,000 - 696,000
Other income (expense):
Interest, net (18,000) 18,000 3,000 - 3,000
Foreign exchange gain (loss) - - 20,000 - 20,000
Other, net (324,000) (3,000) 11,000 - (316,000)
Equity in income of
subsidiaries 1,387,000 - - (1,387,000)
------------ ------------ ------------- ------------ -----------
Total other income
(expense), net 1,045,000 15,000 34,000 (1,387,000) (293,000)
------------ ------------ ------------- ------------ -----------
Income (loss) before income
taxes and
Minority interests 678,000 983,000 129,000 (1,387,000) 403,000
Income tax benefit (expense) (140,000) 346,000 (71,000) - 135,000
------------ ------------ ------------- ------------ -----------
Income (loss) before minority
interests 538,000 1,329,000 58,000 (1,387,000) 538,000
Minority interests in
subsidiaries - (3,000) 3,000 - -
------------ ------------ ------------- ------------ -----------
Net income (loss) $ 538,000 1,326,000 61,000 (1,387,000) $ 538,000
============ ============ ============= ============ ===========
</TABLE>
18
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Telscape Non-
International Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $ - 49,229,000 29,211,000 (12,663,000) $ 65,777,000
Cost of revenues - 46,133,000 23,586,000 (12,663,000) 57,056,000
------------ ------------ ------------- ------------ -----------
Gross profit - 3,096,000 5,625,000 - 8,721,000
Selling, general and
administrative expenses 690,000 1,380,000 3,635,000 - 5,705,000
------------ ------------ ------------- ------------ -----------
Operating income (loss) before
depreciation and amortization (690,000) 1,716,000 1,990,000 - 3,016,000
Depreciation and amortization 279,000 686,000 293,000 - 1,258,000
------------ ------------ ------------- ------------ -----------
Operating income (loss) (969,000) 1,030,000 1,697,000 - 1,758,000
Other income (expense):
Interest, net (123,000) (70,000) (58,000) - (251,000)
Foreign exchange gain (loss) - - (187,000) - (187,000)
Other, net - 72,000 24,000 - 96,000
Equity in income of
subsidiaries 1,259,000 - - (1,259,000) -
------------ ------------ ------------- ------------ -----------
Total other income
(expense), net 1,136,000 2,000 (221,000) (1,259,000) (342,000)
------------ ------------ ------------- ------------ -----------
Income (loss) before income
taxes and minority interests 167,000 1,032,000 1,476,000 (1,259,000) 1,416,000
Income tax benefit (expense) 325,000 (583,000) (637,000) - (895,000)
------------ ------------ ------------- ------------ -----------
Income (loss) before minority
interests 492,000 449,000 839,000 (1,259,000) 521,000
Minority interests in
subsidiaries - (29,000) - - (29,000)
------------ ------------ ------------- ------------ -----------
Net income (loss) $ 492,000 420,000 839,000 (1,259,000) $ 492,000
============ ============ ============= ============ ===========
</TABLE>
19
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Telscape Non-
International Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues $ - 5,725,000 5,932,000 (1,716,000) $ 9,941,000
Cost of revenues - 3,767,000 3,943,000 (1,716,000) 5,994,000
------------ ------------ ------------- ------------ -----------
Gross profit - 1,958,000 1,989,000 - 3,947,000
Selling, general and
administrative expenses 639,000 766,000 1,994,000 - 3,399,000
------------ ------------ ------------- ------------ -----------
Operating income (loss) before
depreciation and amortization (639,000) 1,192,000 (5,000) - 548,000
Depreciation and amortization 29,000 112,000 98,000 - 239,000
------------ ------------ ------------- ------------ -----------
Operating income (loss) (668,000) 1,080,000 (103,000) - 309,000
Other income (expense):
Interest, net (23,000) 19,000 4,000 - -
Foreign exchange gain (loss) - - 27,000 - 27,000
Other, net (324,000) - 31,000 - (293,000)
Equity in income of
subsidiaries 1,433,000 - - (1,433,000) -
------------ ------------ ------------- ------------ -----------
Total other income
(expense), net 1,086,000 19,000 62,000 (1,433,000) (266,000)
------------ ------------ ------------- ------------ -----------
Income (loss) before income
taxes and
Minority interests 418,000 1,099,000 (41,000) (1,433,000) 43,000
Income tax benefit (expense) (204,000) 411,000 (40,000) - 167,000
------------ ------------ ------------- ------------ -----------
Income (loss) before minority
interests 214,000 1,510,000 (81,000) (1,433,000) 210,000
Minority interests in
subsidiaries - 1,000 3,000 - 4,000
------------ ------------ ------------- ------------ -----------
Net income (loss) $ 214,000 1,511,000 (78,000) (1,433,000) $ 214,000
============ ========== ============= ============ ===========
</TABLE>
20
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Telscape Non-
International Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 492,000 420,000 839,000 (1,259,000) $ 492,000
Adjustments to reconcile net
income to net cash provided
by (used in) operating
activities:
Provision for doubtful
accounts - 548,000 8,000 - 556,000
Depreciation and
amortization 279,000 686,000 293,000 - 1,258,000
Imputed interest on
non-interest bearing
notes payable 20,000 122,000 - - 142,000
Minority interests in
subsidiaries' income - 29,000 - - 29,000
Equity in income from
subsidiaries (1,210,000) - - 1,259,000 49,000
Changes in other
assets and other
liabilities (3,296,000) (760,000) 1,971,000 - (2,085,000)
------------ ------------ ------------- ------------ ------------
Net cash provided by
(used in) operating
activities (3,715,000) 1,045,000 3,111,000 - 441,000
------------ ------------ ------------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment - (2,909,000) (2,787,000) - (5,696,000)
Acquisition of MSN, net of
cash acquired (2,325,000) - - - (2,325,000)
Acquisition of INTERLINK, net
of cash acquired (8,250,000) - - - (8,250,000)
------------ ------------ ------------- ------------ ------------
Net cash used in
investing activities (10,575,000) (2,909,000) (2,787,000) - (16,271,000)
------------ ------------ ------------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on capital lease
obligations (46,000) - - - (46,000)
Payments on notes payable (444,000) - - - (444,000)
Purchase of treasury stock (332,000) - - - (332,000)
Borrowings on line of credit,
net - 1,948,000 - - 1,948,000
Proceeds from warrants and
options exercised 4,909,000 - - - 4,909,000
Proceeds from issuance of
convertible debt 10,000,000 - - - 10,000,000
------------ ------------ ------------- ------------ ------------
Net cash provided by
financing activities 14,087,000 1,948,000 - - 16,035,000
------------ ------------ ------------- ------------ ------------
Net increase (decrease)
in cash and cash
equivalents (204,000) 85,000 324,000 - 205,000
------------ ------------ ------------- ------------ ------------
Cash and cash
equivalents at beginning
of period 3,000 4,187,000 544,000 - 4,734,000
------------ ------------ ------------- ------------ ------------
Cash and cash
equivalents at end
of period $ (201,000) 4,272,000 868,000 - $ 4,939,000
============ ============ ============= ============ ============
</TABLE>
21
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Telscape Non-
International Guarantor Guarantor
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 214,000 1,511,000 (78,000) (1,433,000) $ 214,000
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Provision for doubtful
accounts - 243,000 11,000 - 254,000
Depreciation and
amortization 29,000 112,000 98,000 - 239,000
Write-off investment
in operating venture 196,000 - - - 196,000
Minority interests in
subsidiaries' income - (1,000) (3,000) - (4,000)
Equity in income from
subsidiaries (1,433,000) - - 1,433,000 -
Changes in other
assets and other
liabilities 1,078,000 1,079,000 339,000 - 2,496,000
------------ ------------ ------------- ------------ ------------
Net cash provided by
operating activities 84,000 2,944,000 367,000 - 3,395,000
------------ ------------ ------------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment (336,000) (236,000) (95,000) - (667,000)
------------ ------------ ------------- ------------ ------------
Net cash used in
investing activities (336,000) (236,000) (95,000) - (667,000)
------------ ------------ ------------- ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on capital lease
obligations (45,000) - - - (45,000)
Proceeds from warrants and
options exercised 2,000 - - - 2,000
------------ ------------ ------------- ------------ ------------
Net cash provided by
financing activities (43,000) - - - (43,000)
------------ ------------ ------------- ------------ ------------
Net increase (decrease)
in cash and cash
equivalents (295,000) 2,708,000 272,000 - 2,685,000
------------ ------------ ------------- ------------ ------------
Cash and cash
equivalents at beginning
of period 300,000 55,000 140,000 - 495,000
============ ============ ============= ============ ============
Cash and cash
equivalents at end of period $ 5,000 2,763,000 412,000 - $ 3,180,000
============ ============ ============= ============ ============
</TABLE>
22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Quarterly Report on Form 10-Q made herein
that are not historical are forward-looking within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements can be identified by
the use of forward-looking terminology such as "believes", "expects", "may",
"estimates", "will", "should", "plans", or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. These statements are based on 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. Investors are cautioned that all
forward-looking statements are not guarantees of future performance and that
actual results could vary materially from those in the forward-looking
statements. Investors are also cautioned that forward-looking statements involve
risks and uncertainties including, without limitation, risks related to the
effectiveness of management's strategies and decisions, market acceptance of and
demand for the Company's products and services by customers, continued
relationships with and pricing dependence on third party suppliers, economic
conditions, results of financing efforts and regulatory approvals and
developments. This report identifies other factors that could cause such
differences. No assurance can be given that these are all of the factors that
could cause actual results to vary materially from the forward-looking
statements. Statements with respect to acquisitions and continued trends are
forward-looking and involve risks and uncertainties. Furthermore, the Company
has significant operations in Mexico, subjecting the Company to certain
political and commercial risk. The Company undertakes no obligation and does not
intend to update, revise or otherwise publicly release the result of any
revisions to these forward-looking statements that may be made to reflect future
events or circumstances.
OVERVIEW
Telscape is a rapidly growing emerging multinational telecommunications
carrier focused on Latin America. The Company provides international wholesale
long distance services for calls originating in the United States and
terminating in markets in Latin America. As a way to generate increased
international long distance traffic to countries it serves, the Company markets
long distance services principally to Hispanic consumers in the United States
through the distribution of prepaid cards under the TELEFIESTA(R) brand name. In
addition to these wholesale and retail international long distance services, the
Company also provides a broad range of systems integration and value-added voice
and data services to major public and private sector customers in Mexico.
Telscape intends to significantly expand its facilities-based
telecommunications operations over the next 18 months and to broaden its service
offerings in markets where it has established, or expects to establish, a
significant presence. In June 1998, Telereunion S.A. de C.V. ("Telereunion
S.A."), a Mexican corporation and an affiliate of the Company, was granted a
long distance concession from the Mexican government. The concession is a
30-year, facilities-based carrier license which allows it to construct and
operate a network over which the Company can carry long distance traffic in
Mexico ("the Mexican Concession"). Assuming that the Company is able to raise
the capital described in Liquidity and Capital Resources, the Company, through
Telereunion S.A., intends to construct the Mexican Network, a 4,025 kilometer
combined fiber-optic and microwave long distance network, connecting the United
States, the Gulf region of Mexico and targeted Mexican cities.
In May 1996, Telscape began to focus on providing telecommunication
services to and in Latin America. The Company acquired all of the stock of
Telereunion S.A., the owner of 97.0% of Vextro de Mexico S.A. de C.V.
("Vextro"). Vextro is a Mexico-based systems integration company, with an
emphasis on voice solutions. In September 1996, the Company expanded its
operations to include international long distance by acquiring Orion
Communications, Inc., a U.S.-based reseller of long distance services ("Orion").
In 1997, the Company expanded its systems integration service offerings by
acquiring Integracion de Redes,
23
<PAGE>
S.A. de C.V. ("Integracion") and N.S.I., S.A. de C.V. ("N.S.I."), both focused
on data services and based in Mexico City, Mexico.
In January 1998, Telscape acquired MSN Communications, Inc. ("MSN"), a
leading provider of Prepaid Cards that are marketed under the TELEFIESTA(R)
brand name to Hispanic consumers residing in the United States. The MSN
acquisition enhances Telscape's international long distance business by
providing a retail platform, enhancing its ability to market additional products
and services to Hispanic customers and increasing its ability to generate
significant returns of U.S.-outbound traffic to Latin America. The Company plans
to leverage the TELEFIESTA(R) brand recognition in other Latin American
countries after obtaining the required licenses.
Effective June 1, 1998, the Company through its newly-formed subsidiary
Interlink Communications Holding Co., Inc. ("INTERLINK") acquired California
Microwave Services Division, Inc. for $8.2 million in cash, subject to
post-closing adjustments. INTERLINK provides the Company with a teleport
facility in California, thereby enhancing the Company's position as an
integrated telecommunications provider and contributing to the Company's ability
to provide satellite capacity to its targeted markets in Latin America.
In June 1998, Telereunion S.A. received the Mexican Concession. The
Company believes that the Mexican Concession will enhance its service offerings
to business customers in Mexico while allowing it to reduce its cost of
international termination in Mexico.
Telscape intends to capitalize on the deregulating markets of Latin
America by providing international long distance services to and from targeted
Latin American countries. The Company also intends to position itself as an
integrated telecommunications provider in Mexico through the construction of the
Mexican Network under its recently granted Mexican Concession. The Company
believes that owning a long distance network in Mexico, combined with an
expanding international telecommunications network, will increase the percentage
of minutes of traffic carried on-net, enable it to increase margins and
profitability and ensure quality of service on both international and domestic
long distance traffic.
REVENUES
During 1997, the Company derived its revenues principally from the
provision of systems integration and value-added services in Mexico and from the
sale of U.S. outbound international long distance services to Latin America. In
1998, with the addition of prepaid card revenues generated by recently acquired
MSN, the Company's revenue mix changed.
The Company also provides domestic and international long distance
services through the sale of prepaid cards. The Company has in the past entered
into, and may in the future enter into, arrangements with third parties whereby
these parties provide, at a fixed cost to the Company, the long distance
telecommunications services for the prepaid cards that the Company sells. The
Company recognizes revenues from the sale of prepaid cards under these
agreements at the time of shipment. In other cases, third parties provide
telecommunications services for the prepaid cards and bills the Company for such
services based on customer usage. The Company recognizes revenues from the sale
of prepaid cards under these agreements at the time of customer usage.
The Company provides international long distance services to wholesale
customers. Revenues are derived from the number of minutes of use (or fraction
thereof) billed by the Company and are recorded upon completion of calls.
The Company provides systems integration services to private and public
sector customers in Mexico. Revenues are derived from the sale of equipment and
value-added services. Revenues from this business have grown significantly
through both internal growth and strategic acquisitions in 1996 and 1997.
24
<PAGE>
In May 1998, one of the Company's wholesale long distance customers
filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code.
Additionally, an affiliate of this customer provided switching services and the
Company's prepaid card platform and arranged for other carriers to provide
telecommunications services for the Company's prepaid cards. The Company had
paid the affiliate of the customer for the telecommunications services at the
time the prepaid cards were activated. After the bankruptcy, such affiliate was
unable to provide these services. Because the Company continued to provide
service to its prepaid card customers by working directly with the underlying
service providers, this resulted in the Company paying for certain of the
telecommunications services a second time. The overall impact of the bankruptcy
filing to the operating income of the Company for the second quarter 1998,
including additional prepaid card service costs, the write-off of uncollectible
receivables and the lost margin contribution from the loss of a wholesale long
distance customer, is estimated at approximately $2.0 million. This bankruptcy
is not expected to have a material impact on the Company's future operating
results.
GROSS MARGIN
The Company has enjoyed strong gross profits from its international long
distance and systems integration services to date; however, as these markets
become more competitive, the Company has been experiencing a decline in gross
profit percentage. The effects of this decline are expected to be mitigated by
the Company's strategy of focusing on providing long distance services in
deregulating markets, particularly in Latin America, and on providing
value-added services, where it can enjoy higher gross profit percentages. In
addition, gross profits as a percentage of revenues from the Company's
newly-acquired prepaid card business are significantly lower than those of the
wholesale international long distance and systems integration businesses. As
such, overall gross profit as a percentage of revenues has declined in the first
half of 1998 as compared to fiscal 1997 and may continue to decline to the
extent that prepaid card revenues increase as a percentage of overall revenues.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
REVENUES increased from $6,170,000 in 1997 to $32,378,000 in 1998. This
increase of $26,208,000, or 425%, was due principally to the acquisition of MSN
completed in the first quarter of 1998, increased revenues of wholesale
international long distance and, to a lesser extent, revenues associated with
the acquisitions of Integracion completed effective July 1, 1997, N.S.I
completed effective October 1, 1997 and INTERLINK completed effective June 1,
1998.
COST OF REVENUES increased from $3,468,000 in 1997 to $28,598,000 in
1998, or $25,130,000. The 725% increase in cost of revenues was due principally
to the incremental cost of revenues associated with the acquisition of MSN, the
increase in the sale of international long distance services and, to a lesser
extent, the incremental cost of revenues attributable to the acquisitions of
Integracion, N.S.I and INTERLINK. The cost of revenues as a percentage of
revenues increased from 56.2% to 88.3%, or 32.1%, due principally to the higher
cost of revenues as a percentage of revenues associated with the sale of prepaid
phone cards. In addition, cost of revenues was negatively impacted by the
additional costs, estimated at $766,000, incurred on the Company's prepaid card
services as a result of the bankruptcy of a customer as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from
$1,921,000 in 1997 to $3,552,000 in 1998, or $1,631,000. The 84.9% increase in
SG&A was due principally to the incremental SG&A related to the operations of
the acquisitions of Integracion, N.S.I., MSN and INTERLINK and, to a lesser
extent, increased staffing at existing operations of the systems integration
business and the wholesale long distance business to meet the additional
resource requirements from the growth of these operations. In
25
<PAGE>
addition, SG&A was negatively impacted by the write off of receivables, of
approximately $541,000, due from the customer which filed for bankruptcy as
discussed above.
Overall SG&A as a percentage of revenues decreased from 31.1% to 11.0%,
or 20.1%. This decrease was due principally to the lower SG&A expenses as a
percentage of revenues associated with MSN and to the growth in overall revenues
rapidly outpacing the growth in SG&A expenses. This improvement was partially
offset by the write off of receivables due from the customer which filed for
bankruptcy as discussed above.
DEPRECIATION AND AMORTIZATION increased from $85,000 in 1997 to $689,000
in 1998, or $604,000. This increase is due to an increase in goodwill
amortization primarily due to the vesting of performance based warrants issued
in connection with the Telereunion acquisition, which resulted in additional
goodwill being recognized on December 31, 1997 and goodwill recognized on the
Integracion, N.S.I., MSN and INTERLINK acquisitions. In addition, depreciation
increased as a result of the Company's continuing expansion of its international
wholesale long distance network which includes purchases of switches and other
telecommunications equipment and facilities. The Company expects depreciation
expense to increase as it continues to expand its telecommunications network.
OTHER INCOME (EXPENSE) decreased from $(293,000) in 1997 to $(211,000)
in 1998, or $82,000. In 1997 the Company wrote off its $196,000 investment in
Elterix, an operating joint venture, and incurred a litigation settlement
expense of $128,000. These items were offset by interest expense associated with
the increase in the Company's level of borrowings in 1998 including notes issued
in connection with the Integracion and MSN acquisitions, and the Convertible
Subordinated Debentures and Convertible Debentures issued in connection with the
INTERLINK acquisition.
INCOME TAX BENEFIT (EXPENSE) decreased from $135,000 in 1997 to $68,000
in 1998. The Company's overall effective tax rate for the three months ended
June 30, 1998 is a combination of the Company paying taxes on its profitable
Mexican operations at Mexican statutory tax rates of 34% and the Company
realizing a tax benefit on losses incurred on its U.S. operations.
NET INCOME (LOSS). The Company experienced net income of $538,000 in
1997 as compared to a net loss of $(662,000) in 1998 due to a combination of the
factors discussed above.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES increased from $9,941,000 in 1997 to $65,777,000 in 1998. This
increase of $55,836,000, or 562%, was due principally to the acquisition of MSN
completed in the first quarter of 1998, increased revenues of wholesale
international long distance and, to a lesser extent, revenues associated with
the acquisitions of Integracion completed effective July 1, 1997, N.S.I
completed effective October 1, 1997 and INTERLINK completed effective June 1,
1998.
COST OF REVENUES increased from $5,994,000 in 1997 to $57,056,000 in
1998, or $51,062,000. The 852% increase in cost of revenues was due principally
to the incremental cost of revenues associated with the acquisition of MSN, the
increase in the sale of international long distance services and, to a lesser
extent, the incremental cost of revenues attributable to the acquisitions of
Integracion, N.S.I and INTERLINK. The cost of revenues as a percentage of
revenues increased from 60.3% to 86.7%, or 26.4%, due principally to the higher
cost of revenues as a percentage of revenues associated with the sale of prepaid
phone cards. In addition, cost of revenues was negatively impacted by the
additional costs, estimated at $766,000, incurred on the Company's prepaid card
services as a result of the bankruptcy of a customer as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from
$3,399,000 in 1997 to $5,705,000 in 1998, or $2,306,000. The 67.8% increase in
SG&A was due principally to the incremental
26
<PAGE>
SG&A related to the operations of the acquisitions of Integracion, N.S.I., MSN
and INTERLINK and, to a lesser extent, increased staffing at existing operations
of the systems integration business and the wholesale long distance business to
meet the additional resource requirements from the growth of these operations.
In addition, SG&A was negatively impacted by the write off of receivables,
approximately $541,000, due from the customer which filed for bankruptcy as
discussed above.
Overall SG&A as a percentage of revenues decreased from 34.2% to 8.7%,
or 25.5%. This decrease was due principally to the lower SG&A expenses as a
percentage of revenue associated with MSN and to the growth in overall revenues
rapidly outpacing the growth in SG&A expenses. This improvement was partially
offset by the write off of receivables due from the customer which filed for
bankruptcy as discussed above.
DEPRECIATION AND AMORTIZATION increased from $239,000 in 1997 to
$1,258,000 in 1998, or $1,019,000. This increase is due to an increase in
goodwill amortization primarily due the vesting of performance based warrants
issued in connection with the Telereunion acquisition, which resulted in
additional goodwill being recognized on December 31, 1997 and goodwill
recognized on the INTERLINK, MSN, Integracion and N.S.I. acquisitions.
Depreciation increased as a result of the Company's continuing expansion of its
international wholesale long distance network which includes purchases of
switches and other telecommunications equipment and facilities. The Company
expects depreciation expense to increase as it continues to expand its
telecommunications network.
OTHER INCOME (EXPENSE) increased from $(266,000) in 1997 to $(342,000)
in 1998, or $76,000. This increase was mainly due to an increase in the
Company's level of borrowings including notes issued in connection with the
Integracion and MSN acquisitions, and the Convertible Subordinated Debentures
and Convertible Debentures issued in connection with the INTERLINK acquisition.
In 1997 the Company wrote off its $196,000 investment in Elterix, an operating
joint venture, and incurred a litigation settlement expense of $128,000.
INCOME TAX BENEFIT (EXPENSE) changed from an income tax benefit of
$167,000 in 1997 to an income tax expense of $(895,000) in 1998. The tax benefit
realized in 1997 is a result of 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. The
effective tax rate for the six months ended June 30, 1998, is higher than the
U.S. and Mexico statutory rates of 34% due to permanent differences, the most
significant of which is the nondeductible nature of goodwill amortization.
NET INCOME (LOSS). The Company experienced a net income of $214,000 in
1997 as compared to a net income of $492,000 in 1998 due to a combination of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3,395,000 and $441,000
for the six months ended June 30, 1997 and June 30, 1998, respectively. The
decrease in net cash provided by operations in 1998 as compared to 1997 was due
primarily to an increase of value added tax receivables of approximately $2.1
million, additional costs on the Company's prepaid card services and the write
off of receivables associated with the bankruptcy of a customer.
Net cash used in investing activities was $(667,000) and $(16,271,000)
for the six months ended June 30, 1997 and June 30, 1998, respectively. In the
six months ended June 30, 1998, the Company expended approximately $5.7 million
on purchases of, or deposits on, property and equipment as part of the Company's
network expansion strategy. In addition, the Company acquired MSN for $2.3
million, net of cash acquired and INTERLINK for $8.3 million, net of cash
acquired.
27
<PAGE>
Net cash provided by (used in) financing activities was $(43,000) and
$16,035,000 for the six months ended June 30, 1997 and June 30, 1998,
respectively. In December 1997, the Company announced its intention to redeem
publicly traded warrants to purchase an aggregate of 525,000 common shares with
a 30 day notice requirement. This announcement resulted in 475,535 warrants
being exercised prior to the redemption date. The Company realized net proceeds
from these exercises of $3.7 million, of which $2.7 million was received
subsequent to year-end. The company raised $10.0 million from the issuance of
Convertible Subordinate Debentures and Convertible Debentures. In addition, the
Company realized $2.2 million in proceeds from the exercise of options and
warrants.
As of June 30, 1998, the Company had cash and cash equivalents of
$4,939,000 and negative working capital of $2,552,000. Included in current
liabilities is $5.0 million in Convertible Debentures which mature on May 29,
1999.
In the first and second quarter of 1998, the Company continued its
strategic plans to significantly expand the Company's facilities and capacity
related to its long distance services and Prepaid Card business lines. Through
June 30, 1998, the Company has expended or placed purchase orders for equipment
purchases for a total in excess of $9.0 million relating to these business
expansions. Management does not expect that cash generated from operations will
be adequate to fund these capital investments.
RECENT FINANCINGS AND SOURCES OF CAPITAL
On May 1, 1998, the Company issued $3,000,000 in 8% Convertible
Subordinated Debentures (the "Convertible Subordinated Debentures") maturing
three years from closing (the "First Draw"). On May 28, 1998, the Company issued
an additional $1,000,000 of the Convertible Subordinated Debentures (the "Second
Draw"). On June 30, 1998, the Company issued an additional $1,000,000 of the
Convertible Subordinated Debentures (the "Third Draw"). The Convertible
Subordinated Debentures are convertible by the holder into shares of Common
Stock at a price equal to $26 per share for the First Draw, $29 per share for
the Second Draw and $26 per share for the Third Draw, until November 1, 1998,
and thereafter, at the lesser of (i) $26 per share for the First Draw, $29 per
share for the Second Draw and $26 per share for the Third Draw or (ii) a price
equal to the average of the three highest of the five lowest closing prices of
the Common Stock for the 20 trading days preceding the conversion date. If the
Common Stock trades below $15 per share for the First Draw, $16.66 per share for
the Second Draw and $15 for the Third Draw for three consecutive trading days,
the Company may redeem all or part of such Convertible Subordinated Debentures
at 107% of face value plus any accrued interest in the event the holder elects
to convert. The Company's obligation to make interest payments on the
Convertible Subordinated Debentures terminates if the price of Common Stock
closes for twenty consecutive trading days at or above $30 per share for the
First Draw, at or above $33.50 per share for the Second Draw and at or above $30
per share for the Third Draw, adjusted, without limitation, for any stock splits
or combinations. In connection with the Convertible Subordinated Debentures, the
holder also received warrants to purchase an aggregate of 8,952 share of Common
Stock at an exercise price of $16.76 per share for the First Draw, warrants to
purchase an aggregate of 2,427 shares of Common Stock at $20.60 per share for
the Second Draw and warrants to purchase an aggregate of 6,382 shares of Common
Stock at $15.67 per share for the Third Draw. The warrants have a term of three
years from the effectiveness of a registration statement covering such warrants.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Convertible Subordinated Debentures
(the "Convertible Subordinated Exit Fee"). The Convertible Subordinated Exit Fee
varies depending upon the date of payment, and is equal to (i) 6.6% if the
payment is made within 90 days after the closing of each respective draw, (ii)
7.2% if payment is made after 90 days and up to 180 days after the closing of
each respective draw, (iii) 8.8% if payment is made after 180 days and up to 270
days after the closing of each respective draw and (iv) 10.0% if payment is made
after 270 days after the closing of each respective draw. The Convertible
Subordinated Exit Fee is adjusted on a pro
28
<PAGE>
rata basis to the extent that the prepayment is made between periods except that
a minimum Convertible Subordinated Exit Fee of 6.6% is required if the
prepayment is made prior to 90 days after closing.
On May 29, 1998, the Company issued $5,000,000 in 8% Convertible
Debentures (the "Convertible Debentures") maturing one year from closing. The
Convertible Debentures are convertible by the holder into shares of Common Stock
at a price equal to $29.00 per share until November 1, 1998, and thereafter, at
the lesser of (i) $29.00 per share or (ii) a price equal to the average of the
three highest of the five lowest closing prices of the Common Stock for the 20
trading days preceding the conversion date. If the Common Stock trades below
$16.66 for three consecutive trading days, the Company may redeem all or part of
such Convertible Debentures at 107% of face value plus any accrued interest in
the event the holder elects to convert. The Company's obligation to make
interest payments on the Convertible Debentures terminates (i) in the event the
Common Stock closes, for twenty consecutive trading days, at or above $33.50 per
share, adjusted, without limitation, for any stock splits or combinations, (ii)
when a registration statement covering the Convertible Debentures is effective
and (iii) if there exists no event of default under the Convertible Debentures.
The Convertible Debentures are secured by a pledge of the Company's stock in
Telereunion and the Company's preferred stock in INTERLINK. In addition, the
Convertible Debentures are guaranteed by INTERLINK and such guaranty is
collateralized by a security agreement covering all of INTERLINK's assets. In
connection with the Convertible Debentures, the holder also received warrants to
purchase an aggregate of 12,136 shares of Common Stock at an exercise price of
$20.60 per share. The warrants have a term of three years from the effectiveness
of the registration statement covering such warrants.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Convertible Debentures (the
"Convertible Exit Fee"). The Convertible Exit Fee varies depending upon the date
of payment, and is equal to (i) 6.5% if the payment is made within 90 days after
May 29, 1998, (ii) 13.0% if payment is made after 90 days and up to 180 days
after May 29, 1998, (iii) 19.0% if payment is made after 180 days and up to 270
days after May 29, 1998 and (iv) 25.0% if payment is made after 270 days and up
to 365 days after May 29, 1998. The Convertible Exit Fee with respect to any
payment made after May 28, 1999 shall be equal to (a) 25.0% plus (b) 25.0%
multiplied by the number of days elapsed from May 28, 1999 divided by 365. The
Convertible Exit Fee is adjusted on a pro rata basis to the extent that the
prepayment is made between periods during the first twelve months except that a
minimum Convertible Exit Fee of 6.5% is required if the prepayment is made prior
to 90 days after closing.
Approximately $8.2 million of the proceeds from the Convertible
Subordinated Debentures and the Convertible Debentures were used to finance the
INTERLINK Acquisition and the remainder was utilized for capital investments and
general working capital purposes.
On March 12, 1998, the Company entered into the Revolving Credit
Facility with a commercial bank which provided for borrowings up to $1.3 million
subject to adequate levels of eligible accounts receivable. Borrowings are
secured by the accounts receivable of Telscape USA and MSN. This facility
provides that borrowings will bear interest at floating rates of prime plus 1%
and expires in six months. The Company renegotiated the terms of the Revolving
Credit Facility to provide for borrowings of up to $2.5 million and extended the
term of the facility to July 31, 1999. As of June 30, 1998, the Company had
drawn $1.9 million on this facility.
Telscape USA and MSN have obtained a waiver under the Revolving Credit
Facility to (i) permit the Guarantee of the Notes described below by Telscape
USA and MSN and (ii) waive the defaults under the minimum current ratio,
minimize tangible net worth and prohibition on quarterly loss covenants.
The Company has also negotiated terms with certain of its equipment
vendors which call for extended payment terms and increased credit lines,
including two lines of credit each of up to $2.0 million, with 60 day and 90 day
payment terms, respectively.
29
<PAGE>
In June 1998, the Company financed the purchase of $1.4 million of
equipment by entering into an equipment lease arrangement with a financing
company which provides for monthly lease payments of $27,500, including
principal and interest, through May 31, 2003. The lease obligation is secured by
the financed equipment.
In July 1998, the Company financed the purchase of $972,000 of equipment
by entering into two equipment lease arrangements with a financing company which
provide for monthly lease payments of $22,100, including principal and interest
through July 6, 2003. The lease obligations are secured by the financed
equipment.
In July 1998, the Company financed the purchase of $243,000 of equipment
by entering into an equipment lease arrangement with a financing company which
provides for monthly lease payments of $6,600, including principal and interest
through July 14, 2002. The lease obligation is secured by the financed
equipment.
In July 1998, the Company received a commitment from a financing company
to fund equipment purchases of up to $6.0 million dollars through May 1999. This
financing is structured as loans maturing three years from funding at interest
rates 550 basis points above the Federal Reserve Treasury Constant Maturity Rate
(as defined). The Company expects to close this transaction in August.
In July 1998, the Company filed two Registration Statements with the
Securities and Exchange Commission for the offering and sale of (i) $125.0
million in Senior Unsecured Notes (the "Notes") due 2008 and (ii) 3,400,000
shares of the Company's Common Stock. The consummation of each respective
offering is not a condition precedent to the consummation of the other offering.
The Company intends to utilize the net proceeds from the offerings estimated at
$163.5 million as follows: (i) approximately $137.0 million towards the
construction of the Mexican Network; (ii) approximately $15.0 million to acquire
international switching and transmission facilities; and (iii) the balance to
pursue joint ventures, strategic alliances or acquisitions and for working
capital and other general corporate purposes.
The Company intends to finance its growth and additional capital
investments required for its planned facility expansions through cash generated
from operations, additional financing through commercial lenders and additional
lease financing and the sale of debt and equity securities (or a combination of
both). There can be no assurance that the cash generated from operations will be
sufficient or that the Company will be able to obtain additional financing on
commercially reasonable terms, if at all. Additional funding through the
incurrence of additional debt or sale of additional equity (or a combination of
both) may 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 its business could be materially
adversely affected.
ESCROW AGREEMENT
Pursuant to the Texas Securities Act of 1957, the Texas State Securities
Commissioner has the discretion to require that an issuer offering and selling
securities to the residents of Texas in a public offering deposit certain
outstanding securities in escrow. In that regard, certain former officers and
directors of the Company, as well as two other individuals (collectively, the
"Escrow Shareholders"), are parties to a Stock Escrow Agreement (the "Escrow
Agreement") dated August 8, 1994. The Escrow Agreement was required by the Texas
State Securities Commissioner as a condition to the registration of securities
in Texas in connection with the Company's initial public offering. The Escrow
Agreement provides that a total of 415,503 shares of Common Stock ("Escrow
Shares") and 55,779 shares of Common Stock issuable upon the exercise of options
("Escrow Options") be held in escrow for a period of not less than two years and
not more than ten years. The terms of the Escrow Agreement provide further that
Escrow Shares and Escrow Options may be released from escrow provided certain
performance requirements of the Company ("Performance Requirements") are
30
<PAGE>
met. For instance, if the Common Stock trades at a price per share of at least
$11.81 for at least ninety (90) consecutive trading days then the Escrow Shares
and Escrow Options are automatically released from escrow.
During the first quarter of 1998, the Company and the Escrow
Shareholders entered into agreements, which resulted in (i) the early
termination of the Escrow Agreement in July 1998, (ii) the repurchase by the
Company of certain of the Escrow Shares at a significant discount to market and
(iii) the resolution of a disagreement with certain of the Escrow Shareholders
concerning the validity of the Escrow Options. The agreements called for the
Escrow Shareholders to sell a total of 101,417 Escrow Shares to the Company for
$985,580, or $9.72 per share, of which 25% was paid by the Company upon
execution of the agreements and 75% was scheduled to be paid on July 6, 1998. In
addition, the Escrow Shareholders signed a lock-up agreement ("Escrow Lock-Up"),
ending on July 6, 1998, for any Escrow Shares which were not sold to the
Company; provided, however, that if any of the Performance Requirements be met
during the Escrow Lock-Up, the Escrow Lock-Up would terminate automatically.
Finally, certain of the Escrow Shareholders agreed to the termination of
approximately 40,000 of the Escrow Options, which had an exercise price of $0.80
per share. On May 1, 1998, the Company agreed to reduce the number of Escrow
Shares required to be sold to the Company, resulting in a reduction in the total
number of Escrow Shares being repurchased to 86,417 Escrow Shares for total
consideration of $873,000, or $10.10 per share.
In July 1998, the Company assigned the rights to purchase 80,257 of the
Escrow Shares to Preferred Capital Markets, Inc. ("Preferred"). In return for
the assignment, Preferred paid the Company $725,000 for the assignment. The
Company has no further obligations in connection with the Escrow Shares.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") 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
No. 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.
SFAS 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 No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that are evaluated regularly by the chief
operating decision makers in deciding how to allocate resources and in assessing
performance.
SFAS No. 132, "Employers' Disclosure about Pensions and other
Postretirement Benefits" standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. The statement
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
SFAS No.'s 130, 131 and 132 are effective for financial statements for
the periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Adoption of these statements is
not expected to have a material effect on the Company's financial statement
disclosures.
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at
31
<PAGE>
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to have a material effect
on its financial statements.
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. To the extent the Company's Mexican subsidiaries do not
have a positive net cash flow from its operations in 1998, 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 the
Mexican subsidiaries would likely be funded out of the working capital of the
parent corporation. Any such fundings would reduce the funds available to
finance and expand 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 the Company's Mexican subsidiaries.
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.
The international long distance market, although large and rapidly
growing, is also very competitive. The Company competes in this market with
companies that have greater experience and substantially greater resources, both
financial and otherwise. In addition, the Company faces 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 markets. The Company will be increasingly
exposed to these risks as the Company expands its presence in this market. The
Company's growth in this business is dependent on its ability to expand its
capacity through investments in additional facilities or entering into
termination arrangements with other carriers. There can be no assurance that the
Company will be successful in raising the capital required to fund the
additional facilities or to enter into such arrangements with other carriers, in
which case the Company's operations, the future growth in this business and the
ability to compete effectively against competitors with significantly more
resources could be materially adversely affected.
The prepaid phone card market represents a new market for the Company.
While the former owners of MSN are currently officers of the Company and
continue to actively manage the prepaid phone card operations, this is a rapidly
growing and very competitive market. As with international long distance
services, the Company will compete in this market with companies that have
greater experience and have substantially greater resources. In addition, the
prepaid phone card industry is subject to extensive U.S.
32
<PAGE>
federal and state regulation including the imposition of various excise taxes
and fees, including the "Universal Service Fund". As with the wholesale
international long distance business, the Company's growth in this business is
dependent on its ability to expand its capacity through investments in
additional facilities or entering in partnering arrangements for outsourcing the
telecommunications services related to calls initiated on the prepaid phone
cards it serves. There can be no assurance that the Company will be successful
in raising the capital required to fund the additional facilities, or in
obtaining such partnering arrangements, in which case the Company's operations,
the future growth in this business and the ability to compete effectively
against competitors with significantly more resources could be materially
adversely affected.
The Company is also pursuing a strategy of growth through selective
acquisitions. However, there can be no assurance that any acquisition will be
completed, that attractive candidates will be identified in the future, that the
Company will be successful in raising the capital to fund such acquisitions, or
that, if completed, any acquisition will be beneficial to the Company.
FOREIGN CURRENCY RISK
The general economic conditions of 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 transact and 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 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. 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. In addition, the Company pays its
termination partners in Latin America in their respective local currencies,
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.
YEAR 2000 PLANS
In anticipation of the year 2000, management has developed a plan to
review software that was internally developed or externally purchased or
licensed, and also to review with its key vendors and service providers their
software, for compliance with Year 2000 processing requirements. In accordance
with Emerging Issues Task Force Consensus No. 96-14, "ACCOUNTING FOR THE COSTS
ASSOCIATED WITH MODIFYING COMPUTER SOFTWARE FOR THE YEAR 2000," the Company will
expense all costs as incurred. The Company does not believe that such costs will
have a material impact on the financial results of the Company.
33
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See Index to Exhibits on page 19.
(b) Reports on Form 8-K.
On June 11, 1998, 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 California Microwave Services Division, Inc.
34
<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: August 14, 1998 By:
E. Scott Crist
President and Chief Executive
Officer
Date: August 14, 1998 By:
Todd M. Binet
Executive Vice President and Chief
Financial Officer (Principal
Financial and Chief Accounting
Officer)
35
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
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 - Securities Purchase Agreement between Deere Park Capital Management, LLC and
Telscape International, Inc. dated as of May 1, 1998; Registration Rights
Agreement dated as of May 1, 1998 between Telscape International, Inc. and
Deere Park Capital Management, LLC; Form of Convertible Subordinated Debenture
for $3,000,000 dated May 1, 1998; Form of Stock Purchase Warrant to Purchase
8,952 shares of Common Sock of Telscape International, Inc. dated May 1, 1998
(filed as Exhibit 4.4 to the Company's Report on Form 10Q for the quarter
ended March 31, 1998 and incorporated herein by reference)
4.5 - Stock Purchase Agreement dated May 18, 1998, by and among Telscape
International, Inc.; California Microwave, Inc., and California Microwave
Services Divisions, Inc. together with a Form of Supply Agreement between
California Microwave, Inc. and California Microwave Services Division, Inc.
as Exhibit B (all filed as Exhibit 10.1 to the Company's Report on Form 8-K
dated June 9, 1998 and incorporated herein by reference)
4.6 - A Form of Convertible Subordinated Debenture in the principal amount of
$1,000,000 between Deere Park Capital Management, LLC and Telscape
International, Inc. dated as of May 28, 1998; and a form of Stock Purchase
Warrant to Purchase 2,427 shares of Common Stock of Telscape International,
Inc. dated May 28, 1998 (all filed as Exhibit 10.3 to the Company's Report
on Form 8-K dated June 9, 1998 and incorporated herein by reference)
4.7 - Securities Purchase Agreement dated May 29, 1998 by and between Telscape
International, Inc. and Gordon Brothers Capital, LLC ("Gordon Brothers");
together with a Form of Convertible Debenture in the principal amount of
$5,000,000 payable to Gordon Brothers attached as Exhibit A; a Form of
Stock Purchase Warrant for Gordon Brothers for 12,136 shares of Common
Stock of Telscape International, Inc. as Exhibit B; and a Registration
Rights Agreement by and between Gordon Brothers and Telscape International,
Inc. as Exhibit C (all filed as Exhibit 10.4 to the Company's Report on
Form 8-K dated June 9, 1998 and incorporated herein by reference)
4.8 - Equity Purchase Agreement by and between Interlink Communications Holding
Co., Inc. and each of Telscape International, Inc., E. Russell Hardy,
Stephen Strohman, Monty J. Moore, and Salvador Giblas dated as of May 18,
1998 (all filed as Exhibit 10.5 to the Company's Report on Form 8-K dated
June 9, 1998 and incorporated herein by reference)
36
<PAGE>
4.9 - Form of Employment Agreement by and between California Microwave Services
Division, Inc. and E. Russell Hardy dated as of May 18, 1998 (all filed as
Exhibit 10.6 to the Company's Report on Form 8-K dated June 9, 1998 and
incorporated herein by reference)
4.10 - Form of Employment Agreement by and between California Microwave Services
Division, Inc. and Stephen Strohman dated as of May 18, 1998 (all filed as
Exhibit 10.7 to the Company's Report on Form 8-K dated June 9, 1998 and
incorporated herein by reference)
4.11 - Form of Consulting Agreement by and between California Microwave Services
Division, Inc. and Salvador Giblas dated as of May 18, 1998 (all filed as
Exhibit 10.8 to the Company's Report on Form 8-K dated June 9, 1998 and
incorporated herein by reference)
*27.1 - Financial Data Schedule
</TABLE>
- -----------------
*Filed herein
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,939,000
<SECURITIES> 0
<RECEIVABLES> 13,211,000
<ALLOWANCES> (370,000)
<INVENTORY> 3,803,000
<CURRENT-ASSETS> 28,375,000
<PP&E> 14,402,000
<DEPRECIATION> (1,318,000)
<TOTAL-ASSETS> 69,045,000
<CURRENT-LIABILITIES> 30,927,000
<BONDS> 9,463,000
0
0
<COMMON> 5,000
<OTHER-SE> 28,587,000
<TOTAL-LIABILITY-AND-EQUITY> 69,045,000
<SALES> 65,777,000
<TOTAL-REVENUES> 65,777,000
<CGS> (57,056,000)
<TOTAL-COSTS> (6,963,000)
<OTHER-EXPENSES> (342,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (342,000)
<INCOME-PRETAX> 1,416,000
<INCOME-TAX> (895,000)
<INCOME-CONTINUING> 492,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 492,000
<EPS-PRIMARY> .11
<EPS-DILUTED> .06
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,180,000
<SECURITIES> 0
<RECEIVABLES> 2,274,000
<ALLOWANCES> (328,000)
<INVENTORY> 1,709,000
<CURRENT-ASSETS> 7,486,000
<PP&E> 2,277,000
<DEPRECIATION> (544,000)
<TOTAL-ASSETS> 12,898,000
<CURRENT-LIABILITIES> 6,026,000
<BONDS> 413,000
0
0
<COMMON> 4,000
<OTHER-SE> 5,703,000
<TOTAL-LIABILITY-AND-EQUITY> 12,898,000
<SALES> 9,941,000
<TOTAL-REVENUES> 9,941,000
<CGS> (5,994,000)
<TOTAL-COSTS> (3,638,000)
<OTHER-EXPENSES> (240,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (26,000)
<INCOME-PRETAX> 43,000)
<INCOME-TAX> 167,000
<INCOME-CONTINUING> (214,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (214,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
