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 MARCH 31, 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
4,732,328 shares of Registrant's common stock ($.001 Par Value) were outstanding
as of April 28, 1998.
<PAGE>
Telscape International, Inc.
Table of Contents
Form 10-Q
March 31, 1998
PAGE
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Condensed Consolidated Balance Sheets -
As of December 31, 1997 and March 31, 1998 .................. 1
Unaudited Condensed Consolidated Statements of Operations -
For the Three Months Ended March 31, 1997 and 1998 ......... 2
Unaudited Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 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 ............... 10
PART II. OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K ............................ 17
(a) Exhibits
(b) Reports on Form 8-K
Signatures ......................................................... 18
<PAGE>
TELSCAPE INTERNATIONAL, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
---------------------------
December 31, March 31,
1997 1998
------------ ------------
CURRENT ASSETS: (unaudited)
<S> <C> <C>
Cash and cash equivalents ................................................ $ 4,734,000 $ 2,882,000
Accounts receivable, less allowance for doubtful accounts
of and $200,000 and $215,000 (unaudited), respectively ................. 6,276,000 7,346,000
Inventories .............................................................. 4,305,000 3,113,000
Prepaid expenses and other ............................................... 2,674,000 4,917,000
Deferred income taxes .................................................... 517,000 311,000
------------ ------------
Total current assets ................................................... 18,506,000 18,569,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation .................... 2,679,000 5,344,000
GOODWILL AND OTHER INTANGIBLES, net of accumulated
amortization ............................................................... 17,674,000 23,324,000
DEFERRED INCOME TAXES ...................................................... 77,000 74,000
OTHER ASSETS ............................................................... 699,000 629,000
------------ ------------
Total assets ................................................. $ 39,635,000 $ 47,940,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ......................................................... $ 10,756,000 $ 13,583,000
Accrued expenses ......................................................... 3,303,000 2,398,000
Current portion of notes payable and capital lease
obligations ............................................................ 508,000 1,747,000
Deferred income taxes .................................................... 270,000 416,000
------------ ------------
Total current liabilities .............................................. 14,837,000 18,144,000
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS ................................ 2,677,000 2,548,000
MINORITY INTERESTS ......................................................... 34,000 46,000
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 4,667,548 issued, respectively ............................. 4,000 5,000
Additional paid-in capital ............................................... 25,232,000 29,310,000
Accumulated deficit ...................................................... (2,852,000) (1,738,000)
Treasury stock ........................................................... (297,000) (375,000)
------------ ------------
Total stockholders' equity ............................................. 22,087,000 27,202,000
------------ ------------
Total liabilities and stockholders' equity ............................. $ 39,635,000 $ 47,940,000
============ ============
</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
Three Months Ended
March 31,
--------------------------
1997 1998
----------- -----------
REVENUES ........................................ $ 3,771,000 $ 33,399,000
COST OF REVENUES ................................ 2,525,000 28,334,000
----------- ------------
GROSS PROFIT .................................... 1,246,000 5,065,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .... 1,478,000 2,277,000
----------- ------------
OPERATING INCOME (LOSS) BEFORE DEPRECIATION
AND AMORTIZATION ................................ (232,000) 2,788,000
DEPRECIATION AND AMORTIZATION ................... 154,000 569,000
----------- ------------
OPERATING INCOME (LOSS) ......................... (386,000) 2,219,000
OTHER INCOME (EXPENSE):
Interest income ............................... 5,000 37,000
Interest expense .............................. (8,000) (93,000)
Foreign exchange gain (loss) .................. 7,000 (122,000)
Other, net .................................... 22,000 48,000
----------- ------------
Total other income (expense), net ....... 26,000 (130,000)
----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTERESTS .............................. (360,000) 2,089,000
INCOME TAX BENEFIT (EXPENSE) .................... 32,000 (963,000)
----------- ------------
INCOME (LOSS) BEFORE MINORITY INTERESTS ......... (328,000) 1,126,000
MINORITY INTERESTS IN SUBSIDIARIES .............. 4,000 (12,000)
----------- ------------
NET INCOME (LOSS) ............................... $ (324,000) $ 1,114,000
=========== ============
EARNINGS (LOSS) PER SHARE:
Basic ......................................... $ (0.08) $ 0.25
Diluted (1) ................................... n/a $ 0.15
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ......................................... 3,935,969 4,371,464
Diluted(1) .................................... n/a 7,779,177
(1) Inclusion of additional shares under a diluted analysis for the three
months ended March 31, 1997 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>
Three Months Ended March 31,
-------------------------
1997 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) .................................... $ (324,000) $ 1,114,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts ...................... 22,000 15,000
Depreciation and amortization ........................ 154,000 569,000
Deferred income tax (benefit) expense ................ (88,000) 355,000
Imputed interest on non-interest bearing notes payable -- 71,000
Minority interest in subsidiaries' income (loss) ..... (4,000) 12,000
Changes in assets and liabilities:
Accounts receivable ................................ (98,000) (44,000)
Inventories ........................................ 459,000 1,207,000
Prepaid and other assets ........................... (248,000) (1,267,000)
Accounts payable ................................... 1,265,000 1,880,000
Deferred revenue ................................... -- (1,997,000)
Accrued liabilities ................................ (90,000) (1,289,000)
----------- -----------
Net cash provided by operating activities .............. 1,048,000 626,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................. (394,000) (3,642,000)
Acquisition of MSN, net of cash acquired ............. -- (2,325,000)
----------- -----------
Net cash used in investing activities .................. (394,000) (5,967,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations ................ (18,000) (26,000)
Payments on notes payable ............................ -- (300,000)
Purchase of treasury shares .......................... -- (78,000)
Borrowings on line of credit ......................... -- 694,000
Proceeds from warrants and options exercised ......... -- 3,199,000
----------- -----------
Net cash provided by (used in) financing activities .... (18,000) 3,489,000
----------- -----------
Net increase (decrease) in cash and cash equivalents ... 636,000 (1,852,000)
----------- -----------
Cash and cash equivalents at beginning of period ....... 495,000 4,734,000
----------- -----------
Cash and cash equivalents at end of period ............. $ 1,131,000 $ 2,882,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
3
<PAGE>
TELSCAPE INTERNATIONAL, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------
1997 1998
--------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................ $ 7,762 $ 10,000
Income taxes paid: ........................................... $ -- $339,000
NON-CASH TRANSACTIONS:
Property and equipment acquired by execution of
capital lease obligation ....................................... 328,985 --
Issuance of common stock and promissory notes in connection with
acquisition of MSN:
Promissory Notes ......................................... $672,000
Common Stock ............................................. $880,000
</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 months ended March 31, 1997 and March
31, 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 months
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the 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.
ECONOMIC CONDITIONS
The devaluation of the Mexican peso in late 1994 caused Mexico to
experience an economic crisis characterized by exchange rate instability,
increased inflation, high domestic interest rates, reduced consumer purchasing
power and high unemployment. Consequently, the Mexican government has exercised,
and continues to exercise, significant influence over the Mexican economy.
Accordingly, Mexican governmental actions could have a significant effect on
Mexican companies, including the Company's customers, and overall market
conditions.
The Company's foreign currency risk is mitigated in Mexico due to the
fact that many of the Company's customers are multinational firms that pay in
U.S. dollars. In addition, most of the customers that do pay in pesos pay at the
spot exchange rate in effect at the time of payment as opposed to the exchange
rate at the time the receivable is created. Nevertheless, significant adverse
effects from any downturns in the Mexican economy could result in an adverse
effect on the Company's operations. The Company also has a significant amount of
its payables denominated in pesos which exposes the Company to exchange rate
risk.
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
130 requires that all items that are required to be recognized under current
accounting standards as components of
5
<PAGE>
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 130 and 131 are effective for financial statements for the periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. The Company does not believe this statement will
have a material impact on its financial statements.
NOTE 2 - MSN ACQUISITION
Effective January 1, 1998, the Company acquired all of the outstanding
common stock of 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 $50,000. 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 $6,063,000 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 - 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
Ended March 31,
------------------------
1997 1998
----------- ----------
BASIC
<S> <C> <C>
Net income (loss) as reported ..................................... $ (324,000) $1,114,000
Weighted average common shares outstanding ........................ 3,935,969 4,371,464
Basic earnings (loss) per share ................................... $ (0.08) $ 0.25
6
<PAGE>
DILUTED
Net income (loss) as reported ..................................... $ (324,000) $1,114,000
Interest expense on convertible debt .............................. -- 21,000
Net income (loss) applicable to common stockholders ............... $ (324,000) $1,135,000
Weighted average common shares outstanding ........................ 3,935,969 4,371,464
Weighted average diluted potential common shares outstanding ...... 73,304 3,407,713
Weight average common and dilutive potential common shares
outstanding ...................................................... 4,009,273 7,779,177
Diluted earnings (loss) per share ................................. $ (0.08) $ 0.15
</TABLE>
Diluted EPS for the three months ended March 31, 1997 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 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 March 31, 1997 and March 31, 1998, there were 2,695,000 and 500,000
performance based warrants, respectively, which had not vested which were not
included in the calculation of diluted EPS. Additionally, 556,164 and 17,000
options and warrants outstanding at March 31, 1997 and 1998, respectively, 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 4 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The Company's notes payable and capital lease obligations consist of the
following:
-------------------------------
December 31, March 31,
1997 1998
--------------- ------------
Non-interest bearing promissory notes, imputed interest
at 10%, unamortized discount of $348,297 and $308,339,
respectively, issued in connection with Integracion
acquisition, maturing at various dates through
January 1, 2001 $1,853,000 $1,592,000
Non-interest bearing promissory note, imputed interest
at 10%, unamortized discount of $140,851 and $119,723,
respectively, issued in connection with Integracion
acquisition, convertible into 333,000 shares of
common stock, and maturing on September 1, 1999 839,000 860,000
Promissory note issued to repurchase common stock,
payable in six semi-annual installments through
May 20, 2000, and bearing interest at 6% 250,000 250,000
Capital lease obligation payable in monthly
installments of $11,244 including principal and
interest maturing February 28, 2000 243,000 217,000
7
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Non-interest bearing promissory note, imputed
interest at 10%, unamortized discount of $77,800,
issued in connection with MSN acquisition, payable
in eight equal quarterly installments beginning
April 23, 1998 --- 682,000
Revolving credit facility maturing September 30,
1998 bearing interest at prime plus 1%, secured
by accounts receivable --- 694,000
--------------- ------------
Total notes payable and capital leases 3,185,000 4,296,000
Current portion 508,000 1,747,000
--------------- ------------
Long term portion $ 2,677,000 $ 2,548,000
=============== ============
The annual maturity of the debt indicated above for the five years
following December 31, 1997 are $508,000 in 1998, $1,429,000 in 1999, $565,000
in 2000 and $682,000 in 2001.
On March 12, 1998, the Company entered into a revolving credit facility
with a commercial bank, which provides for borrowings up to $1,250,000 subject
to adequate levels of eligible receivables. Borrowings are secured by the
accounts receivable of the Company's Telscape USA and MSN subsidiaries. This
facility provides that borrowings will bear interest at floating rates of prime
plus one percent (1%). The Company has also negotiated terms with several of its
equipment vendors which call for extended payment terms and increased credit
lines (including $2,000,000 lines of credit with sixty day and ninety day
payment terms, respectively, obtained from two of its equipment vendors).
On May 1, 1998, the Company issued $3,000,000 in 8% Convertible
Subordinated Debentures (the "Convertible Debentures") maturing three years from
closing. The Company has the option to issue up to another $2,000,000 in
Convertible Debentures on similar terms for a period of one year, subject to the
Company meeting certain requirements. The Convertible Debentures are convertible
by the holder into shares of the Company's common stock at a price equal to $26
per share for the first six months following closing, and thereafter, at the
lesser of (i) $26 per share or (ii) a price equal to the average of the three
highest of the five lowest closing prices of the Company's common stock for the
20 trading days preceding the conversion date. However, should the common stock
trade below $15.00 for three consecutive trading days, the Company may elect to
redeem all or part of such Convertible Debenture at one hundred and seven
percent of face value plus accrued interest. In the event that the Company's
common stock closes above $30 per share, adjusted without limitation, for any
stock splits or combinations, the Company's obligation to make interest payments
on the Convertible Debenture is terminated. In connection with the initial
$3,000,000 of Convertible Debentures, the holders also received warrants to
purchase an aggregate of 8,952 shares of the Company's common stock at an
exercise price of $16.76 per share. The warrants have a term of three years. If
the Company exercises its option to issue additional Convertible Debentures,
additional warrants would be issued based on a predefined formula. In addition,
the Company is required to file a registration statement with the Securities and
Exchange Commission to register the shares of common stock issuable upon the
conversion of the Convertible Debentures or the exercise of the warrants.
NOTE 5 - 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
8
<PAGE>
"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 IPO. The Escrow Agreement provides
that a total of 415,503 shares of Common Stock ("Shares") and 55,779 shares of
Common Stock issuable upon the exercise of options ("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 Shares and Options held in escrow
may be released provided certain performance requirements of the Company
("Performance Requirements") are met. For instance, if the Company's common
stock trades at a price per share of at least $11.81 for at least ninety (90)
consecutive trading days then the Shares and Options are automatically released
from escrow.
During the first quarter of 1998, the Company and the Shareholders
entered into a series of agreements, which will result in the early termination
of the Escrow Agreement in the second quarter of 1998, the repurchase by the
Company of certain of the Shares at a significant discount to market and the
resolution of a disagreement with certain of the Shareholders concerning the
validity of the Options. The agreements called for the Shareholders to sell a
total of 101,417 Shares to the Company for $985,580 or $9.72 per share to be
paid 25% upon closing and 75% by July 6, 1998. As of the filing of this Form
10-Q, each of the agreements have been closed. In addition, the Shareholders
agreed to sign a lock-up agreement ("Lock-Up"), ending on July 6, 1998, for any
Shares which were not sold to the Company; provided, however, that should any of
the Performance Requirements be met during the Lock-Up, the Lock-Up will
terminate automatically. Finally, certain of the Shareholders agreed to the
termination of approximately 40,000 of the Options, which had an exercise price
of $0.80 per share. On May 1, 1998, the Company agreed to reduce the number of
shares required to be sold to the Company, resulting in a reduction in the total
number of shares being repurchased to 86,417 Shares for total consideration of
$873,000, or $10.10 per share.
9
<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.
OUTLOOK
The quarter ended March 31, 1998 further demonstrated the Company's
strategy to position itself as a fully-integrated telecommunications provider
and to provide its customers with a complete telecommunications solution.
Operating results from the Company's two existing business lines, systems
integration and international long distance, were in line with management
expectations.
In January 1998, the Company acquired MSN, a leading provider of prepaid
telephone calling cards to US-based Hispanic consumers via the TELEFIESTA brand
name. The acquisition enhances the profile of the Company's long distance
business by establishing a retail platform for its international long distance
services and the ability to market additional products and services to Hispanic
customers. Early results from this acquisition are encouraging, as revenues
exceeded expectations and operating results were immediately accretive.
In March 1998, the Company acquired a license from the government of El
Salvador to provide inbound and outbound international long distance as well as
certain other telecommunications services. This license marks the first time the
Company will offer international long distance services for calls originating in
Latin America. The Company plans to leverage the TELEFIESTA brand recognition in
El Salvador and other Latin American countries as regulations and licenses
permit.
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.
During 1997, the Company's revenues were derived approximately equally from its
then two core businesses: systems integration and wholesale long distance
services. In the first quarter of 1998, with the growth in prepaid card revenues
generated by recently acquired MSN, the Company's revenue mix changed.
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<PAGE>
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.
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. For
the year ended December 31, 1997, one wholesale customer accounted for
approximately 28% of the Company's overall revenues. For the three months ended
March 31, 1998, that same customer accounted for approximately 12% of the
Company's overall revenues.
The Company also provides domestic and international long distance
services through the sale of prepaid phone cards. In cases where the Company
arranges for or provides the telecommunications services related to the prepaid
phone cards, the Company recognizes revenue at the time of customer usage. The
Company recognizes deferred revenue as its prepaid phone cards are shipped. In
addition, the Company has entered into arrangements with a third party whereby
this party provides the long distance telecommunications services for the cards
the Company sells at a fixed cost to the Company. The Company recognizes
revenues from the sale of cards under these agreements at time of shipment.
GROSS PROFIT. 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 may experience a decline
in gross profit percentage. The effects of this potential decline are expected
to be mitigated by the Company's strategy of focusing on deregulating markets,
particularly in Latin America, and on providing value-added services, where it
can enjoy higher gross profits. Gross profits from the Company's newly-acquired
prepaid phone 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 quarter of
1998 and may continue to decline to the extent that prepaid card revenues
increase as a percentage of overall revenues.
OPERATING INCOME. As the Company continues to expand its core
businesses, growth in revenues is expected to outpace decreases in overall gross
margins. Additionally, operating expenses are expected to grow at a lesser rate
than that of revenues. These factors should result in increased operating income
to the Company in the future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUES increased from $3,771,000 in 1997 to $33,399,000 in 1998. This
increase of $29,628,000, or 786%, 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, the acquisitions of
Integracion de Redes ("Integracion") and N.S.I completed in the third and fourth
quarters of 1997. In addition, revenues from Vextro for the three months ended
March 31, 1998 doubled those for the three months ended March 31, 1997.
COST OF REVENUES increased from $2,525,000 in 1997 to $28,334,000 in
1998, or $25,809,000. The 1022% 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 and N.S.I. In addition, cost of revenues increased due to the higher
sales generated at Vextro. The cost of revenues as a percentage of revenues
increased from 67.0% to 84.8%, or 17.8%, due principally to the higher cost of
revenues as a percentage of revenues associated with the sale of prepaid phone
cards.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from
$1,478,000 in 1997 to $2,277,000 in 1998, or $799,000. The 54% increase in SG&A
was due principally to the incremental SG&A related to the operations of the
acquisitions of Integracion, N.S.I. and MSN and, to a lesser extent, increased
staffing at existing operations of Vextro and the wholesale long distance
business to meet the additional resource requirements from the growth of these
operations.
Overall SG&A as a percentage of revenues decreased from 39.2% to 6.8%,
or 32.4%. This decrease was due principally to the growth in overall revenues
rapidly outpacing the growth in operating expenses and to the lower SG&A as a
percentage of revenues required to support the MSN operations.
DEPRECIATION AND AMORTIZATION increased from $154,000 in 1997 to
$569,000 in 1998, or $415,000. 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; goodwill recognized on the MSN
acquisition completed effective January 1, 1998; and goodwill recognized on the
Integracion and N.S.I. acquisitions completed during 1997.
OTHER INCOME (EXPENSE) decreased from $26,000 in 1997 to $(130,000) in
1998, or $156,000. This decrease is due to interest expense in 1998, relating to
the amortization of interest expense on non-interest bearing notes issued in
connection with the Integracion and MSN acquisitions, as compared to net
interest income in 1997, and a foreign exchange loss in 1998 as compared to a
foreign exchange gain in 1997.
INCOME TAX BENEFIT (EXPENSE) changed from an income tax benefit of
$32,000 in 1997 to an income tax expense of $(963,000) in 1998. The Company's
overall effective tax rate for the three months ended March 31, 1998, at 46%,
was 12% over the statutory rate in the U.S. and Mexico primarily due to the non
deductible nature of goodwill amortization.
NET INCOME (LOSS). The Company experienced a net loss of $(324,000) in
1997 as compared to a net income of $1,114,000 in 1998 due to a combination of
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,048,000 and $626,000
for the three months ended March 31, 1997 and March 31, 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 receivable of approximately
$1,000,000 and a decrease in deferred revenues of $1,997,000. In the fourth
quarter of 1997, MSN entered into an arrangement with a third party whereby the
third party provides the telecommunications services related to the prepaid
phone cards sold by MSN at a fixed cost to MSN. Prior to this arrangement, MSN
would arrange for the telecommunication services itself and would recognize the
revenues associated with these telecommunications services as the cards were
utilized. As a result, at December 31, 1997, MSN had recorded $1,997,000 in
deferred revenues related to the receipt of monies related to sales of prepaid
phone cards in the fourth quarter of 1997. The cards were utilized in the first
quarter of 1998, and the costs associated with these services were paid by MSN
in the first quarter of 1997. Under the new arrangement with the third party,
revenues are recognized at time of shipment and the costs paid to the third
party are paid shortly thereafter.
Net cash used in investing activities was $(394,000) and $(5,967,000)
for the three months ended March 31, 1997 and March 31, 1998, respectively. In
the first quarter of 1998, the Company expended approximately $3.6 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.
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Net cash provided by (used in) financing activities was $(18,000) and
$3,489,000 for the three months ended March 31, 1997 and March 31, 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 $3,710,000, of which $2,721,000 was received subsequent
to year end.
As of March 31, 1998, the Company had cash and cash equivalents of
$2,882,000 and positive working capital of $425,000. In January 1998, the
Company completed the acquisition of MSN by issuing to the sellers $3,250,000 in
cash, $750,000 in non-interest bearing promissory notes and 100,000 shares of
common stock. This acquisition utilized the majority of the funds realized from
the warrant exercises.
In the first 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 phone card business lines. Through May 11,
1998, the Company has expended or placed purchase orders for equipment purchases
for a total in excess of $6.0 million relating to these business expansions.
Management does not expect that cash generated from operations will be adequate
to fund these capital investments.
On March 12, 1998, the Company entered into a revolving credit facility
with a commercial bank which provides for borrowings up to $1,250,000 subject to
adequate levels of eligible accounts receivable. Borrowings are secured by the
accounts receivable of the Company's Telscape USA and MSN subsidiaries. This
facility provides that borrowings will bear interest at floating rates of prime
plus 1% and expires in six months. The Company has also negotiated terms with
several of its equipment vendors which call for extended payment terms and
increased credit lines (including $2,000,000 lines of credit with sixty day and
ninety day payment terms, respectively, obtained from two of its equipment
vendors).
On May 1, 1998, the Company issued $3,000,000 in 8% Convertible
Subordinated Debentures (the "Convertible Debentures") maturing three years from
closing. The Company has the option to issue up to another $2,000,000 in
Convertible Debentures on similar terms for a period of one year, subject to the
Company meeting certain requirements. The Convertible Debentures are convertible
by the holder into shares of the Company's common stock at a price equal to $26
per share for the first six months following closing, and thereafter, at the
lesser of (i) $26 per share or (ii) a price equal to the average of the three
highest of the five lowest closing prices of the Company's common stock for the
20 trading days preceding the conversion date. However, should the common stock
trade below $15.00 for three consecutive trading days, the Company may elect to
redeem all or part of such Convertible Debenture at one hundred and seven
percent of face value plus accrued interest. In the event that the Company's
common stock closes above $30 per share, adjusted without limitation, for any
stock splits or combinations, the Company's obligation to make interest payments
on the Convertible Debenture is terminated. In connection with the initial
$3,000,000 of Convertible Debentures, the holders also received warrants to
purchase an aggregate of 8,952 shares of the Company's common stock at an
exercise price of $16.76 per share. The warrants have a term of three years. If
the Company exercises its option to issue additional Convertible Debentures,
additional warrants would be issued based on a predefined formula. In addition,
the Company is required to file a registration statement with the Securities and
Exchange Commission to register the shares of common stock issuable upon the
conversion of the Convertible Debentures or the exercise of the warrants.
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 additional equity (or a combination of
both). There can be no assurance that the cash generated from operations will be
sufficient nor that the Company will be able to obtain additional financing on
commercially reasonable terms, if at all. Additional funding through the
incurrence of 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
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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
"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 IPO. The Escrow Agreement provides
that a total of 415,503 shares of Common Stock ("Shares") and 55,779 shares of
Common Stock issuable upon the exercise of options ("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 Shares and Options held in escrow
may be released provided certain performance requirements of the Company
("Performance Requirements") are met. For instance, if the Company's common
stock trades at a price per share of at least $11.81 for at least ninety (90)
consecutive trading days then the Shares and Options are automatically released
from escrow.
During the first quarter of 1998, the Company and the Shareholders
entered into a series of agreements, which will result in the early termination
of the Escrow Agreement in the second quarter of 1998, the repurchase by the
Company of certain of the Shares at a significant discount to market and the
resolution of a disagreement with certain of the Shareholders concerning the
validity of the Options. The agreements called for the Shareholders to sell a
total of 101,417 Shares to the Company for $985,580 or $9.72 per share to be
paid 25% upon closing and 75% by July 6, 1998. As of the date of the filing of
this Form 10-Q, each of the agreements have been closed. In addition, the
Shareholders agreed to sign a lock-up agreement ("Lock-Up"), ending on July 6,
1998 for any Shares which were not sold to the Company; provided, however, that
should any of the Performance Requirements be met during the Lock-Up, the
Lock-Up will terminate automatically. Finally, certain of the Shareholders
agreed to the termination of approximately 40,000 of the Options, which had an
exercise price of $0.80 per share. On May 1, 1998, the Company agreed to reduce
the number of shares required to be sold to the Company, resulting in a
reduction in the total number of shares being repurchased to 86,417 shares for
total consideration of $873,000, or $10.10 per share.
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
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.
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SFAS 130 and 131 are effective for financial statements for the periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. The Company does not believe this statement will
have a material impact 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. 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
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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 acquistions, 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 Opinion 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.
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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 January 7, 1998, the Company filed a report on Form 8-K, relating to
certain outstanding litigation.
On February 6, 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 MSN Communications, Inc.
On April 7, 1998, the Company filed a report of Form 8-K/A providing
financial statements and pro forma financial information required to be filed in
connection with the MSN acquisition.
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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: May 15, 1998 By:______________________________
E. Scott Crist
President and Chief Executive
Officer
Date: May 15, 1998 By:______________________________
Todd M. Binet
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Chief Accounting Officer)
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INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
3.1 - Articles of Incorporation of the Registrant, as amended
(filed as Exhibit 3.1 to the Company's Registration
Statement No. 33-80542-D and incorporated herein by
reference)
3.2 - Bylaws of the Registrant, as amended (filed as Exhibit 3.2
to the Company's Registration Statement No. 33-80542-D and
incorporated herein by reference)
4.1 - Form of Certificate evidencing Common Stock (filed as
Exhibit 4.1 to 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.
*27.1 - Financial Data Schedule
- -----------------
*Filed herewith
19
EXHIBIT 4.4
SECURITIES PURCHASE AGREEMENT
BETWEEN
DEERE PARK CAPITAL MANAGEMENT, LLC
AND
TELSCAPE INTERNATIONAL, INC.
DATED AS OF MAY 1, 1998
THIS SECURITIES PURCHASE AGREEMENT dated as of May 1, 1998 (the
"Agreement"), by and between DEERE PARK CAPITAL MANAGEMENT, LLC, a limited
liability company organized and existing under the laws of the State of
Illinois, as nominee (the "Investor"), and TELSCAPE INTERNATIONAL, INC., a
corporation organized and existing under the laws of the State of Texas (the
"Company").
RECITALS
A. The parties desire that, upon the terms and subject to the conditions
contained herein, the Company shall issue to the Investor, and the Investor
shall purchase from the Company, from time to time as provided herein, the
Company's 8% Convertible Subordinated Debentures, a form of which is attached as
Exhibit A hereto (the "Convertible Debentures"), for an aggregate purchase price
of up to $5,000,000.
B. Except as otherwise provided in this Agreement, such investments will
be made in reliance upon the provisions of Section 4(2) promulgated by the
Securities and Exchange Commission under the United States Securities Act of
1933, as amended, and/or upon such other exemption from the registration
requirements of the Securities Act as may be available with respect to any or
all of the investments in Convertible Debentures to be made hereunder.
NOW, THEREFORE, in consideration of the foregoing Recitals which are
hereby incorporated by this reference and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1 "CLOSING" means the consummation of each purchase and sale
of Convertible Debentures pursuant to Section 2.1.
Section 1.2 "CLOSING DATE" means (i) with respect to the Initial
Convertible Debenture, the first business day following execution of this
Agreement and satisfaction of all conditions set forth in Section 3.1, and (ii)
with respect to the Optional Convertible Debentures, the relevant Optional
Purchase Date, provided in each case that all conditions to the applicable
Closing have been satisfied.
<PAGE>
Section 1.3 "COMMITMENT PERIOD" means the period commencing on the
Initial Closing Date and expiring on the earlier to occur of (x) the date on
which the Investor shall have purchased the Convertible Debentures pursuant to
this Agreement for an aggregate Purchase Price of $5,000,000, (y) the date this
Agreement is terminated pursuant to Section 2.6, or (z) the first anniversary of
the Initial Closing Date.
Section 1.4 "COMMON STOCK" means the Company's common stock, par value
$.001 per share.
Section 1.5 "CONVERSION NOTICE" means the written form of notice given
to notify the Company that the Investor is exercising its option to convert a
Convertible Debenture to Common Stock, and directing the Company or its transfer
agent to issue and deliver to the party indicated, a certificate or certificates
representing the Common Shares received upon conversion, a form of which is
attached as an exhibit to the form of the Convertible Debenture attached hereto
as EXHIBIT A.
Section 1.6 "EFFECTIVE DATE" means the date on which the SEC declares
effective the Registration Statement described in Section 6.4.
Section 1.7 "EXCHANGE ACT" means the United States Securities Exchange
Act of 1934, as amended.
Section 1.8 "EXERCISE PRICE" See Section 2.9(a).
Section 1.9 "FIXED CONVERSION PRICE" See Section 2.8.
Section 1.10 "INITIAL CLOSING DATE" means the date upon which the
Closing of the purchase and sale of the Initial Convertible Debenture shall
occur.
Section 1.11 "INITIAL CONVERTIBLE DEBENTURE" See Section 2.2.
Section 1.12 "INVESTMENT AMOUNT" means for (i) the Initial Convertible
Debenture, $3,000,000 and (ii) for any Optional Convertible Debenture, the
amount set forth by the Company in the related Optional Purchase Notice, up to
an aggregate maximum amount of $2,000,000.
Section 1.13 "LOOKBACK PERIOD" means the twenty (20) Trading Days
immediately preceding the date of conversion of any Convertible Debenture on the
Principal Market by the Investor.
Section 1.14 "MATERIAL ADVERSE EFFECT" means a material adverse effect
on the business, operations, properties, prospects, or financial condition of
the Company.
Section 1.15 "NASD" means the National Association of Securities
Dealers, Inc.
Section 1.16 "OPTIONAL CONVERTIBLE DEBENTURE" See Section 2.3.
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Section 1.17 "OPTIONAL PURCHASE DATE" means a Trading Day during the
Commitment Period which is five (5) Trading Days after the date on which the
Company elects by delivery of an Optional Purchase Notice pursuant to Section
2.5 to sell an Optional Convertible Debenture to the Investor, in conformity
with the provisions of this Agreement.
Section 1.18 "OPTIONAL PURCHASE NOTICE" See Section 2.5.
Section 1.19 "PRINCIPAL MARKET" means the NASDAQ National Market, the
NASDAQ Small-Cap Market, the American Stock Exchange or the New York Stock
Exchange, whichever is at the time the principal trading exchange or market for
the Company's Common Stock.
Section 1.20 "REDEMPTION FLOOR PRICE" means, with respect to the Initial
Convertible Debenture, $15.00, subject to any adjustment, and with respect to
any Convertible Debenture subsequently issued to the Investor in accordance with
this Agreement, that price calculated in accordance with the Redemption Floor
Price Formula, as adjusted without limitation, for any stock splits or
combinations.
Section 1.21 "REDEMPTION FLOOR PRICE FORMULA" means 83.3 % of the
closing price of the Common Stock on the Trading Day immediately preceding an
Optional Purchase Date.
Section 1.22 "REGISTRATION RIGHTS AGREEMENT" See Section 2.9.
Section 1.23 "REGISTRATION STATEMENT" See Section 6.4.
Section 1.24 "SEC" means the Securities and Exchange Commission.
Section 1.25 "SECURITIES ACT" means the United States Securities Act of
1933, as amended.
Section 1.26 "SEC DOCUMENTS" means registration statements, reports and
documents, including proxy statements filed with the SEC pursuant to the
Securities Act or Exchange Act since December 31, 1996.
Section 1.27 "SUBORDINATION AGREEMENT" See Section 7.4(b).
Section 1.28 "SUBSCRIPTION DATE" means the date of this Agreement.
Section 1.29 "TRADING DAY" means any day during which the Principal
Market shall be open for business.
Section 1.30 "VARIABLE CONVERSION PRICE" See Section 2.8.
Section 1.31 "VOLUME LIMITATION" See Section 2.3.
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Section 1.32 "WARRANT FORMULA" See Section 2.9(a).
Section 1.33 "WARRANTS" See Section 2.9(b).
ARTICLE II
PURCHASE AND SALE OF CONVERTIBLE DEBENTURES
Section 2.1 INVESTMENTS. Upon the terms and conditions set forth herein
(including, without limitation, the provisions of Article III hereof), during
the Commitment Period the Company shall issue and sell to the Investor, and the
Investor shall purchase from the Company, the Convertible Debentures.
Section 2.2 INITIAL PURCHASE. The Company agrees to sell and the
Investor agrees to purchase the Initial Convertible Debenture in an aggregate
principal amount of $3,000,000 (the "Initial Convertible Debenture").
Section 2.3. OPTIONAL CONVERTIBLE DEBENTURES. In addition to the
purchase of the Initial Convertible Debenture pursuant to Section 2.2, the
Investor agrees to purchase, at the Company's option, additional 8% Convertible
Debentures (each, an "Optional Convertible Debenture") up to an aggregate
maximum amount of $2,000,000; provided, however, that the Company may not
deliver Optional Purchase Notices for more than $1,000,000 in the aggregate
during the first (90) days following the Initial Closing Date. The purchase of
the Optional Convertible Debentures shall occur on one or more Optional Purchase
Dates; PROVIDED, however, that (i) the average daily trading volume of the
Company's Common Stock over the course of the thirty (30) days preceding the
Optional Purchase Date multiplied by the price of the Company's Common Stock on
such Optional Purchase Date, all as reported by Bloomberg L.P, is at least equal
to $200,000 (the "Volume Limitation"); (ii) the conditions of either Section
3.2(a) or (b) have been satisfied, depending on the timing of the delivery of
the Optional Purchase Notice; and (iii) the Commitment Period has not elapsed
prior to the applicable Optional Purchase Date.
Section 2.4 CLOSINGS.
(a) With respect to the sale of the Initial Convertible Debenture, on or
before the Initial Closing Date, (i) the Company shall deliver to the Investor
the Initial Convertible Debenture, substantially in the form of EXHIBIT A
attached hereto, to be purchased by the Investor pursuant to Section 2.2, and
(ii) the Investor shall deliver or cause to be delivered to the Company the
amount of $3,000,000 by wire transfer of immediately available funds to one or
more accounts designated by the Company.
(b) With respect to the Closing relating to each Optional Convertible
Debenture, on the applicable Optional Purchase Date, (i) the Company shall
deliver an Optional Convertible Debenture substantially in the form of EXHIBIT A
attached hereto, to be purchased by the Investor pursuant to Section 2.3, and
(ii) the Investor shall deliver the principal amount of such Optional Purchase
Debenture by wire transfer to the account designated by the Company.
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(c) In addition, on or prior to each Closing Date, the Company and the
Investor shall deliver all documents, instruments and writings required to be
delivered or reasonably requested by either of them pursuant to this Agreement
in order to implement and effect the transactions contemplated herein.
Section 2.5 MECHANICS OF EXERCISE RELATING TO OPTIONAL CONVERTIBLE
DEBENTURE.
(a) DELIVERY OF THE OPTIONAL PURCHASE NOTICE. The Company may deliver
not more than four (4) written notices to the Investor (each notice hereinafter
referred to as an "Optional Purchase Notice") setting forth an Investment Amount
of not less than $500,000, in increments of $500,000, subject to the limitations
imposed by Sections 2.3 and 3.2 herein, which the Company must draw down within
the Commitment Period. Each Optional Purchase Notice shall be revocable within
three (3) Trading Days after delivery to the Investor at the Company's option.
The Company may not deliver an Optional Purchase Notice to the Investor if any
event described in Section 2.6 occurs or if the applicable conditions set forth
in Article III are not satisfied. If any of the events described in Section 2.6
occur on or after the date on which an Optional Purchase Notice is given, but
prior to the Optional Purchase Date associated with such Optional Purchase
Notice, or if the applicable conditions set forth in Section 2.3 or Article III
are not satisfied as of the applicable Closing Date (subject to any extension as
mutually agreed by the Company and the Investor), such Optional Purchase Notice
shall be null, void and of no further force or effect.
(b) DATE OF DELIVERY OF OPTIONAL PURCHASE NOTICE. An Optional Purchase
Notice shall be deemed delivered on (i) the Trading Day it is received by
facsimile or otherwise by the Investor if such notice is received prior to 5:00
P.M. Chicago time, or (ii) the immediately succeeding Trading Day if it is
received by facsimile or otherwise after 5:00 P.M. Chicago time. The Optional
Purchase Notice may not be delivered or deemed delivered, on a day which is not
a Trading Day.
Section 2.6 TERMINATION OR SUSPENSION OF INVESTMENT OBLIGATION. The
Investor shall not be required to purchase an Optional Convertible Debenture
from the Company on any Closing Date nor may the Optional Purchase Notice be
delivered if there shall exist, if applicable, any one or more of the following:
(i) the withdrawal of the effectiveness of the Registration Statement (as
defined in Section 6.4), (ii) the Company's failure to satisfy in all material
respects the requirements in Sections 2.3 and 3.2(a) or (b) as applicable, or
(iii) any failure or interruption in the compliance in all material respects
with the Company's covenants set forth in Article VI; PROVIDED, HOWEVER, that
the obligation of the Investor to purchase the Optional Convertible Debenture
shall be terminated (including with respect to a Closing Date which has not yet
occurred) in the event that (x) there shall occur any stop order or suspension
of the effectiveness of the Registration Statement, for any reason other than as
a result of subsequent corporate developments which would require such
Registration Statement to be amended to reflect such event in order to maintain
its compliance with the disclosure requirements of the Securities Act, or (y)
the Company shall at any time fail to comply with the requirements of Sections
6.3, 6.4, 6.5, 6.6, 6.7 or 6.8.
Section 2.7 TERMINATION OR SUSPENSION OF COMPANY'S OBLIGATION TO MAKE
PAYMENTS ON THE CONVERTIBLE DEBENTURES. If the Common Stock closes at $30 or
higher for
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twenty (20) consecutive Trading Days, as adjusted, without limitation, for any
stock splits or combinations, the Company's obligation to make interest payments
on the Convertible Debentures is terminated.
Section 2.8 CONVERSION; PREPAYMENT; REDEMPTION.
(a) CONVERSION.
(i) The Investor may, within the first six (6) months following
the Initial Closing Date, convert the Convertible Debentures then issued
into Common Stock at a price equal to $26 per share, as adjusted for any
stock splits or combinations (the "Fixed Conversion Price").
(ii) Beginning on the first day of the seventh month following
the Initial Closing Date, and at any time thereafter, the Investor may,
at its option, convert the Convertible Debentures then issued into
Common Stock at a price equal to the lesser of (i) the Fixed Conversion
Price or (ii) a price equal to 100% of the average of the three highest
of five lowest closing prices of the Common Stock during the Lookback
Period (the "Variable Conversion Price").
(b) PREPAYMENT; REDEMPTION.
(i) The Company may prepay the Convertible Debentures at any time
prior to maturity; PROVIDED, HOWEVER, that only a prepayment of the
entire principal amount and all accrued and unpaid interest owing on the
Convertible Debentures may be made and an Exit Fee (as defined in the
Convertible Debentures) shall be payable by the Company upon any such
prepayment in accordance with the terms of Paragraph 2 of the Convertible
Debentures.
(ii) If at any time during the term of a Convertible Debenture
the price per share of Common Stock has closed below the Redemption
Floor Price such Convertible Debenture for three (3) consecutive Trading
Days, the Company may elect to redeem all or part of such Convertible
Debenture, if the Investor subsequently issues a Conversion Notice and
converts such Convertible Debenture, at one hundred seven percent (107%)
of par, plus any accrued interest or unpaid dividends, by providing
written notice via facsimile to the Investor on the Trading Day
immediately following the third consecutive Trading Day that the Common
Stock has closed below the Redemption Floor Price, or such price per
share as adjusted, of its intent to redeem and the extent of the
redemption. Such written notice shall be valid and irrevocable for ten
(10) Trading Days and shall automatically expire at the end of such
10-day period.
Section 2.9 WARRANTS.
(a) On the Initial Closing Date, the Company will issue to the Investor
warrants, exercisable beginning on the eleventh (11th) Trading Day following the
Effective Date (the "Initial Warrants") and then exercisable at any time over
the following three year period, to purchase an
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aggregate number of shares of Common Stock equal to the face amount of the
Convertible Debenture being simultaneously issued, multiplied by 5%, and divided
by the average closing price for the immediately preceeding five (5) Trading
Days before such exercise (the "Warrant Formula"), at an exercise price equal to
the average closing price for the five (5) Trading Days immediately preceeding
the relevant Closing Date (the "Exercise Price").
(b) If an Optional Purchase Notice is given in accordance with Section
2.5, the Investor, upon receipt of an Optional Convertible Debenture, shall be
issued warrants ("Optional Warrants," together with the Initial Warrants, the
"Warrants"), first exercisable on the eleventh (11th) Trading Day following the
Effective Date or, if such date has passed, on an Optional Purchase Date, and
then exercisable at any time over the following three year period, to purchase
an aggregate number of shares of Common Stock as calculated by the Warrant
Formula, at an exercise price equal to the Exercise Price. The Warrants shall be
in form and substance similar to that warrant which is attached hereto as
EXHIBIT B.
The shares of Common Stock to be issued upon exercise of the Warrants shall be
registered for resale on the Registration Statement referenced in Section 6.4
herein. The resale by the Investor of Common Stock issuable upon exercise of the
Warrants shall be subject to a registration rights agreement (the "Registration
Rights Agreement") to be entered into between the Company and the Investor on
the Initial Closing Date. The Registration Rights Agreement shall be in form and
substance similar to that agreement which is attached hereto as EXHIBIT C.
The Company agrees that a breach of its obligations under this Section 2.9 could
cause the Investor irreparable injury and that monetary damages may not be an
adequate remedy for any such breach. In the event of a breach or threatened
breach by the Company of this Section 2.9, the Company agrees that the Investor
is entitled to equitable relief in any court of competent jurisdiction,
including the remedy of specific performance, in addition to all other remedies
available to the Investor at law or in equity. Notwithstanding anything to the
contrary set forth herein, in the event that the Investor is not obligated to
purchase an Optional Convertible Debenture by reason of the failure of the
Company to satisfy the conditions set forth in Section 2.3 and 3.2 herein, as
applicable, the Company shall be relieved of its obligation to issue the
additional warrants pursuant to Section 2.9(b).
ARTICLE III
CONDITIONS TO CLOSING
Section 3.1 CONDITIONS PRECEDENT TO THE OBLIGATIONS TO ISSUE AND SELL
DEBENTURES BY THE COMPANY AND TO PURCHASE DEBENTURES BY THE INVESTOR.
(a) CONDITIONS PRECEDENT TO COMPANY'S OBLIGATION. The obligation
hereunder of the Company to issue and sell the Initial Convertible Debenture and
the Optional Convertible Debentures to the Investor incident to each Closing is
subject to the satisfaction, at or before each such Closing, of each of the
conditions set forth below:
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(i) ACCURACY OF THE INVESTOR'S REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Investor shall be true and
correct in all material respects as of the date of this Agreement and as
of the date of each Closing as though made at each such time.
(ii) PERFORMANCE BY THE INVESTOR. The Investor shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Investor at or prior to
such Closing.
(iii) NO INJUNCTION. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of
competent jurisdiction which, in the reasonable opinion of the Company
and its legal counsel, prohibits or materially adversely affects any of
the transactions contemplated by this Agreement, and no proceeding shall
have been commenced which may have the effect of prohibiting or
materially adversely affecting any of the transactions contemplated by
this Agreement.
(b) CONDITIONS PRECEDENT TO THE INVESTOR'S OBLIGATIONS. The obligation
hereunder of the Investor to purchase the Initial Convertible Debenture and the
Optional Convertible Debentures is subject to the satisfaction, at or before
each Closing Date, of each of the conditions set forth below:
(i) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company shall be true and correct
in all material respects as of each Closing Date as though made at such
time with respect to all periods, and as to all events and circumstances
occurring or existing to and including such Closing Date.
(ii) PERFORMANCE BY THE COMPANY. The Company shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the
each Closing Date.
(iii) NO INJUNCTION. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of
competent jurisdiction which prohibits or materially adversely affects
any of the transactions contemplated by this Agreement, and no
proceeding shall have been commenced which may have the effect of
prohibiting or materially adversely affecting any of the transactions
contemplated by this Agreement.
(iv) ADVERSE CHANGES. Since December 31, 1997, no event which had
or is reasonably likely to have a Material Adverse Effect has occurred.
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(v) LEGAL OPINIONS. The Company shall have caused to be delivered
to the Investor an opinion of the Company's independent counsel in form
and substance reasonably acceptable to the Investor and its counsel.
(vi) OFFICER'S CERTIFICATE. The Company shall have delivered to
the Investor a certificate dated as of each Closing Date executed by an
executive officer of the Company and to the effect that all the
conditions to such Closing have been satisfied as at the date of each
such certificate.
(vii) OTHER. The Investor shall have received and been reasonably
satisfied with such other certificates and documents as shall have been
reasonably requested by the Investor in order for the Investor to
confirm the Company's satisfaction of the conditions set forth in this
Agreement.
Section 3.2 CONDITIONS PRECEDENT TO THE RIGHT OF THE COMPANY TO DELIVER
AN OPTIONAL PURCHASE NOTICE AND THE OBLIGATION OF THE INVESTOR TO PURCHASE AN
OPTIONAL CONVERTIBLE DEBENTURE.
(a) DELIVERY OF AN OPTIONAL PURCHASE NOTICE PRIOR TO REGISTRATION. If
delivery of an Optional Purchase Notice by the Company occurs prior to the
Company's obligation to have the Registration Statement (as defined in Section
6.4) declared effective pursuant to Section 6.4, the right of the Company to
deliver an Optional Purchase Notice and the obligation of the Investor hereunder
to acquire and pay for an Optional Convertible Debenture is subject to the
satisfaction, on the date of delivery of such applicable Optional Purchase
Notice and on the applicable Closing Date (the "Condition Satisfaction Date") of
each of the following conditions:
(i) CONDITIONS PRECEDENT OF SECTION 3.1(B). The conditions
precedent listed in Section 3.1(b) shall have been satisfied.
(ii) NO SUSPENSION OF TRADING IN OR DELISTING OF COMMON STOCK.
The trading of the Common Stock shall not have been suspended by the
SEC, the Principal Market or NASD and the Common Stock shall have been
approved for listing or quotation on and shall not have been delisted
from the Principal Market. The issuance of such Optional Convertible
Debenture shall not violate the shareholder approval requirements of the
Principal Market.
(b) DELIVERY OF AN OPTIONAL PURCHASE NOTICE SUBSEQUENT TO REGISTRATION.
If delivery of an Optional Purchase Notice by the Company occurs subsequent to
the Company's obligation to have the Registration Statement (as defined in
Section 6.4) declared effective, the right of the Company to deliver an Optional
Purchase Notice and the obligation of the Investor hereunder to acquire and pay
for an Optional Convertible Debenture is subject to the satisfaction, on the
date of delivery of such Optional Purchase Notice and on the applicable Closing
Date of each of the following conditions:
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(i) CONDITIONS PRECEDENT OF SECTION 3.2(A). The conditions
precedent listed in Section 3.2(a) shall have been satisfied.
(ii) EFFECTIVE REGISTRATION STATEMENT. The Registration Statement
shall have previously become effective and shall remain effective on the
Optional Purchase Date and for so long as the Investor holds the
Convertible Debentures or Common Stock and (i) neither the Company nor
the Investor shall have received notice that the SEC has issued or
intends to issue a stop order with respect to the Registration Statement
or that the SEC otherwise has suspended or withdrawn the effectiveness
of the Registration Statement, either temporarily or permanently, or
intends or has threatened to do so, and (ii) no other suspension of the
use of the Registration Statement or prospectus shall exist pursuant to
the Registration Rights Agreement.
(iii) DUE DILIGENCE. No dispute between the Company and the
Investor shall reasonably exist pursuant to Section 3.3 as to the
adequacy of the disclosures contained in the Registration Statement.
(iv) TIMELY ISSUANCE OF COMMON STOCK UPON CONVERSION. The Company
shall have issued all shares of Common Stock for which it theretofore
shall have received appropriate Conversion Notices from the Investor.
Section 3.3 DUE DILIGENCE REVIEW. The Company shall make available for
inspection and review by the Investor, advisors to and representatives of the
Investor (who may or may not be affiliated with the Investor), any underwriter
participating in any disposition of Common Stock on behalf of the Investor
pursuant to the Registration Statement, any such registration statement or
amendment or supplement thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
of the Registration Statement for the sole purpose of enabling the Investor and
such representatives, advisors and underwriters and their respective accountants
and attorneys to conduct initial and ongoing due diligence with respect to the
Company to confirm the accuracy of the Registration Statement.
The Company shall not disclose non-public information to the Investor,
advisors to or representatives of the Investor unless prior to disclosure of
such information the Company identifies such information as being non-public
information and provides the Investor and such advisors and representatives with
the opportunity to accept or refuse to accept such non-public information for
review. The Company may, as a condition to disclosing any non-public information
hereunder, require the Investor's advisors and representatives to enter into a
confidentiality agreement in form reasonably satisfactory to the Company and the
Investor.
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Nothing herein shall require the Company to disclose non-public
information to the Investor, its respective advisors or representatives, and the
Company represents that it does not disseminate non-public information to any
investor who purchases stock in the Company in a public offering, to money
managers or to securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
immediately notify the advisors and representatives of the Investor and
underwriters, if any, of any event or the existence of any circumstance (without
any obligation to disclose the specific event or circumstance) of which it
becomes aware, constituting non-public information (whether or not requested of
the Company specifically or generally during the course of due diligence by such
persons or entities), which, if not disclosed in the prospectus included in the
Registration Statement would cause such prospectus to include a material
misstatement or to omit a material fact required to be stated therein in order
to make the statements therein, in light of the circumstances in which they were
made, not misleading. Nothing contained in this Section 3.3 shall be construed
to mean that such persons or entities other than the Investor (without the
written consent of the Investor prior to disclosure of such information) may not
obtain non-public information in the course of conducting due diligence in
accordance with the terms of this Agreement and nothing herein shall prevent any
such persons or entities from notifying the Company of their opinion that based
on such due diligence by such persons or entities, that the Registration
Statement contains an untrue statement of a material fact or omits a material
fact required to be stated in the Registration Statement or necessary to make
the statements contained therein, in light of the circumstances in which they
were made, not misleading; provided, however, that in no event shall the
Investor's advisors or representatives disclose to the Investor the nature of
the specific event or circumstances constituting any non-public information
discovered by such advisors or representatives in the course of their due
diligence (without the written consent of the Investor prior to disclosure of
such information).
The Investor's advisors or representatives shall make complete
disclosure to the Investor's independent counsel of all events or circumstances
constituting non-public information discovered by such advisors or
representatives in the course of their due diligence upon which such advisors or
representatives form the opinion that the Registration Statement contains an
untrue statement of a material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the statements
contained therein, in the light of the circumstances in which they were made,
not misleading. Upon receipt of such disclosure, the Investor's independent
counsel shall consult with the Company's independent counsel in order to address
the concern raised as to the existence of a material misstatement or omission
and to discuss appropriate disclosure with respect thereto. In the event after
such consultation the Investor's independent counsel believes that the
Registration Statement contains an untrue statement of a material fact or omits
a material fact required to be stated in the Registration Statement or necessary
to make the statements contained therein, in light of the circumstances in which
they were made, not misleading, (x) the Company shall file with the SEC an
amendment to the Registration Statement responsive to such alleged untrue
statement or omission and provide the Investor, as promptly as practicable with
copies of the Registration Statement and related prospectus, as so amended, (y)
if the Company disputes the existence of any such material misstatement or
omission, (i) the Company's independent counsel shall provide the Investor's
independent counsel with an opinion stating that nothing has come to their
attention that would lead them to believe that the Registration Statement or the
related
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prospectus, as of the date of such opinion contains an untrue statement of a
material fact or omits a material fact required to be stated in the Registration
Statement or the related prospectus or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading and (ii) in the event the dispute relates to the adequacy of
financial disclosure and the Investor shall reasonably request, the Company's
independent auditors shall provide to the Company a letter outlining the
performance of such "agreed upon procedures" as shall be reasonably requested by
the Investor and the Company shall provide the Investor with a copy of such
letter, or (z) if the Company disputes the existence of any such material
misstatement or omission, and the dispute relates to the timing of disclosure of
a material event and the Company's independent counsel is unable to provide the
opinion referenced in clause (y) above to the Investor, then this Agreement
shall be suspended for a period of up to thirty (30) days, at the end of which,
if the dispute still exists between the Company's independent counsel and the
Investor's independent counsel, the Company shall either (i) amend the
Registration Statement as provided above, (ii) provide to the Investor the
Company's independent counsel opinion and a copy of the letter of the Company's
independent auditors referenced above, or (iii) this Agreement shall be
suspended for an additional period of up to thirty (30) days; provided, however,
that at the end of such sixty (60) day period, if the dispute still exists
between the Company's independent counsel and the Investor's independent
counsel, the Company shall either (i) amend the Registration Statement as
provided above, (ii) provide the Company's independent counsel opinion
referenced above, or (iii) the obligation of the Investor to purchase the
Convertible Debentures or shares of Common Stock pursuant to this Agreement
shall terminate.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF INVESTOR
The Investor represents and warrants to the Company that:
Section 4.1 INTENT. The Investor (which for purposes of this Article IV
shall include each beneficial owner of the Common Stock and the Convertible
Debentures, as determined pursuant to Rule 13d-3 under the Exchange Act) is
entering into this Agreement for its own account and the Investor has no present
arrangement (whether or not legally binding) at any time to sell the Convertible
Debentures or Common Stock to or through any person or entity; provided,
however, that by making the representations herein, the Investor does not agree
to hold the Convertible Debentures or Common Stock for any minimum or other
specific term and reserves the right to dispose of the Convertible Debentures or
Common Stock at any time in accordance with federal and state securities laws
applicable to such disposition.
Section 4.2 SOPHISTICATED AND ACCREDITED INVESTOR. The Investor is a
sophisticated Investor (as described in Rule 506(b)(2)(ii) of Regulation D) and
an accredited Investor (as defined in Rule 501 of Regulation D), and the
Investor has such experience in business and financial matters that it is
capable of evaluating the merits and risks of an investment in Convertible
Debentures or Common Stock. The Investor acknowledges that an investment in the
Convertible Debentures or Common Stock is speculative and involves a high degree
of risk. The Investor acknowledges that the Convertible Debentures to be issued
pursuant to this Agreement are
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"restricted securities" within the meaning of the Securities Act and the rules
and regulations promulgated thereunder and may not be resold in the absence of
an effective registration statement under the Securities Act or an available
exemption from the Securities Act registration requirements.
Section 4.3 AUTHORITY. This Agreement has been duly authorized and
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
Section 4.4 NOT AN AFFILIATE. The Investor is not an officer, director
or "affiliate" (as that term is defined in Rule 405 of the Securities Act) of
the Company.
Section 4.5 ORGANIZATION AND STANDING. The Investor represents and
warrants that it is a limited liability company duly organized, validly
existing, and in good standing under the laws of Illinois.
Section 4.6 ABSENCE OF CONFLICTS. The execution and delivery of this
Agreement and any other document or instrument executed in connection herewith,
and the consummation of the transactions contemplated thereby, and compliance
with the requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on the Investor, or
the provision of any indenture, instrument or agreement to which the Investor is
a party or is subject, or by which the Investor or any of its assets is bound,
or conflict with or constitute a material default thereunder, or result in the
creation or imposition of any lien pursuant to the terms of any such indenture,
instrument or agreement, or constitute a breach of any fiduciary duty owed by
the Investor to any third party, or require the approval of any third-party
(which has not been obtained) pursuant to any material contract, agreement,
instrument, relationship or legal obligation to which the Investor is subject or
to which any of its assets, operations or management may be subject.
Section 4.7 DISCLOSURE; ACCESS TO INFORMATION. The Investor has received
all documents, records, books and other information pertaining to Investor's
investment in the Company that have been requested by the Investor. The Investor
further acknowledges that it understands that the Company is subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the Investor has reviewed or received copies
of any such reports that have been requested by it.
Section 4.8 MANNER OF SALE. At no time was the Investor presented with
or solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Investor that:
Section 5.1 COMPANY STATUS. The Company has registered its Common Stock
pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company has
maintained all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. As of the date hereof, the Principal Market is the NASDAQ Small-Cap
Market.
Section 5.2 CURRENT PUBLIC INFORMATION. The Company has furnished the
Investor with true and correct copies of all registration statements, reports
and documents, including proxy statements (other than preliminary proxy
statements), filed with the SEC by or with respect to the Company since December
31, 1996, pursuant to the Securities Act or Exchange Act. All such registration
statements, reports and documents, together with those registration statements,
reports and documents filed pursuant to the Securities Act or Exchange Act
subsequent to the date of this Agreement are collectively referred to herein as
the "SEC Documents").
Section 5.3 NO GENERAL SOLICITATION IN REGARD TO THIS TRANSACTION.
Neither the Company nor any of its affiliates nor any distributor or any person
acting on its or their behalf has conducted any general solicitation (as that
term is used in Rule 502(c) of Regulation D) with respect to any of the Common
Stock, nor have they made any offers or sales of any security or solicited any
offers to buy any security under any circumstances that would require
registration of the Common Stock under the Securities Act.
Section 5.4 VALID ISSUANCE OF DEBENTURES AND STOCK.
(a) All of the outstanding shares of Common Stock of the Company have
been duly and validly authorized and issued and are fully paid and
nonassessable. As of the date of this Agreement, the Company has authorized
capitalization consisting of 25,000,000 shares of Common Stock, par value $.001
per share, 5,000,000 shares of Preferred Stock, par value $.001 per share, and
1,000,000 shares of Series A Preferred Stock, par value $.001 per SHARE. Stock
options granted or reserved for issuance to employees and directors of the
Company are as described in Schedule 5.4. As of April 29, 1998, there were
issued and outstanding 4,732,328 shares of Common Stock. As of the date of this
Agreement, the Company has no other capital stock issued and outstanding and no
other outstanding securities convertible into Common Stock other than as set
forth in Schedule 5.4.
(b) The Convertible Debentures have been duly authorized and, when
issued in accordance with this Agreement, will be validly issued 8% Convertible
Debentures, with no personal liability attaching to the ownership thereof.
Additionally, the Convertible Debentures will be free and clear of all liens,
charges, restrictions, claims and encumbrances imposed by or through the Company
except as set forth in the Registration Rights Agreement and the holders of
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outstanding Common Stock of the Company are not and shall not be entitled to
preemptive or other rights afforded by the Company to subscribe for the capital
stock or other securities of the Company as a result of the issuance or
conversion of the Convertible Debentures or issuance or exercise of the Warrants
to the Investor hereunder.
(c) Upon conversion of the Convertible Debentures, or the exercise of
the Warrants, in accordance with the terms and conditions of this Agreement,
such Common Stock will be duly and validly issued, fully paid and nonassessable.
Section 5.5 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly incorporated and existing in good standing under the laws of the State of
Texas and has the requisite corporate power to own its properties and to carry
on its business as now being conducted. Except as disclosed in Schedule 5.5, the
Company does not have any subsidiaries. The Company and each subsidiary is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, other than those in which the
failure so to qualify would not have a Material Adverse Effect.
Section 5.6 AUTHORIZATION; ENFORCEMENT. (i) The Company has the
requisite corporate power and authority to enter into and perform this Agreement
and to issue the Convertible Debentures and the Warrants, (ii) the execution,
issuance and delivery of this Agreement by the Company and the consummation by
it of the transactions contemplated hereby have been duly authorized by all
necessary corporate action and no further consent or authorization of the
Company or its Board of Directors or shareholders is required, and (iii) this
Agreement has been duly executed and delivered by the Company and constitutes
valid and binding obligations of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, or similar laws relating to, or affecting
generally the enforcement of, creditors' rights and remedies or by other
equitable principles of general application.
Section 5.7 CORPORATE DOCUMENTS. The Company has furnished or made
available or will furnish and make available prior to the Initial Closing Date
to the Investor true and correct copies of the Company's Articles of
Incorporation, as amended and in effect on the date hereof (the "Articles"), and
the Company's By-Laws, as amended and in effect on the date hereof (the
"By-Laws").
Section 5.8 NO CONFLICTS. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby, including without limitation the issuance of
the Convertible Debentures and the Warrants do not and will not (i) result in a
violation of the Company's Articles of Incorporation or By-Laws or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, or (iii)
result in a violation of any federal, state, local or foreign law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations)
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applicable to the Company or any of its subsidiaries or by which any property or
asset of the Company or any of its subsidiaries is bound or affected (except for
such conflicts, defaults, terminations, amendments, accelerations, cancellations
and violations as would not, individually or in the aggregate, have a Material
Adverse Effect); nor is the Company otherwise in violation of, in conflict with
or in default under any of the foregoing; provided that, for purposes of the
Company's representations and warranties as to violations of foreign law, rule
or regulation referenced in clause (iii), such representations and warranties
are made only to the best of the Company's knowledge insofar as the execution,
delivery and performance of this Agreement by the Company and the consummation
by the Company of the transactions contemplated hereby are or may be affected by
the status of the Investor under or pursuant to any such foreign law, rule or
regulation). The business of the Company is not being conducted in violation of
any law, ordinance or regulation of any governmental entity, except for possible
violations which either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Convertible Debentures or the Warrants in
accordance with the terms hereof (other than any SEC, NASD or state securities
filings which may be required to be made by the Company subsequent to any
Closing, and any registration statement which may be filed pursuant hereto;
provided that, for purposes of the representation made in this sentence, the
Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investor herein.
SECTION 5.9 SEC DOCUMENTS. The Company has delivered or made available
to the Investor true and complete copies of the SEC Documents (including,
without limitation, proxy information and solicitation materials). As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and
rules and regulations of the SEC promulgated thereunder and other federal, state
and local laws, rules and regulations applicable to such SEC Documents, and none
of the SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of the Company included
in the SEC Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements) and fairly present
in all material respects the financial position of the Company as of the dates
thereof and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
Section 5.10 NO MATERIAL ADVERSE EFFECT. Since December 31, 1997, no
Material Adverse Effect has occurred or exists with respect to the Company or
its subsidiaries.
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Section 5.11 NO UNDISCLOSED LIABILITIES. The Company and its
subsidiaries have no liabilities or obligations which are material, individually
or in the aggregate, and are not disclosed in the SEC Documents or otherwise
publicly announced, other than those incurred in the ordinary course of the
Company's or its subsidiaries' respective businesses since the filing of the
Company's most recent SEC Document, and which, individually or in the aggregate,
do not or would not have a Material Adverse Effect on the Company and upon any
and its subsidiaries.
Section 5.12 NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since the filing of
the Company's most recent SEC Document, no event or circumstance has occurred or
exists with respect to the Company or its subsidiaries or their respective
businesses, properties, prospects, operations or financial condition, which,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the SEC Documents.
Section 5.13 NO INTEGRATED OFFERING. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, other than pursuant to this Agreement, under circumstances
that would require registration of the Convertible Debentures under the
Securities Act.
Section 5.14 LITIGATION AND OTHER PROCEEDINGS. Except as may be set
forth on Schedule 5.14 and in the SEC Documents, there are no lawsuits or
proceedings pending or to the best knowledge of the Company threatened, against
the Company, nor has the Company received any written or oral notice of any such
action, suit, proceeding or investigation, which could reasonably be expected to
have a Material Adverse Effect on the Company or which could reasonably be
expected to materially adversely affect the transactions contemplated by this
Agreement. Except as set forth in the SEC Documents no judgment, order, writ,
injunction or decree or award has been issued by or, so far as is known by the
Company, requested of any court, arbitrator or governmental agency which could
reasonably be expected to result in a Material Adverse Effect on the Company or
which could reasonably be expected to materially adversely affect the
transactions contemplated by this Agreement.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1 REGISTRATION RIGHTS. The Registration Rights Agreement shall
remain in full force and effect and the Company shall comply in all respects
with the terms thereof.
Section 6.2 RESERVATION OF COMMON STOCK. As of the date hereof, the
Company has reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, shares of Common Stock for
the purpose of enabling the Company to satisfy any obligation to issue shares of
its Common Stock incident to the conversion of the Convertible Debentures and
incident to the exercise of the Warrants; such amount of shares of Common Stock
to be reserved to be calculated based upon the minimum conversion price therefor
under the terms
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of this Agreement, and assuming the full exercise of the Warrants. The number of
shares so reserved from time to time, as theretofore increased or reduced as
hereinafter provided, may be reduced by the number of shares actually delivered
hereunder and the number of shares so reserved shall be increased to reflect (a)
potential increases in the Common Stock which the Company may thereafter be so
obligated to issue by reason of adjustments to the purchase price therefor and
the issuance of the Warrants and (b) stock splits and stock dividends and
distributions.
Section 6.3 LISTING OF COMMON STOCK. The Company hereby agrees to
maintain the listing of the Common Stock on a Principal Market, and as soon as
practicable but in any event prior to the commencement of the Commitment Period
to list the additional shares of Common Stock issuable under this Agreement
(including Common Stock issuable upon conversion of the Convertible Debentures
and exercise of the Warrants). The Company further agrees, if the Company
applies to have the Common Stock traded on any other Principal Market, it will
include in such application the Common Stock issuable under this Agreement
(including Common Stock issuable upon conversion of the Convertible Debentures
and exercise of the Warrants), and will take such other action as is necessary
or desirable to cause the Common Stock to be listed on such other Principal
Market as promptly as possible.
Section 6.4 REGISTRATION OF THE COMMON STOCK WITH THE SEC. Within ninety
(90) days following the Initial Closing Date, a registration statement on Form
S-3 or otherwise appropriate form (the "Registration Statement") for the
registration of the resale by the Investor of Common Stock to be issued upon
conversion of the Convertible Debentures and upon exercise of the Warrants under
the Securities Act shall have been declared effective by the SEC and no stop
order or suspension or withdrawal of the effectiveness of or with respect to any
such registration statement or any other suspension of the use of any such
registration statement or related prospectus shall have been issued by the SEC
or any state securities commission as long as the Registration Rights Agreement
is in effect; the Company shall be in compliance in all material respects with
the terms of the Registration Rights Agreement.
Section 6.5 LEGAL OPINIONS. The Company shall have caused to be
delivered to the Investor, (i) within five (5) Trading Days prior to the
Effective Date of the Registration Statement and (ii) to the extent provided by
Section 3.3, an opinion of the Company's independent counsel in form and
substance reasonably acceptable to the Investor and their counsel, addressed to
the Investor stating, inter alia, that, subject to such qualifications relating
to the absence of independent inquiry and to such counsel's actual knowledge as
are contained in the opinion delivered to the Investor by counsel to the Company
on the Initial Closing Date, nothing shall have come to such counsel's attention
that causes such counsel to believe that the Registration Statement (if
applicable, as amended to the date thereof) contains an untrue statement of
material fact or omits a material fact required to make the statements contained
therein, not misleading or that the underlying prospectus (if applicable, as so
amended or supplemented) contains an untrue statement of material fact or omits
a material fact required to make the statements contained therein, in light of
the circumstances in which they were made, not misleading, except with respect
to the financial statements and the notes thereto and the schedules and other
financial and statistical data derived therefrom in the Registration Statement
or the Prospectus, as to which such counsel shall express no opinion; provided,
however, that in the event that such an opinion cannot be delivered by the
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Company's independent counsel to the Investor, the Company shall promptly revise
the Registration Statement and shall not deliver an Optional Purchase Notice.
The Company's independent counsel shall also deliver to the Investor on the
Initial Closing Date an opinion in form and substance satisfactory to the
Investor and its counsel addressing, among other things, corporate matters and
the exemption from registration under the Securities Act of the issuance of the
Initial Convertible Debenture by the Company to the Investor under this
Agreement.
Section 6.6 EXCHANGE ACT REGISTRATION. The Company will cause its Common
Stock to continue to be registered under Section 12(g) or 12(b) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
said Act, and will not take any action or file any document (whether or not
permitted by said Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said Act. The Company will take all action to continue the listing and
trading of its Common Stock on the Principal Market and will comply in all
respects with the Company's reporting, filing and other obligations under the
bylaws or rules of the NASD and the Principal Market.
Section 6.7 LEGENDS. The certificates evidencing the Common Stock to be
issued to the Investor upon the conversion of the Convertible Debentures and the
exercise of the Warrants, subject to the continued effectiveness of the
appropriate registration statement, shall be free of legends, so-called "stop
transfer," or "stock transfer restrictions," or other restrictions upon transfer
by the Investor to a bona fide third party which is not an affiliate of the
Company. Notwithstanding the absence of such legends or restrictions, the
Investor agrees to comply with Securities Act prospectus delivery requirements
in any sale of Common Stock not made in compliance with Rule 144 or another
available exemption. Immediately following the Effective Date, the Investor
shall have the right to surrender the Convertible Debentures in exchange for
certificates free of legends, "stop transfer" or "stock transfer restrictions,"
or other restrictions upon transfer, and the Company agrees to perform whatever
acts are reasonably necessary to facilitate such exchange on a timely basis.
Section 6.8 CORPORATE EXISTENCE. The Company will take all steps
necessary to preserve and continue the corporate existence of the Company.
Section 6.9 ADDITIONAL SEC DOCUMENTS. The Company will furnish to the
Investor upon request copies of all SEC Documents furnished or submitted to the
SEC.
Section 6.10 "BLACKOUT PERIOD". (a) The Company will immediately notify
the Investor upon the occurrence of any of the following events in respect of a
registration statement or related prospectus in respect of an offering of Common
Stock Securities; (i) receipt of any request for additional information by the
SEC or any other federal or state governmental authority during the period of
effectiveness of the registration statement for amendments or supplements to the
registration statement or related prospectus; (ii) the issuance by the SEC or
any other federal or state governmental authority of any stop order suspending
the effectiveness of the registration statement or the initiation of any
proceedings for that purpose; (iii) receipt of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Common Stock for sale in any jurisdiction or the initiation or threatening
of any proceeding for
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such purpose; (iv) the happening of any event which makes any statement made in
the registration statement or related prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
which requires the making of any changes in the registration statement, related
prospectus or documents so that, in the case of the registration statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (v) the Company's reasonable determination that a post-effective
amendment to the registration statement would be appropriate; and the Company
will promptly make available to the Investor any such supplement or amendment to
the related prospectus. The Company shall not deliver to the Investor any
Optional Purchase Notice during the continuation of any of the foregoing events.
Section 6.11 PENALTIES FOR FAILURE TO OBTAIN OR MAINTAIN EFFECTIVENESS
OF A REGISTRATION STATEMENT.
(a) In the event the Company fails to file a Registration Statement and
obtain the effectiveness of a Registration Statement within ninety (90) days
from the date hereof as set forth in Section 6.4, or the effectiveness of the
Registration Statement is suspended or a current prospectus meeting the
requirements of Section 10 of the Securities Act is not available for delivery
by the Investor (such suspension or failure of delivery is referred to herein as
a "suspension"), and such occurrence is not the result of any information
provided or failed to be provided by the Investor or some unforeseeable
catastrophe affecting the operation of the SEC, the Company shall pay to the
Investor within five (5) days following the end of the first 30-day period
following the date by which such Registration Statement was required to have
been declared effective, or following the date of suspension, in cash, an
aggregate amount equal to two percent (2%) of the principal amount of the
Convertible Debentures then outstanding, and for each 30-day period thereafter,
an aggregate amount equal to three (3%) of the principal amount of the
Convertible Debentures then outstanding. All amounts payable hereunder shall be
paid to the Investor by cashier's check or wire transfer in immediately
available funds to such account or accounts as shall be designated in writing by
the Investor.
(b) In the event the Company fails to obtain the effectiveness of a
Registration Statement within 180 days following the Initial Closing Date, the
Investor shall have a right to sell to the Company and the Company shall be
obligated to purchase from the Investor the Convertible Debentures at a price
equal to 107% of par plus accrued and unpaid dividends and penalties. In the
event the Investor exercises such rights of sale, the Company shall be obligated
to close the purchase of the Convertible Debentures within 15 days after receipt
of notice of such exercise.
Section 6.12 LEGAL FEES AND EXPENSES. The Company shall pay upon
demand or otherwise half of all reasonable legal fees and expenses incurred by
the Investor in connection with the transactions contemplated by this Agreement,
the Warrants and the Registration Rights Agreement, including without limitation
those incurred in connection with the negotiation, drafting, documentation and
closing thereof.
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ARTICLE VII
LEGENDS; INVESTOR COVENANTS
Section 7.1 LEGENDS. The Convertible Debentures and each Warrant will
bear the following legend (the "Legend"):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE
SECURITIES UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION
REQUIREMENTS.
Upon the execution and delivery hereof, the Company is issuing to the
transfer agent for its Convertible Debentures and Common Stock (and to any
substitute or replacement transfer agent for its Convertible Debentures and
Common Stock contemporaneous with the Company's appointment of any such
substitute or replacement transfer agent) irrevocable instructions. Such
instructions shall be irrevocable by the Company from and after the date hereof
or from and after the issuance thereof to any such substitute or replacement
transfer agent, as the case may be, except as otherwise expressly provided in
the Registration Rights Agreement. It is the intent and purpose of such
instructions, as provided therein, to require the transfer agent for the
Convertible Debentures and Common Stock from time to time upon transfer of the
Convertible Debentures and Common Stock by the Investor to issue certificates
evidencing Common Stock free of the Legend during the following periods and
under the following circumstances and without consultation by the transfer agent
with the Company or its counsel and without the need for any further advice or
instruction or documentation to the transfer agent by or from the Company or its
counsel or the Investor:
(a) At any time after the Effective Date: (i) incident to the conversion
of shares of the Convertible Debentures; (ii) incident to the exercise of any
Warrant; or (iii) upon any surrender of one or more certificates evidencing
Common Stock which bear the Legend, to the extent accompanied by a notice
requesting the issuance of new certificates free of the Legend to replace those
surrendered; and
(b) At any time upon any surrender of the Convertible Debentures or
Common Stock which bear the Legend, to the extent accompanied by a notice
requesting the issuance of new certificates free of the Legend to replace those
surrendered and containing representations that (i) the Investor has a bona fide
intention to dispose of such stock pursuant to Rule 144 under the Securities Act
or is otherwise permitted to dispose thereof without limitation as to amount or
manner of sale pursuant to Rule 144(k) under the Securities Act; or (ii) the
Investor has sold, pledged or otherwise transferred or agreed to sell, pledge or
otherwise transfer such stock in a manner other than pursuant to an effective
registration statement, to a transferee who will upon such transfer be entitled
to freely tradeable securities; provided that in connection with an event
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described in clause (i) or (ii), the transfer agent shall be entitled to receive
an opinion of counsel to the Investor that in such circumstances the Legend may
be removed and that the transferee (provided that such transferee is not an
affiliate of the Company) shall be entitled to hold freely tradable securities.
Section 7.2 NO OTHER LEGEND OR STOCK TRANSFER RESTRICTIONS. No Legend
has been or shall be placed on the Convertible Debentures and Common Stock and
no instructions or "stop transfers," so called, "stock transfer restrictions,"
or other restrictions have been or shall be given to the Company's transfer
agent with respect thereto other than as expressly set forth in this Article
VII.
Section 7.3 INVESTOR'S COMPLIANCE. Nothing in this Article VII shall
affect in any way the Investor's obligations under any agreement to comply with
all applicable securities laws upon resale of the Convertible Debentures and
Common Stock.
Section 7.4 COVENANTS OF THE INVESTOR. The Investor agrees that:
(a) any short sales made by the Investor with respect to Common
Stock will be (i) followed by a notice of conversion with respect to an
equivalent number of shares of Common Stock within five (5) Trading Days of such
short sale, and (ii) made in compliance with all applicable federal and state
securities laws; and
(b) the Investor shall enter into a Subordination Agreement in
form and substance similar to that Subordination Agreement attached hereto as
EXHIBIT D with the Company and the Company's senior secured lender at such time
as the Company proposes to obtain senior secured financing.
ARTICLE VIII
OTHER ISSUANCES OF COMMON STOCK
Section 8.1 ANTIDILUTION PROHIBITION. The Company may at any time during
the Commitment Period, issue shares of Common Stock to the Investor or any other
person without consideration (other than in the form of a dividend) or at a
price per share less than the daily low trading price on the date of issue,
issue options, rights or warrants to subscribe for or purchase Common Stock (or
securities convertible into Common Stock) without consideration or at a price
per share (or having a conversion price per share, if a security convertible
into Common Stock) less than the daily low trading price of the Common Stock on
the date of issue, or in the case of securities convertible into Common Stock
having a conversion price less than the daily low trading price of the Common
Stock on the date of issuance of such convertible security; PROVIDED, HOWEVER,
that the Company agrees to (a) adjust the Redemption Floor Price on all
outstanding Convertible Debentures to such price at which the Investor or such
other person has received Common Stock or may be entitled to receive Common
Stock, and (b) provide the Investor with prior written notice of any such
issuance.
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The foregoing provision shall not apply to the issuance of shares of Common
Stock which may be issued upon exercise of options under the Company's employee
or director stock option plans, upon the conversion or exchange of convertible
or exchangeable securities or upon the exercise of warrants, or other rights,
which options, convertible or exchangeable securities, warrants or other rights
are outstanding on the date of execution and delivery of this Agreement and are
described in Schedule 5.4.
ARTICLE IX
CHOICE OF LAW AND VENUE
Section 9.1 CHOICE OF LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT
SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW. The parties hereby agree that
all actions or proceedings arising directly or indirectly from or in connection
with this Agreement shall, at the option of either party, be litigated only in a
state or federal court located in the City of Chicago, Cook County, Illinois.
The parties consent to the jurisdiction and venue of the foregoing court and
consent that any process or notice of motion or other application to said court
or a judge thereof may be served inside or outside the State of Illinois by
registered mail, return receipt requested, directed to the party for which it is
intended at its address set forth in this Agreement (and service so made shall
be deemed complete five (5) days after the same has been posted as aforesaid) or
by personal service or in such other manner as may be permissible under the
rules of said court.
ARTICLE X
ASSIGNMENT; ENTIRE AGREEMENT, AMENDMENT; PUBLICITY
Section 10.1 ASSIGNMENT. Neither this Agreement nor any rights of the
Investor or the Company hereunder may be assigned by any party to any other
person. Notwithstanding the foregoing, (a) the provisions of this Agreement
shall inure to the benefit of, and be enforceable by, any transferee of any of
the Convertible Debentures and Common Stock purchased or acquired by the
Investor hereunder with respect to the Convertible Debentures and Common Stock
held by such person, and (b) the Investor's interest in this Agreement may be
assigned at any time, in whole or in part, to any other person or entity
(including any affiliate of the Investor) upon the prior written consent of the
Company, which consent shall not to be unreasonably withheld.
Section 10.2 ENTIRE AGREEMENT, AMENDMENT. This Agreement, the
Registration Rights Agreement, and the other documents delivered or to be
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subject hereof and thereof, and
no party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth in
this Agreement or therein. Except as expressly provided in this Agreement,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
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Section 10.3 PUBLICITY. The Company agrees that it will not disclose,
and will not include in any public announcement, the name of the Investor
without its consent, unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.
ARTICLE XI
NOTICES; COST AND EXPENSES; INDEMNIFICATION
Section 11.1 NOTICES. All notices, demands, requests, consents,
approvals or other communications required or permitted to be given hereunder or
which are given with respect to this Agreement shall be in writing and shall be
personally served or deposited in the mail, registered or certified, return
receipt requested, postage prepaid, or delivered by reputable air courier
service with charges prepaid, or transmitted by hand delivery, telegram, telex
or facsimile, addressed as set forth below, or to such other address as such
party shall have specified most recently by written notice:
(a) if to the Company, to: Telscape International, Inc.
2700 Post Oak Boulevard
Suite 1000
Houston, Texas 77056
Attention: Todd M. Binet, Executive
Vice President
Facsimile No.: (713) 968-0930
with a copy to: Gardere Wynne Sewell & Riggs, L.L.P.
333 Clay Avenue, Suite 800
Houston, Texas 77002-4086
Attention: Eric A. Blumrosen, Esq.
Facsimile No.: (713) 308-5555
(b) if to the Investor, to: Deere Park Capital Management, LLC 40
Skokie Boulevard, Suite 110
Northbrook, Illinois 60062
Attention: Douglas A. Gerrard,
President
Facsimile No.: (847) 509-8529
with copies to: Ungaretti & Harris
3500 Three First National Plaza
Chicago, Illinois 60602
Attention: Gary I. Levenstein, Esq.
Facsimile No.: (312) 977-4405
Notice shall be deemed given on the date of service or transmission if
personally served or transmitted by telegram, telex or facsimile. Notice
otherwise sent as provided herein shall be
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deemed given on the third business day following the date mailed or on the
second business day following delivery of such notice by a reputable air courier
service.
Section 11.2 INDEMNIFICATION.
(a) INDEMNIFICATION OF INVESTOR. The Company agrees to indemnify and
hold harmless the Investor and each person, if any, who controls the Investor
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement of
a material fact contained in the Registration Statement (or any
amendment thereto), including any prospectus, or in any offering
circular or other document, as applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statement therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
contained in any prospectus (or any amendment or supplement thereto), or
in any offering circular or other document, as applicable, or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
11.2(d) below) any such settlement is effected with the written consent
of the Company; and
(iii) against any and all expenses whatsoever, as incurred
(including the fees and disbursements of counsel chosen by the
Investor), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above; provided, however, that
this indemnity shall not apply to any loss, liability, claim, damage or
expense to the extent arising out of any untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in
conformity with written information furnished to the Company by the
Investor expressly for use in the Registration Statement (or any
amendment thereto), including any prospectus (or any amendment or
supplement thereto), or in any offering circular or other document, as
applicable.
(b) INDEMNIFICATION OF COMPANY. The Investor agrees to indemnify and
hold harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act against any and all loss, liability, claim, damage and expense described in
the indemnity contained in subsection (a) of this Section, as incurred, but only
25
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with respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the Registration Statement (or any amendment thereto),
including any prospectus (or any amendment or supplement thereto), or in
offering circular or other document, as applicable, in reliance upon and in
conformity with written information furnished to the Company by the Investor
expressly for use in the Registration Statement (or any amendment or supplement
thereto) or in any offering circular or other document, as applicable.
(c) ACTION AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 11.2(a) above,
counsel to the indemnified parties shall be selected by the Investor, and in the
case of parties indemnified pursuant to Section 11.2(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry or any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section or Section
11.3 hereof (whether or not the indemnified parties are actual or potential
parties thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of an any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT OR FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for the fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 11.2(a)(ii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
Section 11.3 CONTRIBUTION. If the indemnification provided for in
Section 11.2 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to herein, then each indemnifying party
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shall contribute to the aggregate amount of such losses, liabilities, claims,
damages and expenses incurred by such indemnified party, as incurred (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Investor on the other hand from the offering of
the Convertible Debentures pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
Investor on the other hand in connection with the statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Investor on the other hand in connection with the offering of the Common Stock
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Convertible
Debentures pursuant to this Agreement (before deducting expenses) received by
the Company and the total net proceeds received by the Investor (before
deducting expenses) bear to the aggregate public offering price.
The relative fault of the Company on the one hand and the Investor on
the other hand shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Investor and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Investor agree that it would not be just and
equitable if contribution pursuant to this Section 11.43were determined on a
pro-rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 11.3.
The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 11.3
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 11.3, the Investor shall
not be required to contribute any amount in excess of the amount by which the
total price at which the Convertible Debentures purchased by it and resold to
the public exceeds the amount of any damages which the Investor have otherwise
been required to pay by reason of any such untrue or alleged untrue statement or
omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 11.3, each person, if any, who controls the
Investor within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act shall have the same
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rights to contribution as such Investor, and each director of the Company, each
officer of the Company who signed the Registration Statement, and each person,
if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Company.
ARTICLE XII
MISCELLANEOUS
Section 12.1 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which together shall constitute one instrument.
Section 12.2 SURVIVAL; SEVERABILITY. The representations, warranties,
covenants and agreements of the parties hereto shall survive each Closing
hereunder. The indemnity and contribution agreements contained in Sections 11.2
and 11.3 hereof shall remain operative and in full force and effect regardless
of (i) any termination of this Agreement or of the Commitment Period, (ii) any
investigation made by or on behalf of any indemnified party or by or on behalf
of the Company, and (iii) the consummation of the sale or successive resales of
the Common Stock. In the event that any provision of this Agreement becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
Section 12.3 TITLE AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
Section 12.4 REPORTING ENTITY FOR THE COMMON STOCK. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement shall
be Bloomberg L.P. or any other reputable pricing service chosen by the Investor
and reasonably acceptable to the Company.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date first
written above.
DEERE PARK CAPITAL MANAGEMENT, LLC
By:_______________________________
Its:______________________________
TELSCAPE INTERNATIONAL, INC.
By:_______________________________
Its:______________________________
29
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LIST OF EXHIBITS AND SCHEDULES
Exhibits
A Form of Convertible Debenture
B Form of Warrant
C Registration Rights Agreement
D Form of Subordination Agreement
SCHEDULES
5.4 List of Directors / Employees and stock options granted / reserved for
issuance
5.5 List of Subsidiaries
5.14 Litigation and Other Proceedings
30
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EXHIBIT A
[FORM OF CONVERTIBLE DEBENTURE]
31
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EXHIBIT B
[FORM OF WARRANT]
32
<PAGE>
EXHIBIT C
[REGISTRATION RIGHTS AGREEMENT]
33
<PAGE>
EXHIBIT D
[FORM OF SUBORDINATION AGREEMENT]
34
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SCHEDULE 5.4
[LIST OF DIRECTORS / EMPLOYEES WITH
COMMON STOCK EQUIVALENTS]
35
<PAGE>
SCHEDULE 5.5
[LIST OF SUBSIDIARIES]
36
<PAGE>
SCHEDULE 5.14
[LITIGATION AND OTHER PROCEEDINGS]
37
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of May
1, 1998 is made and entered into among TELSCAPE INTERNATIONAL, INC., a Texas
corporation (the "Company"), and DEERE PARK CAPITAL MANAGEMENT, LLC, an Illinois
limited liability company, (the "INVESTOR").
RECITALS:
A. The Company and the Investor have entered into that certain
Securities Purchase Agreement, dated of even date herewith (the "SECURITIES
PURCHASE AGREEMENT"), pursuant to which the Company will issue to the Investor
8% Convertible Subordinated Debentures, (the "CONVERTIBLE DEBENTURES"), for an
aggregate purchase price of up to $5,000,000.
B. Pursuant to the terms of, and in partial consideration for, the
Investor's agreement to enter into the Securities Purchase Agreement, the
Company has issued to the Investor Warrants of even date herewith, exercisable
from time to time during a three-year period commencing on the eleventh (11th)
Trading Day following the Effective Date, or if such date has passed, on the
Optional Purchase Date (as such terms are defined in the Securities Purchase
Agreement) (the "WARRANTS"), for the purchase of shares of Common Stock as
calculated by the Warrant Formula (as defined in the Securities Purchase
Agreement) at an exercise price equal to the average closing price of the five
(5) Trading Days immediately preceding the exercise.
C. Pursuant to the terms of, and in partial consideration for, the
Investor's agreement to enter into the Securities Purchase Agreement, the
Company has agreed to provide the Investor with certain registration rights with
respect to the Registrable Securities (as defined below).
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein, in the Convertible
Debentures, the Warrants and in the Securities Purchase Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.1. DEFINITIONS. Capitalized terms defined in the Securities
Purchase Agreement, the Convertible Debentures, or the Warrants shall have the
same meanings herein as are ascribed to them therein. In addition, the following
terms shall have the meanings ascribed below:
"REGISTRABLE SECURITIES" means all of the Common Stock and any other
securities issued or issuable upon conversion of the Convertible Debentures and
the exercise of the Warrants as provided therein until (i) a registration
statement under the Securities Act covering the offering
<PAGE>
of such securities has been declared effective by the SEC and such securities
have been disposed of pursuant to such effective registration statement, (ii)
such securities are sold under circumstances in which all of the applicable
conditions of Rule 144 (or any similar provision then in force) under the
Securities Act ("RULE 144") are met, (iii) such securities have been otherwise
transferred and the Company has delivered a new certificate or other evidence of
ownership for such securities not bearing a restrictive legend or (iv) such time
as, in the opinion of counsel to the Company, which counsel shall be reasonably
acceptable to the Investor, such securities may be sold without any time, volume
or manner limitation pursuant to Rule 144(k) (or any similar provision then in
effect) under the Securities Act.
"REGISTRATION STATEMENT" See Section 2.1 (a).
ARTICLE II
REGISTRATION RIGHTS
Section 2.1. REGISTRATION STATEMENTS.
(a) Subject to the terms and conditions of this Agreement and in
accordance with the provisions of Section 6.4 of the Securities Purchase
Agreement, the Company shall file with the SEC a registration statement on FORM
S-3 or otherwise appropriate form (the "Registration Statement") under the
Securities Act for the registration of the resale by the Investor of Common
Stock to be issued upon conversion of the Convertible Debentures and exercise of
the Warrants.
(b) The Registration Statement shall be declared effective by the SEC no
later than August 1, 1998 and shall remain in effect until such time as no
Registrable Securities remain unsold.
(c) In the event the Company fails to obtain the effectiveness of a
Registration Statement within the time period set forth in Section 2.1(b) or the
effectiveness of the Registration Statement is suspended or a current prospectus
meeting the requirements of Section 10 of the Securities Act is not available
for delivery by the Investor, and such occurrence is not the result of any
information provided or failed to be provided by the Investor or some
unforeseeable catastrophe affecting the operation of the SEC, the Company shall
pay to the Investor the amounts set forth in Section 6.11 of the Securities
Purchase Agreement.
ARTICLE III
REGISTRATION PROCEDURES
Section 3.1. FILINGS; INFORMATION. Whenever the Company is required to
effect or cause the registration of Registrable Securities pursuant to Section
2.1, the Company will use its best efforts to effect the registration of such
Registrable Securities in accordance with the intended method of disposition
thereof as quickly as practicable, and in connection with any such request:
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(a) The Company will as expeditiously as possible, prepare and file with
the SEC the Registration Statement and use its best efforts to cause such filed
Registration Statement to become as soon as possible and remain effective
(pursuant to Rule 415 under the Securities Act or otherwise), and the Company
will as expeditiously as possible prepare and file with the SEC such amendments
and supplements to such Registration Statement and the prospectus used in
connection therewith as may be necessary to keep such Registration Statement
effective for the time periods prescribed by Section 2.1(b) and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during such period in
accordance with the intended methods of disposition by the Investor set forth in
such Registration Statement.
(b) The Company will, prior to filing a Registration Statement or
prospectus or any amendment or supplement thereto (excluding amendments deemed
to result from the filing of documents incorporated by reference therein),
furnish to the Investor and one firm of counsel representing the Investor,
copies of such Registration Statement as proposed to be filed, together with
exhibits thereto, which documents will be subject to review by such parties, and
thereafter furnish to the Investor and its counsel for their review such number
of copies of such Registration Statement, each amendment and supplement thereto
(in each case including all exhibits thereto), the prospectus included in such
Registration Statement (including each preliminary prospectus) and such other
documents or information as the Investor or counsel may reasonably request in
order to facilitate the disposition of the Registrable Securities.
(c) After the filing of the Registration Statement, the Company will
promptly notify the Investor of any stop order issued or threatened by the SEC
that the Company has knowledge of in connection therewith and take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered.
(d) The Company will use its reasonable good faith efforts to (i)
register or qualify such Registrable Securities under such other securities or
blue sky laws of such jurisdictions in the United States as the Investor may
reasonably (in light of its intended plan of distribution) request, and (ii)
cause such Registrable Securities to be registered with or approved by such
other governmental agencies or authorities in the United States as may be
necessary by virtue of the business and operations of the Company and do any and
all other acts and things that may be reasonably necessary or advisable to
enable the Investor to consummate the disposition of the Registrable Securities;
provided that the Company will not be required to (A) qualify generally to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this paragraph (d), (B) subject itself to taxation in any such
jurisdiction or (C) consent or subject itself to general service of process in
any such jurisdiction.
(e) The Company will immediately notify the Investor upon the occurrence
of any of the following events in respect of a Registration Statement or related
prospectus in respect of an offering of Registrable Securities: (i) receipt of
any request for additional information by the SEC or any other federal or state
governmental authority during the period of effectiveness of the Registration
Statement for amendments or supplements to the Registration Statement or related
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prospectus; (ii) the issuance by the SEC or any other federal or state
governmental authority of any stop order suspending the effectiveness of the
Registration Statement or the initiation of any proceedings for that purpose;
(iii) receipt of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose that the Company has knowledge of; (iv) the
happening of any event which makes any statement made in the Registration
Statement or related prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or which
requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of the Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (vi) the Company's reasonable determination that a
post-effective amendment to the Registration Statement would be appropriate; and
the Company will promptly make available to the Investor any such supplement or
amendment to the related prospectus.
(f) The Company will enter into customary agreements and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of such Registrable Securities (the Investor may, at its option,
require that any or all of the representations, warranties and covenants of the
Company also be made to and for the benefit of the Investor).
(g) The Company will make available to the Investor (and will deliver to
Investor's counsel), subject to restrictions imposed by the United States
federal government or any agency or instrumentality thereof, copies of all
correspondence between the SEC and the Company, its counsel or auditors and will
also make available for inspection by the Investor and any attorney, accountant
or other professional retained by the Investor (collectively, the "INSPECTORS"),
all financial and other records, pertinent corporate documents and properties of
the Company (collectively, the "RECORDS") as shall be reasonably necessary to
enable it to exercise its due diligence responsibility, and cause the Company's
officers and employees to supply all information reasonably requested by any
Inspectors in connection with such Registration Statement. Records which the
Company determines, in good faith, to be confidential and which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (i)
the disclosure of such Records is necessary to avoid or correct a misstatement
or omission in such Registration Statement or (ii) the disclosure or release of
such Records is requested or required pursuant to oral questions,
interrogatories, requests for information or documents or a subpoena or other
order from a court of competent jurisdiction or other process; provided that
prior to any disclosure or release pursuant to clause (ii), the Inspectors shall
provide the Company with prompt notice of any such request or requirement so
that the Company may seek an appropriate protective order or waive such
Inspectors' obligation not to disclose such Records; and, provided further, that
if failing the entry of a protective order or the waiver by the Company
permitting the disclosure or release of such Records, the Inspectors, upon
advice of counsel, are compelled to disclose such Records, the Inspectors may
disclose that portion of the Records which counsel has advised the Inspectors
that the Inspectors are compelled to disclose. The Investor agrees that
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information obtained by them solely as a result of such inspections (not
including any information obtained from a third party who, insofar as is known
to the Investor after reasonable inquiry, is not prohibited from providing such
information by a contractual, legal or fiduciary obligation to the Company)
shall be deemed confidential and shall not be used by it as the basis for any
market transactions in the securities of the Company or its Affiliates unless
and until such information is made generally available to the public. The
Investor further agrees that they will, upon learning that disclosure of such
Records is sought in a court of competent jurisdiction, give notice to the
Company and allow the Company, at its expense, to undertake appropriate action
to prevent disclosure of the Records deemed confidential.
(h) The Company will otherwise comply with all applicable rules and
regulations of the SEC, including, without limitation, compliance with
applicable reporting requirements under the Exchange Act.
(i) The Company will appoint a transfer agent and registrar for all such
Registrable Securities covered by such Registration Statement not later than the
effective date of such Registration Statement.
The Company may require the Investor to promptly furnish in
writing to the Company such information regarding the distribution of the
Registrable Securities as the Company may from time to time reasonably request
and such other information as may be legally required in connection with such
registration including, without limitation, all such information as may be
requested by the SEC, the NASD or the Principal Market. The Investor agrees to
provide such information requested in connection with such registration within
ten (10) business days after receiving such written request and the Company
shall not be responsible for (and the penalties specified in Section 2.1(c)
shall not apply in respect of) any delays in obtaining or maintaining the
effectiveness of the Registration Statement caused by the Investor's failure to
timely provide such information. The Investor agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 3.1(e) hereof, the Investor will forthwith discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until the Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3.1(e) hereof, and,
if so directed by the Company, the Investor will deliver to the Company all
copies, other than permanent file copies then in the Investor's possession, of
the most recent prospectus covering such Registrable Securities at the time of
receipt of such notice. In the event the Company shall give such notice, the
Company shall extend the period during which such Registration Statement shall
be maintained effective (including the period referred to in Section 3.1(a)
hereof) by the number of days during the period from and including the date of
the giving of notice pursuant to Section 3.1(e) hereof to the date when the
Company shall make available to the Investor a prospectus supplemented or
amended to conform with the requirements of Section 3.1 (e) hereof.
Section 3.2. REGISTRATION EXPENSES. In connection with each Registration
Statement, the Company shall pay the following registration expenses incurred in
connection with the registration thereunder (the "REGISTRATION EXPENSES"): (i)
all registration and filing fees, (ii) fees and expenses of compliance with
securities or blue sky laws (including reasonable fees and
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<PAGE>
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), (iii) printing expenses, (iv) the Company's internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), (v) the fees and
expenses incurred in connection with the listing of the Registrable Securities,
(vi) reasonable fees and disbursements of counsel for the Company and customary
fees and expenses, if any, for independent certified public accountants retained
by the Company, (vii) the fees and expenses of any special experts retained by
the Company in connection with such registration and (viii) reasonable fees and
expenses (in any event not to exceed $1,000 in the aggregate) of one firm of
counsel for the Investor retained as the Investor's counsel with respect to such
Registration Statement. The Company shall have no obligation to pay any
underwriting fees, discounts or commissions attributable to the sale of
Registrable Securities, such costs to be borne by the Investor.
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
Section 4.1 INDEMNIFICATION.
(a) INDEMNIFICATION OF INVESTOR. The Company agrees to indemnify and
hold harmless the Investor, its partners, Affiliates, officers, directors,
employees and duly authorized agents, and each Person or entity, if any, who
controls the Investor within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act, together with the partners, Affiliates,
officers, directors, employees and duly authorized agents of such controlling
Person or entity (collectively, the "CONTROLLING PERSONS"), from and against any
loss, claim, damage, liability, reasonable attorneys' fees, costs or expenses
and costs and expenses of investigating and defending any such claim
(collectively, "DAMAGES"), joint or several, and any action in respect thereof
to which the Investor, its partners, Affiliates, officers, directors, employees
and duly authorized agents, and any such Controlling Person may become subject
under the Securities Act or otherwise, insofar as such Damages (or proceedings
in respect thereof) arise out of, or are based upon, any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement or prospectus relating to the Registrable Securities or any
preliminary prospectus, or arises out of, or are based upon, any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are based upon information furnished in writing to the Company by the
Investor expressly for use therein, and shall reimburse the Investor, its
partners, Affiliates, officers, directors, employees and duly authorized agents,
and each such Controlling Person for any legal and other expenses reasonably
incurred by the Investor, its partners, Affiliates, officers, directors,
employees and duly authorized agents, or any such Controlling Person in
investigating or defending or preparing to defend against any such Damages or
proceedings; provided, however, that the Company shall not be liable to the
Investor to the extent that any such Damages arise out of or are based upon an
untrue statement or omission made in any preliminary prospectus if (i) the
Investor failed to send or deliver a copy of the final prospectus with or prior
to the delivery of written confirmation of the sale by the Investor to the
Person asserting the claim from which such Damages arise, and (ii) the final
prospectus
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would have corrected such unsure statement or alleged untrue statement or such
omission or alleged omission.
(b) INDEMNIFICATION OF COMPANY. The Investor agrees to indemnify and
hold harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each of its Controlling Persons from and against any
Damages, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Registration Statement
(or any amendment thereto), including any prospectus (or any amendment or
supplement thereto), or offering circular or other document, as applicable, in
reliance upon and in conformity with written information furnished to the
Company by the Investor expressly for use in the Registration Statement (or any
amendment or supplement thereto) or in any offering circular or other document,
as applicable.
(c) ACTION AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of his indemnity
agreement. In the case of parties indemnified pursuant to Section 4.1(a) above,
counsel to the indemnified parties shall be selected by the Investor, and in the
case of parties indemnified pursuant to Section 4.1(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry or any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section or Section
4.2 hereof (whether or not the indemnified parties are actual or potential
parties thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of an any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT OR FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for the fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 4.1(a) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of
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<PAGE>
such settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
Section 4.2 CONTRIBUTION. If the indemnification provided for in this
Article IV is unavailable to the indemnified parties in respect of any Damages
referred to herein, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such Damages as between the Company on the one
hand and the Investor on the other, in such proportion as is appropriate to
reflect the relative fault of the Company and of the Investor in connection with
such statements or omissions, as well as other equitable considerations. The
relative fault of the Company on the one hand and the Investor on the other hand
shall be determined by reference to, among other things, whether any such untrue
or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact relates to information supplied by the Company or by
the Investor and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company and the Investor agree that it would not be just and
equitable if contribution pursuant to this Section 4.2 were determined by a
pro-rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 4.2.
The amount paid or payable by an indemnified party as a result of the Damages
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim.
Notwithstanding the provisions of this Section 4.2, the Investor shall
in no event be required to contribute any amount in excess of the amount by
which the total price at which the Registrable Securities of the Investor were
sold to the public (less underwriting discounts and commissions) exceeds the
amount of any Damages which the Investor has otherwise been required to pay by
reason of such untrue or alleged untrue or alleged untrue statement or omission
or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 4.2, each person, if any, who controls the
Investor within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act shall have the same rights to contribution as such Investor,
and each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act shall have the same rights to contribution as the Company.
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ARTICLE V
MISCELLANEOUS
Section 5.1. TERM. The registration rights provided to the holders of
Registrable Securities hereunder shall terminate one (1) year from the end of
the exercise period of either the Initial Warrant or the Optional Warrants,
whichever is later; PROVIDED, HOWEVER, that the provisions of Article IV hereof
shall survive any termination of this Agreement.
Section 5.2. RULE 144. The Company covenants that it will file all
reports required to be filed by it under the Act and the Exchange Act and that
it will take such further action as holders of Registrable Securities may
reasonably request, all to the extent required from time to time to enable the
Investor to sell Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (a) Rule 144,
as such Rule may be amended from time to time, or (b) any successor or similar
rule or regulation hereafter adopted by the SEC. If at any time the Company is
not required to file such reports, it will, upon the request of any holder of
Registrable Securities, make publicly available other information so long as
necessary to permit sales pursuant to Rule 144. Upon the request of the
Investor, the Company will deliver to the Investor a written statement as to
whether it has complied with such requirements.
Section 5.3. AMENDMENT AND MODIFICATION. Any provision of this Agreement
may be waived, provided that such waiver is set forth in a writing executed by
the party against whom the enforcement of such waiver is sought. The provisions
of this Agreement, including the provisions of this sentence, may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, unless the Company has obtained the
written consent of the holders of a majority of the then outstanding Registrable
Securities. Notwithstanding the foregoing, the waiver of any provision hereof
with respect to a matter that relates exclusively to the rights of holders of
Registrable Securities whose securities are being sold pursuant to a
Registration Statement and does not directly or indirectly affect the rights of
other holders of Registrable Securities may be given by holders of at least a
majority of the Registrable Securities being sold by such holders; provided that
the provisions of this sentence may not be amended, modified or supplemented
except in accordance with the provisions of the immediately preceding sentence.
No course of dealing between or among any Persons having any interest in this
Agreement will be deemed effective to modify, amend or discharge any part of
this Agreement or any rights or obligations of any person under or by reason of
this Agreement.
Section 5.4. SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This Agreement
and all of the provisions hereof shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns. The Investor
may assign their rights under this Agreement to any subsequent holder of
Warrants or Registrable Securities, provided that the Company shall have the
right to require any holder of Registrable Securities to execute a counterpart
of this Agreement as a condition to such holder's claim to any rights hereunder.
This Agreement, together with the Securities Purchase Agreement and the
Warrants, set forth the entire agreement
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and understanding among the parties as to the subject matter hereof and merges
and supersedes all prior discussions, agreements and understandings of any and
every nature among them.
Section 5.5. SEPARABILITY. In the event that any provision of this
Agreement or the application of any provision hereof is declared to be illegal,
invalid or otherwise unenforceable by a court of competent jurisdiction, the
remainder of this Agreement shall not be affected except to the extent necessary
to delete such illegal, invalid or unenforceable provision unless that provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
Section 5.6. NOTICES. All notices, demands, requests, consents,
approvals or other communications required or permitted to be given hereunder or
which are given with respect to this Agreement shall be in writing and shall be
personally served or deposited in the mail, registered or certified, return
receipt requested, postage prepaid, or delivered by reputable air courier
service with charges prepaid, or transmitted by hand delivery, telegram, telex
or facsimile, addressed as set forth below, or to such other address as such
party shall have specified most recently by written notice:
(a) if to the Company, to: Telscape International, Inc.
2700 Post Oak Boulevard
Suite 1000
Houston, Texas 77056
Attention: Todd M. Binet, Executive
Vice President
Facsimile No.: (713) 968-0930
with a copy to: Gardere Wynne Sewell & Riggs, L.L.P.
333 Clay Avenue, Suite 800
Houston, Texas 77002-4086
Attention: Eric A. Blumrosen, Esq.
Facsimile No.: (713) 308-5555
(b) if to the Investor, to: Deere Park Capital Management, LLC
40 Skokie Boulevard, Suite 110
Northbrook, Illinois 60062
Attention: Douglas A. Gerrard,
President
Facsimile No.: (847)509-8529
with copies to: Ungaretti & Harris
3500 Three First National Plaza
Chicago, IL 60602
Attention: Gary I. Levenstein, Esq.
Facsimile No.: (312)977-4108
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<PAGE>
Notice shall be deemed given on the date of service or transmission if
personally served or transmitted by telegram, telex or facsimile. Notice
otherwise sent as provided herein shall be deemed given on the third business
day following the date mailed or on the second business day following delivery
of such notice by a reputable air courier service.
Section 5.7. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF ILLINOIS, WITHOUT
GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
Section 5.8. HEADINGS. The headings in this Agreement are for
convenience of reference only and shall not constitute a part of this Agreement,
nor shall they affect their meaning, construction or effect.
Section 5.9. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute one and the same instrument.
Section 5.10. FURTHER ASSURANCES. Each party shall cooperate and take
such action as may be reasonably requested by another party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
Section 5.11. REMEDIES. In the event of a breach or a threatened breach
by any party to this Agreement of its obligations under this Agreement, any
party injured or to be injured by such breach will be entitled to specific
performance of its rights under this Agreement or to injunctive relief, in
addition to being entitled to exercise all rights provided in this Agreement and
granted by law. The parties agree that the provisions of this Agreement shall be
specifically enforceable, it being agreed by the parties that the remedy at law,
including monetary damages, for breach of any such provision will be inadequate
compensation for any loss and that any defense or objection in any action for
specific performance or injunctive relief that a remedy at law would be adequate
is waived.
*****
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by the undersigned, hereunto duly authorized, as of the date first set
forth above.
TELSCAPE INTERNATIONAL, INC.
By:__________________________________
Name:_______________________
Title:______________________
DEERE PARK CAPITAL MANAGEMENT, LLC
By:__________________________________
Name:_______________________
Title:______________________
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<PAGE>
STOCK PURCHASE WARRANT
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE
SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SECURITIES UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
Warrant A-1
May 1, 1998
Warrant to Purchase 8,952 Shares of Common Stock of
Telscape International, Inc.
Telscape International., a Texas corporation (the "COMPANY"), hereby
acknowledges that Deere Park Capital Management, LLC ("INVESTOR") or any other
Warrant Holder is entitled, on the terms and conditions set forth below, to
purchase from the Company, at any time beginning on the eleventh (11th) Trading
Day after the effectiveness of the Registration Statement and continuing for
three years thereafter, the above number of fully paid and nonassessable shares
of Common Stock, par value $0.001 per share, of the Company (the "COMMON STOCK")
at the Purchase Price (hereinafter defined), as the same may be adjusted
pursuant to Section 5 herein. The resale of the shares of Common Stock or other
securities issuable upon exercise or exchange of this Warrant is subject to the
provisions of the Registration Rights Agreement of even date herewith (the
"REGISTRATION RIGHTS AGREEMENT") between the Company and the Investor.
1. DEFINITIONS.
(a) "AGREEMENT" shall mean the Securities Purchase Agreement of even
date herewith between the Company and the Investor.
(b) "INVESTOR" shall mean Deere Park Capital Management, LLC, an
Illinois limited liability company.
(c) "PURCHASE PRICE" shall be $16.7562 per share.
(d) "WARRANT HOLDER" shall mean the Investor or any permitted
assignee of all or any portion of this Warrant.
(e) "WARRANT SHARES" shall mean the shares of Common Stock or other
securities issuable upon exercise of this Warrant.
<PAGE>
(f) Other capitalized terms used herein which are defined in the
Agreement shall have the same meanings herein as therein.
2. EXERCISE OR EXCHANGE OF WARRANT.
(a) This Warrant may be exercised by the Warrant Holder, in whole or
in part, at any time and from time to time by surrender of this Warrant,
together with the form of exercise attached hereto as Exhibit A (the "EXERCISE
FORM") duly executed by Warrant Holder, together with the full Purchase Price
(as defined in Section 1) for each share of Common Stock as to which this
Warrant is exercised, to the Company at the address set forth in Section 13
hereof. In the event that the Warrant is not exercised in full, the number of
Warrant Shares shall be reduced by the number of such Warrant Shares for which
this Warrant is exercised, and the Company, at its expense, shall forthwith
issue and deliver to or upon the order of the Warrant Holder a new Warrant of
like tenor in the name of the Warrant Holder or as the Warrant Holder may
request, reflecting such adjusted Warrant Shares.
(b) The "DATE OF EXERCISE" of the Warrant shall be the date that the
completed Exercise Form is delivered to the Company, together with the original
Warrant and payment in full of the Purchase Price.
3. DELIVERY OF STOCK CERTIFICATES.
(a) Subject to the terms and conditions of this Warrant, as soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within five (5) Trading Days (as defined in the Securities Purchase
Agreement) thereafter, the Company at its expense (including, without
limitation, the payment by it of any applicable issue taxes) will cause to be
issued in the name of and delivered to the Warrant Holder, or as the Warrant
Holder may lawfully direct, a certificate or certificates for the number of
fully paid and non-assessable shares of Common Stock to which the Warrant Holder
shall be entitled on such exercise, together with any other stock or other
securities or property (including cash, where applicable) to which the Warrant
Holder is entitled upon such exercise in accordance with the provisions hereof.
(b) This Warrant may not be exercised as to fractional shares of
Common Stock. In the event that the exercise of this Warrant, in full or in
part, would result in the issuance of any fractional share of Common Stock, then
in such event the Warrant Holder shall be entitled to cash equal to the fair
market value of such fractional share. For purposes of this Warrant, "FAIR
MARKET VALUE" shall equal the closing bid price of the Common Stock on the
Nasdaq National Market or Small-Cap Market, the American Stock Exchange or the
New York Stock Exchange, whichever is the principal trading exchange or market
for the Common Stock (the "PRINCIPAL MARKET") on the date of exercise hereof, or
if the Common Stock is not listed or admitted to trading on any national
securities exchange or quoted on the Nasdaq National Market or Small-Cap Market,
the closing bid price on the over-the-counter market as furnished by any New
York Stock Exchange member firm that
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<PAGE>
makes a market in the Common Stock reasonably selected from time to time by the
Company for that purpose, or, if the Common Stock is not traded over-the-counter
and the average price cannot be determined as contemplated above, the fair
market value of the Common Stock shall be as reasonably determined in good faith
by the Company's Board of Directors.
4. COVENANTS OF THE COMPANY.
(a) The Company shall insure that a registration statement under the
Securities Act covering the resale or other disposition thereof of the Warrant
Shares by the Warrant Holder is effective to the extent provided by the
Registration Rights Agreement.
(b) The Company shall take all necessary action and proceedings as
may be required and permitted by applicable law, rule and regulation, including,
without limitation, the notification of the Nasdaq National Market, for the
legal and valid issuance of this Warrant and the Warrant Shares to the Warrant
Holder.
(c) From the date hereof through the last date on which this Warrant
is exercisable, the Company shall take all steps necessary and within its
control to insure that the Common Stock remains listed or quoted on the
Principal Market and shall not amend its Articles of Incorporation or By-Laws so
as to adversely affect any rights of the Warrant Holder under this Warrant;
provided, however, that increasing the number of authorized shares shall not be
deemed a material adverse effect.
(d) The Company shall at all times reserve and keep available,
solely for issuance and delivery as Warrant Shares hereunder, such shares of
Common Stock as shall from time to time be issuable as Warrant Shares.
(e) The Warrant Shares, when issued in accordance with the terms
hereof; will be duly authorized and, when paid for or issued in accordance with
the terms hereof, shall be validly issued, fully paid and non-assessable. The
Company has authorized and reserved for issuance to the Warrant Holder the
requisite number of shares of Common Stock to be issued pursuant to this
Warrant.
(f) With a view to making available to the Warrant Holder the
benefits of Rule 144 promulgated under the Securities Act ("RULE 144") and any
other rule or regulation of the Securities and Exchange Commission (the "SEC"),
that may at any time permit Warrant Holder to sell securities of the Company to
the public without registration, the Company agrees to use its best efforts to:
(i) make and keep public information available, as those terms are understood
and defined in Rule 144, at all times; and (ii) file with the SEC in a timely
manner all reports and other documents required of the Company under the
Securities Act and the Exchange Act.
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<PAGE>
5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number of and
kind of securities purchasable upon exercise of this Warrant and the Purchase
Price shall be subject to adjustment from time to time as follows:
(a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the Company
shall at any time after the date hereof but prior to the expiration of this
Warrant subdivide its outstanding securities as to which purchase rights under
this Warrant exist, by split-up, spin-off, or otherwise, or combine its
outstanding securities as to which purchase rights under this Warrant exist, the
number of Warrant Shares as to which this Warrant is exercisable as of the date
of such subdivision, split-up, spin-off or combination shall forthwith be
proportionately increased in the case of a subdivision, or proportionately
decreased in the case of a combination. Appropriate adjustments shall also be
made to the Purchase Price, but the aggregate purchase price payable for the
total number of Warrant Shares purchasable under this Warrant as of such date
shall remain the same.
(b) STOCK DIVIDEND. If at any time after the date hereof the Company
declares a dividend or other distribution on Common Stock payable in Common
Stock or other securities or rights convertible into or exchangeable for Common
Stock ("COMMON STOCK EQUIVALENTS"), without payment of any consideration by
holders of Common Stock for the additional shares of Common Stock or the Common
Stock Equivalents (including the additional shares of Common Stock issuable upon
exercise or conversion thereof), then the number of shares of Common Stock for
which this Warrant may be exercised shall be increased as of the record date (or
the date of such dividend distribution if no record date is set) for determining
which holders of Common Stock shall be entitled to receive such dividends, in
proportion to the increase in the number of outstanding shares (and shares of
Common Stock issuable upon conversion of all such securities convertible into
Common Stock) of Common Stock as a result of such dividend, and the Purchase
Price shall be adjusted so that the aggregate amount payable for the purchase of
all the Warrant Shares issuable hereunder immediately after the record date (or
on the date of such distribution, if applicable), for such dividend shall equal
the aggregate amount so payable).
(c) OTHER DISTRIBUTIONS. If at any time after the date hereof the
Company distributes to holders of its Common Stock, other than as part of a
dissolution or liquidation or the winding up of its affairs, any shares of its
capital stock, any evidence of indebtedness or any of its assets without payment
of any consideration by holders of Common Stock (other than cash, Common Stock
or securities convertible into or exchangeable for Common Stock), then, in any
such case, the Warrant Holder shall be entitled to receive, upon exercise of
this Warrant, with respect to each share of Common Stock issuable upon such
exercise, the amount of cash or evidences of indebtedness or other securities or
assets which such Warrant Holder would have been entitled to receive with
respect to each such share of Common Stock as a result of the happening of such
event had this Warrant been exercised immediately prior to the record date or
other date determining the shareholders entitled to participate in such
distribution (the "DETERMINATION DATE") or, in lieu thereof, if the Board of
Directors of the Company should so determine at the time of such distribution, a
reduced Purchase Price determined by multiplying the Purchase Price on the
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Determination Date by a fraction, the numerator of which is the result of such
Purchase Price reduced by the value of such distribution applicable to one share
of Common Stock (such value to be determined in good faith by the Company's
Board of Directors) and the denominator of which is such Purchase Price.
(d) MERGER, CONSOLIDATION, ETC. If at any time after the date hereof
there shall be a merger or consolidation of the Company with or into, or a
transfer of all or substantially all of the assets of the Company to, another
entity (a "CONSOLIDATION EVENT"), then the Warrant Holder shall be entitled to
receive upon such transfer, merger or consolidation becoming effective, and upon
payment of the aggregate Purchase Price then in effect, the number of shares or
other securities or property of the Company or of the successor corporation
resulting from such merger or consolidation, which would have been received by
Warrant Holder for the shares of stock subject to this Warrant had this Warrant
been exercised immediately prior to such transfer, merger or consolidation
becoming effective or to the applicable record date thereof, as the case may be.
The Company shall not effect any Consolidation Event unless the resulting
successor or acquiring entity (if not the Company) assumes by written instrument
the obligation to deliver to the Warrant Holder such shares of stock and/or
securities as the Warrant Holder is entitled to receive had this Warrant been
exercised in accordance with the foregoing; provided, however, that if as of the
third business day prior to the consummation of the Consolidation Event the
closing bid price of the Common Stock shall be equal to at least 200% of the
Purchase Price, then the Warrant shall be automatically exchanged on the date of
consummation of the Consolidation Event, as provided in Section 2 hereof.
(e) RECLASSIFICATION, ETC. If at any time after the date hereof
there shall be a reclassification of any securities as to which purchase rights
under this Warrant exist, into the same or a different number of securities of
any other class or classes, then the Warrant Holder shall thereafter be entitled
to receive upon exercise of this Warrant, during the period specified herein and
upon payment of the Purchase Price then in effect, the number of shares or other
securities or property resulting from such reorganization or reclassification,
which would have been received by the Warrant Holder for the shares of stock
subject to this Warrant had this Warrant at such time been exercised.
(f) PURCHASE PRICE ADJUSTMENT. In the event that the Company issues
or sells any Common Stock or securities which are convertible into or
exchangeable for its Common Stock or any convertible securities, or any warrants
or other rights to subscribe for or to purchase or any options for the purchase
of its Common Stock or any such convertible securities (other than issuance of
shares of Common Stock upon conversion thereof, shares or options issued or
which may be issued to employees, directors or consultants as of the date hereof
or shares issued upon exercise of options, warrants or rights outstanding as of
the date hereof) at an effective purchase price per share which is less than the
Purchase Price then in effect and more than fifteen percent (15%) less than the
fair market value (as hereinabove defined) of the Common Stock on the Trading
Day next preceding such issue or sale, then in each such case, the Purchase
Price in effect immediately prior to such issue or sale shall be reduced
effective concurrently with such issue or sale to an amount
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determined by multiplying the Purchase Price then in effect by a fraction, (x)
the numerator of which shall be the sum of (1) the number of shares of Common
Stock outstanding immediately prior to such issue or sale, including, without
duplication, those deemed to have been issued under the Warrants plus (2) the
number of shares of Common Stock which the aggregate consideration received by
the Company for such additional shares would purchase at such fair market value
then in effect and (y) the denominator of which shall be the number of shares of
Common Stock of the Company outstanding immediately after such issue or sale
including, without duplication, those deemed to have been issued under the
Warrants. For purposes of the foregoing fraction, Common Stock outstanding shall
include, without limitation, any equity offerings then outstanding, whether or
not they are exercisable or convertible when such fraction is to be determined.
The foregoing price adjustment shall not apply to the issuance of shares of
Common Stock which may be issued upon exercise of options under the Company's
employee or director stock option plans, upon the conversion or exchange of
convertible or exchangeable securities or upon the exercise of warrants, or
other rights, which options, convertible or exchangeable securities, warrants or
other rights are outstanding on the date of execution and delivery of this
Warrant.
The number of shares which may be purchased shall be increased
proportionately to any reduction in Purchase Price pursuant to this paragraph
5(f), so that after such adjustments the aggregate Purchase Price payable
hereunder for the increased number of shares of Common Stock shall be the same
as the aggregate Purchase Price in effect immediately prior to such adjustments.
Notwithstanding anything else contained in this Warrant to the contrary,
there shall be no adjustment of the Purchase Price or the number of shares of
Common Stock issuable pursuant to the exercise of this Warrant in the event that
during the term of this Warrant, the Company issues shares of Common Stock, or
securities convertible into Common Stock to the Purchaser.
(g) ADJUSTMENTS; ADDITIONAL SHARES, SECURITIES OR ASSETS. In the
event that at any time, as a result of an adjustment made pursuant to this
Section 5, the Warrant Holder shall, upon exercise of this Warrant, become
entitled to receive shares and/or other securities or assets (other than Common
Stock) then, wherever appropriate, all references herein to shares of Common
Stock shall be deemed to refer to and include such shares and/or other
securities or assets; and thereafter the number of such shares and/or other
securities or assets shall be subject to adjustment from time to time in a
manner and upon terms as nearly equivalent as practicable to the provisions of
this Section 5.
6. NO IMPAIRMENT. The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as
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<PAGE>
may be necessary or appropriate in order to protect the rights of the Warrant
Holder against impairment. Without limiting the generality of the foregoing, the
Company (a) will not increase the par value of any Warrant Shares above the
amount payable therefor on such exercise, and (b) will take all such action as
may be reasonably necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable Warrant Shares on the exercise of
this Warrant.
7. NOTICE OF ADJUSTMENTS; NOTICES. Whenever the Purchase Price or number of
Warrant Shares purchasable hereunder shall be adjusted pursuant to Section 5
hereof, the Company shall execute and deliver (by first class mail, postage
prepaid) to the Warrant Holder a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated and the Purchase Price and number
of shares purchasable hereunder after giving effect to such adjustment.
8. RIGHTS AS SHAREHOLDER. Prior to exercise of this Warrant, the Warrant
Holder shall not be entitled to any rights as a shareholder of the Company with
respect to the Warrant Shares, including (without limitation) the right to vote
such shares, receive dividends or other distributions thereon or be notified of
stockholder meetings. However, in the event of any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Company shall mail to each Warrant
Holder, at least 10 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
9. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of the Warrant and,
in the case of any such loss, theft or destruction of the Warrant, upon delivery
of an indemnity agreement or security reasonably satisfactory in form and amount
to the Company or, in the case of any such mutilation, on surrender and
cancellation of such Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
10. CONSENT TO JURISDICTION. THE COMPANY (I) HEREBY IRREVOCABLY SUBMITS TO
THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS OR ANY STATE COURT LOCATED IN COOK COUNTY,
ILLINOIS FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS WARRANT AND (II) HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY
SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO
THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT
IN AN INCONVENIENT FORUM OR THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS
IMPROPER.
-7-
<PAGE>
THE COMPANY CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR
PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR
NOTICES TO IT UNDER THIS WARRANT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE
GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS
PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW.
11. ENTIRE AGREEMENT; AMENDMENTS. This Warrant, the Registration Rights
Agreement and the Agreement contain the entire understanding of the parties with
respect to the matters covered hereby and thereby. No provision of this Warrant
may be waived or amended other than by a written instrument signed by the party
against whom enforcement of any such amendment or waiver is sought.
12. RESTRICTED SECURITIES.
(a) REGISTRATION OR EXEMPTION REQUIRED. This Warrant has been issued
in a transaction exempt from the registration requirements of the Securities Act
in reliance upon the provisions of Section 4(2) promulgated by the SEC under the
Securities Act of 1933. This Warrant and the Warrant Shares issuable upon
exercise of this Warrant may not be resold except pursuant to an effective
registration statement or an exemption to the registration requirements of the
Securities Act and applicable state laws.
(b) LEGEND. The Warrant and any Warrant Shares issued upon exercise
thereof (until a registration statement has been declared effective by the SEC
with respect to the Warrant Shares, at which time, such legend shall be removed,
and the Warrant Shares shall be freely tradeable), shall bear the following
legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN
APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
(c) ASSIGNMENT. Assuming the conditions of (a) above regarding
registration or exemption have been satisfied, the Warrant Holder may sell,
transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in
part. The Warrant Holder shall deliver a written notice to Company,
substantially in the form of the Assignment attached hereto as Exhibit B,
indicating the person or persons to whom the Warrant shall be assigned and the
respective number of warrants to be assigned to each assignee. The Company shall
effect the assignment within ten (10) days, and shall deliver to the assignee(s)
designated by
-8-
<PAGE>
the Warrant Holder after delivery to the Company of the original Warrant or
Warrants for cancellation, a Warrant or Warrants of like tenor and terms for the
appropriate number of shares.
13. NOTICES. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be effective (a) upon hand
delivery or delivery by facsimile at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
to the Company: Telscape International, Inc.
2700 Post Oak Boulevard
Suite 1000
Houston, Texas 77056
Attention: Todd M. Binet, Executive Vice President
Facsimile No.: (713) 968-0930
to the Warrant Holder: Deere Park Capital Management, LLC
40 Skokie Boulevard, Suite 110
Northbrook, IL 60062
Attention: Douglas A. Gerrard, President
Facsimile: (847) 509-8529
Either party hereto may from time to time change its address or facsimile
number for notices under this Section 13 by giving at least 10 days prior
written notice of such changed address or facsimile number to the other party
hereto.
-9-
<PAGE>
14. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of the State of Delaware. The headings in this Warrant are
for purposes of reference only, and shall not limit or otherwise affect any of
the terms hereof. The invalidity or unenforceability of any provision hereof
shall in no way affect the validity or enforceability of any other provision.
TELSCAPE INTERNATIONAL, INC.
By:_____________________________
Title:__________________________
-10-
<PAGE>
EXHIBIT A
FORM OF WARRANT EXERCISE
------------------------
I/we hereby exercise Telscape International, Inc. (the "Company") Common
Stock Purchases Warrant #_________________.
(a) Number of Shares of the Company common stock covered in Purchase
Warrant #______________ __________________
(b) Total Exercise price (____________ per share) $_________________
________________________________ __________________________________
Signature Employment Identification Number
______________________________________
Name (please print)
__________________________________________________________________
Address
__________________________________________________________________
______________________________________
Telephone Number
__________________________________ __________________________________
Signature Employment Identification No.
______________________________________
Name (please print)
_______________________________________________________________________
Address
_______________________________________________________________________
___________________________________________
Telephone Number
I wish to register my shares of the Company common stock as follows:
a. ( ) Individual Ownership
b. ( ) Husband and Wife as Community Property
c. ( ) Joint Tenants w/Right to Survivorship (JTRS)
d. ( ) Tenants in Common
e. ( ) Other_________________________________
Dated:___________________________________, 19__.
<PAGE>
EXHIBIT B
FORM OF ASSIGNMENT
(To be executed by the registered Warrant Holder desiring to transfer
the Warrant)
FOR VALUED RECEIVED, the undersigned holder of the attached Warrant
hereby sells, assigns and transfers unto the persons below named the right to
purchase ______________ shares of the Common Stock of TELSCAPE INTERNATIONAL,
INC. evidenced by the attached Warrant and does hereby irrevocably constitute
and appoint ______________________ attorney to transfer the said Warrant on the
books of the Company, with full power of substitution in the premises.
Dated:
______________________________
Signature
Fill in for new Registration of Warrant:
_________________________________________
Name
_________________________________________
Address
_________________________________________
Please print name and address of assignee
(including zip code number)
NOTICE: The signature to the foregoing Assignment must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-2-
<PAGE>
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE
SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
AS TO THE SECURITIES UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
CONVERTIBLE SUBORDINATED DEBENTURE
$3,000,000 Issued: May 1, 1998
Due: May 1, 2001
FOR VALUED RECEIVED, TELSCAPE INTERNATIONAL, INC., a corporation
organized and existing under the laws of the State of Texas (herein referred to
as the "COMPANY"), for value received, acknowledges itself indebted and hereby
promises to pay to DEERE PARK CAPITAL MANAGEMENT, LLC, an Illinois limited
liability company (the "REGISTERED OWNER") on the due date written above (the
"DUE DATE"), the sum of Three Million Dollars and No Cents ($3,000,000), along
with interest accrued thereon from the date hereof at the rate of eight percent
(8%) per annum; PROVIDED, HOWEVER, that following the occurrence and during the
continuance of a Default (as defined below), the Company shall pay to Registered
Owner interest from the date of such Default at the rate of twelve percent (12%)
per annum on the outstanding balance of this Debenture. Payment of interest
shall be made monthly in arrears on the last day of each calendar month
(commencing May 31, 1998), and, after maturity, upon demand of Registered Owner.
This Convertible Debenture is issued pursuant to the terms of that
certain Securities Purchase Agreement of even date herewith between the Company
and the Registered Owner (the "SECURITIES PURCHASE AGREEMENT"), to which
reference is hereby made for additional provisions governing the obligations of
the Company. Capitalized terms used in this Debenture which are not defined
herein shall have the meanings assigned to them in the Securities Purchase
Agreement
1. PAYMENT OF PRINCIPAL AND INTEREST. The principal and interest
outstanding under this Debenture shall be made at the principal office of the
Registered Owner, located at 40 Skokie Boulevard, Suite 110, Northbrook,
Illinois 60062. All computations of interest under this Debenture shall be made
on the basis of a year of 365 days, for the actual number of days elapsed. The
date of issuance of this Debenture shall be included in the calculation of
interest. The date of redemption of this Debenture shall be excluded from the
calculation of interest. Whenever any payment to be made under this Debenture
shall be stated to be due on a Saturday,
<PAGE>
Sunday, or public or bank holiday or the equivalent for banks generally under
the laws of the State of Illinois (any other day being a "BUSINESS Day"), such
payment may be made on the next succeeding business day.
2. PREPAYMENT. The Company may prepay the Convertible Debenture at any
time prior to its maturity; PROVIDED, HOWEVER, that only a prepayment of the
entire principal amount and all accrued and unpaid interest owing on the
Convertible Debenture may be made and an exit fee (the "EXIT FEE") shall be
payable by the Company upon any such prepayment. The Exit Fee shall be an amount
which is a function of the number of days after the Closing Date that the
prepayment of the Convertible Debenture occurs (the "FULL PREPAYMENT DATE"), as
set forth in the following table:
NUMBER OF DAYS AFTER CLOSING DATE
THAT FULL PREPAYMENT OCCURS EXIT FEE
----------------- --------
0-90 6.6% of face amount of debenture
91-180 7.2% of face amount of debenture
181-270 8.8% of face amount of debenture
271 and thereafter 10% of face amount of debenture
Notwithstanding the foregoing or anything to the contrary contained in this
Convertible Debenture, for each repayment period set forth in the table above
(other than the 0-90 day period and any day after 365 days), the applicable Exit
Fee shall be reduced PRO RATA based upon the actual number of days between the
Full Prepayment Date and the ending date of the applicable repayment period
3. TERMINATION OR SUSPENSION OF COMPANY'S OBLIGATION TO MAKE PAYMENTS.
If the Common Stock closes at $30 or higher for twenty (20) consecutive Trading
Days, as adjusted, without limitation, for any stock splits or combinations, the
Company's obligation to make interest payments on the Convertible Debentures is
terminated.
4. SECURITY. This Debenture is not secured by any mortgage, pledge,
encumbrance, security agreement or other security device, and only the full
faith and credit of the Company are pledged for the payment of all principal and
interest due under this Debenture.
5. CONVERSION.
(a) CONVERSION CALCULATION. At any time after the effectiveness
of Registration Statement, the Registered Owner is entitled to convert
all, or any part thereof, of the unpaid principal and interest
outstanding under this Debenture (the "OUTSTANDING DEBENTURE AMOUNT")
into that number of fully paid and non-assessable shares of Common Stock
(as defined in the Securities Purchase Agreement), at a price calculated
as follows:
-2-
<PAGE>
(i) if the Registered Owner converts the Outstanding
Debenture Amount within the first six (6) months from the Initial
Closing Date, the conversion price shall be equal to the Fixed
Conversion Price (as defined in the Securities Purchase
Agreement), or
(ii) if the Registered Owner converts the Outstanding
Debenture Amount on the first day of the seventh month following
the Initial Closing Date, or at any time thereafter, the
conversion price shall be equal to the lesser of the Fixed
Conversion Price or the Variable Conversion Price (as defined in
the Securities Purchase Agreement).
Notwithstanding anything to the contrary, the Company shall have the
option to pay the outstanding interest of the Convertible Debentures
then issued upon receipt of the Conversion Notice (as defined below) in
cash.
(b) EXERCISE OF CONVERSION. To exercise its right of conversion,
Registered Owner shall surrender the Debenture to the Company at its
registered office, accompanied by a written notice in the form annexed
hereto as EXHIBIT A, properly completed (the "CONVERSION NOTICE").
Within five (5) Trading Days following its receipt of the Debenture and
Conversion Notice, the Company shall, assuming it has not elected to
exercise its right to redeem pursuant to Paragraph 6 below, issue and
deliver (i) a certificate or certificates for the number of full
Conversion Shares issuable, registered in Registered Owner's name, and
(ii) if less than the entire remaining outstanding principal balance of
the Debenture is being converted, a replacement note in the remaining
outstanding principal amount of the Debenture. Such conversion shall be
deemed to have been effected and the number of Conversion Shares
issuable in connection with such conversion shall be determined as of
the close of business on the date on which the Debenture and Conversion
Notice shall have been received by the Company.
6. REDEMPTION. If at any time during the term of this Agreement the
price per share of Common Stock has closed below the Redemption Floor Price, as
adjusted pursuant Section 8.1 of the Securities Purchase Agreement, for three
(3) consecutive Trading Days, the Company may elect to redeem all or part of the
Convertible Debentures, if the Investor subsequently issues a Conversion Notice
and converts any Convertible Debenture, at one hundred seven percent (107%) of
par, plus any accrued interest or unpaid dividends, by providing written notice
via facsimile to the Investor on the Trading Day immediately following the third
consecutive Trading Day that the Common Stock has closed below the Redemption
Floor Price, as adjusted pursuant Section 8.1 of the Securities Purchase
Agreement, of its intent to redeem and the extent of the redemption. Such
written notice shall be valid and irrevocable for ten (10) Trading Days and
shall automatically expire at the end of such 10-Trading Day period.
7. REGISTRATION RIGHTS AGREEMENT. The resale of the shares of Common
Stock issuable upon conversion of this Debenture is subject to the provisions of
the Registration Rights Agreement of even date herewith by and between the
Company and the Registered Owner.
-3-
<PAGE>
8. DEFAULT.
(a) DEFAULT. If any of the following events ("DEFAULTS") shall
occur:
(i) the Company fails to pay within five (5) days when due
or declared due (whether by scheduled maturity, required payment,
acceleration, demand or otherwise) any principal or interest due
hereunder or any amount payable to the Registered Owner under the
Securities Purchase Agreement; or
(ii) the Company shall fail to perform or observe any
covenant or agreement contained in Article VI of the Securities
Purchase Agreement (other than with respect to any payment
covenants, as to which subsection (i) shall apply), as the case
may be, on its part to be performed or observed, and any such
failure shall remain unremedied for thirty (30) days after
written notice thereof shall have been given to the Company by
the Registered Owner;
then the Registered Owner may declare all or any portion of the principal and
interest due hereunder and all amounts due under the Securities Purchase
Agreement to be immediately due and payable.
(b) RIGHTS AND REMEDIES. In the event of a Default, the
Registered Owner shall have, in addition to any other rights and
remedies contained in the Securities Purchase Agreement, all of which
shall rights and remedies shall be cumulative, and non-exclusive, to the
extent permitted by law, the Registered Owner shall have the right to
immediately convert any remaining Outstanding Debenture Amount without
further regard to the limitations set forth in Section 5 of this
Debenture.
9. SUBORDINATION. The Company and the Registered Owner shall enter into
a Subordination Agreement at such time as the Company deems it appropriate in
form and substance similar that Subordination Agreement attached as Exhibit D to
the Securities Purchase Agreement.
10. TRANSFER. THIS DEBENTURE IS REGISTERED IN THE NAME OF THE REGISTERED
OWNER ON THE DEBENTURE REGISTER MAINTAINED BY THE COMPANY, AND IS TRANSFERABLE
UPON THE WRITTEN ORDER OF THE REGISTERED OWNER. THIS DEBENTURE (AND THE COMMON
STOCK OF THE COMPANY INTO WHICH IT MAY BE CONVERTED) HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER
ANY STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED WITHOUT THE REGISTRATION
THEREOF UNDER THE SECURITIES ACT, AND ANY APPLICABLE STATE SECURITIES LAW, OR AN
OPINION OF COUNSEL TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
11. CONSENT TO JURISDICTION. THE COMPANY AND THE REGISTERED OWNER (I)
HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE UNITED
STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS OR ANY STATE COURT
LOCATED IN COOK COUNTY, ILLINOIS FOR THE PURPOSES
-4-
<PAGE>
OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS DEBENTURE,
AND (II) HEREBY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH SUIT, ACTION OR
PROCEEDING, ANY CLAIM THAT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH
COURT, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM
OR THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. THE COMPANY AND
THE REGISTERED OWNER CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION
OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS IN EFFECT
FOR NOTICES TO IT UNDER THE SECURITIES PURCHASE AGREEMENT AND AGREES THAT SUCH
SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
12. AMENDMENTS. No amendment or waiver of any provision of this
Convertible Debenture, nor consent to any departure by the Company therefrom,
shall in any event be effective unless the same shall be in writing and signed
by Registered Owner, and then such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given; provided,
however, that no amendment, waiver or consent shall, unless in writing and
signed by the Registered Owner, do any of the following: (i) reduce the
principal of or interest on this Convertible Debenture, (ii) postpone the dates
fixed for the payment of principal of or interest on the Convertible Debenture
or (iii) affect adversely the right to convert this Convertible Debenture as
provided in Section 5 hereof.
13. EXPENSES. The Company agrees to promptly pay all costs and expenses
(including attorneys' fees, expenses and disbursements, and costs of settlement
and the fees, expenses and disbursements of experts or advisors) incurred by the
Registered Owner in enforcing any obligations of or in collecting any payments
due from the Company under this Convertible Debenture and the Securities
Purchase Agreement.
IN WITNESS WHEREOF, TELSCAPE INTERNATIONAL, INC. has caused this
Debenture to be duly executed this 1st day of May, 1998.
TELSCAPE INTERNATIONAL, INC.
By:______________________________
Its:_____________________________
-5-
<PAGE>
EXHIBIT A
[FORM OF CONVERSION NOTICE]
TO: Telscape International, Inc.
The undersigned owner of this Debenture hereby: (i) irrevocably
exercises the option to convert this Debenture, or the portion hereof below
designated, for Common Stock of Telscape International, Inc. (the "Conversion
Shares") in accordance with the terms hereof and (ii) directs that such
Conversion Shares deliverable upon the conversion, together with any check in
payment for fractional shares and interest and any Debenture or Debentures
representing any unconverted principal amount hereof, be issued and delivered to
the registered holder hereof unless a different name has been indicated below.
If Conversion Shares are to be delivered or registered in the name of a person
other than the undersigned, the undersigned will pay all taxes with respect
thereto, and the Company will not be required to issue or deliver a certificate
for such Conversion Shares until the undersigned has paid to the Company the
amount of such tax or has established to the satisfaction of the Company that
such tax has been paid.
Dated:_______________ ___________________________
Signature
Fill in for registration of shares if to be delivered, and of Debentures if to
be issued, otherwise than to and in the name of the registered holder.
___________________________
Social Security or Other
Taxpayer Identifying Number
___________________________________
(Name)
___________________________________
(Street Address)
___________________________________
(City, State and Zip Code)
(Please print name and address)
Principal Amount to be Converted (if less than all):
$_________________________
-6-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,882,000
<SECURITIES> 0
<RECEIVABLES> 7,561,000
<ALLOWANCES> (215,000)
<INVENTORY> 3,113,000
<CURRENT-ASSETS> 18,569,000
<PP&E> 5,501,000
<DEPRECIATION> (157,000)
<TOTAL-ASSETS> 47,940,000
<CURRENT-LIABILITIES> 18,144,000
<BONDS> 0
0
0
<COMMON> 5,000
<OTHER-SE> 27,197,000
<TOTAL-LIABILITY-AND-EQUITY> 47,940,000
<SALES> 33,399,000
<TOTAL-REVENUES> 33,399,000
<CGS> (28,334,000)
<TOTAL-COSTS> (2,846,000)
<OTHER-EXPENSES> (37,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (93,000)
<INCOME-PRETAX> 2,089,000
<INCOME-TAX> (963,000)
<INCOME-CONTINUING> 1,114,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,114,000
<EPS-PRIMARY> .25
<EPS-DILUTED> .15
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,131,000
<SECURITIES> 0
<RECEIVABLES> 2,182,000
<ALLOWANCES> (71,000)
<INVENTORY> 1,586,000
<CURRENT-ASSETS> 5,061,000
<PP&E> 2,128,000
<DEPRECIATION> (492,000)
<TOTAL-ASSETS> 10,474,000
<CURRENT-LIABILITIES> 4,040,000
<BONDS> 0
380
0
<COMMON> 4,000
<OTHER-SE> 5,437,000
<TOTAL-LIABILITY-AND-EQUITY> 10,474,000
<SALES> 3,771,000
<TOTAL-REVENUES> 3,771,000
<CGS> (2,525,000)
<TOTAL-COSTS> (1,632,000)
<OTHER-EXPENSES> 34,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8,000)
<INCOME-PRETAX> (360,000)
<INCOME-TAX> 32,000
<INCOME-CONTINUING> (324,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (324,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
