AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1998
REGISTRATION STATEMENT NO. 333-60271
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
TELSCAPE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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2700 POST OAK BLVD.,
SUITE 1000
TEXAS 4813 75-2433637 HOUSTON, TEXAS 77056
(713) 968-0968
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER (ADDRESS, INCLUDING ZIP
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER) CODE, AND TELEPHONE
INCORPORATION OR CLASSIFICATION CODE NUMBER, INCLUDING AREA
ORGANIZATION) NUMBER) CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE
OFFICES)
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MSN COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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230 SECOND ST., SUITE 102
ENCINITAS, CALIFORNIA
CALIFORNIA 4813 33-0707658 92024
(760) 635-1886
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER (ADDRESS, INCLUDING ZIP
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER) CODE, AND TELEPHONE
INCORPORATION OR CLASSIFICATION CODE NUMBER, INCLUDING AREA
ORGANIZATION) NUMBER) CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE
OFFICES)
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TELSCAPE USA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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2700 POST OAK BLVD.,
SUITE 1000
TEXAS 4813 76-049907 HOUSTON, TEXAS 77056
(713) 968-0968
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER (ADDRESS, INCLUDING ZIP
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER) CODE, AND TELEPHONE
INCORPORATION OR CLASSIFICATION CODE NUMBER, INCLUDING AREA
ORGANIZATION) NUMBER) CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE
OFFICES)
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TELEREUNION, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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2700 POST OAK BLVD.,
SUITE 1000
DELAWARE 4813 76-0467511 HOUSTON, TEXAS 77056
(713) 968-0968
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER (ADDRESS, INCLUDING ZIP
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER) CODE, AND TELEPHONE
INCORPORATION OR CLASSIFICATION CODE NUMBER, INCLUDING AREA
ORGANIZATION) NUMBER) CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE
OFFICES)
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TSCP INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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2700 POST OAK BLVD.,
SUITE 1000
TEXAS 4813 76-0577773 HOUSTON, TEXAS 77056
(713) 968-0968
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER (ADDRESS, INCLUDING ZIP
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER) CODE, AND TELEPHONE
INCORPORATION OR CLASSIFICATION CODE NUMBER, INCLUDING AREA
ORGANIZATION) NUMBER) CODE, OF REGISTRANT'S
PRINCIPAL EXECUTIVE
OFFICES)
</TABLE>
TODD M. BINET
CHIEF FINANCIAL OFFICER
TELSCAPE INTERNATIONAL, INC.
2700 POST OAK BOULEVARD, SUITE 1000
HOUSTON, TEXAS 77056
(713) 968-0968
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
MORRIS F. DEFEO, JR., ESQ. WILLIAM B. GANNETT, ESQ.
SWIDLER BERLIN SHEREFF FRIEDMAN, LLP CAHILL GORDON & REINDEL
3000 K STREET, N.W., SUITE 300 80 PINE STREET
WASHINGTON, D.C. 20007 NEW YORK, NEW YORK 10005
(202) 424-7500 (212) 701-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(e)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 1998
PROSPECTUS
[LOGO]
$125,000,000
TELSCAPE INTERNATIONAL, INC.
% SENIOR NOTES DUE 2008
------------------------
Telscape International, Inc., a Texas corporation ( the "Company"), is
hereby offering (the "Notes Offering") $125.0 million aggregate principal
amount of its % Senior Notes due 2008 (the "Notes"). The Notes will mature
on , 2008 and will bear interest at the rate of % per annum. Interest
on the Notes will be payable semi-annually on and of each year
commencing , 1999.
The Notes will be redeemable, in whole or in part, at the option of the
Company on or after , 2003, at the redemption prices set forth herein,
plus accrued and unpaid interest to the date of redemption. In addition, at any
time prior to , 2001, the Company may, at its option, redeem up to
35% of the aggregate principal amount of the Notes originally issued with the
net cash proceeds of one or more Public Equity Offerings (as defined), at a
redemption price equal to % of the aggregate principal amount thereof, plus
accrued and unpaid interest, if any, to the date of redemption; PROVIDED,
HOWEVER, that after giving effect to any such redemption, at least 65% of the
aggregate principal amount of the Notes originally issued remains outstanding.
In the event of a Change of Control (as defined), each holder of the Notes
will have the right to require the Company to repurchase such holder's Notes at
a price equal to 101% of the aggregate principal amount thereof, plus accrued
and unpaid interest, if any, to the date of purchase. In addition, the Company
will be obligated to offer to repurchase the Notes at 100% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase in the event of certain Asset Sales (as defined). See "Description
of the Notes."
The Notes will be general unsecured obligations of the Company and will be
PARI PASSU in right of payment to existing and future senior unsecured
indebtedness of the Company. The Notes will be effectively subordinated to all
secured indebtedness of the Company and its subsidiaries to the extent of the
assets securing such indebtedness. The Notes will be fully and unconditionally
guaranteed (the "Guarantees") by all of the Company's wholly-owned U.S.
subsidiaries (the "Guarantors"). The Guarantees will be general unsecured
obligations of the Guarantors and will be PARI PASSU in right of payment to all
existing and future senior unsecured indebtedness of each Guarantor. The
Guarantees will be subordinated to secured indebtedness of the Guarantors to the
extent of the assets securing such indebtedness. As of June 30, 1998, after
giving effect to the Notes Offering, the Company would have had approximately
$136.1 million of senior indebtedness outstanding, of which $5.2 million would
have been secured, and the Guarantors would have had approximately $4.8 million
(exclusive of the Guarantees of the Notes) of senior indebtedness outstanding,
of which $1.9 million would have been secured.
There is no existing market for the Notes, and there can be no assurance as
to the liquidity of any market that may develop for the Notes, the ability of
the holders of the Notes to sell such Notes or the price at which such holders
would be able to sell their Notes. The Company does not intend to apply for
listing of the Notes on any securities exchange. See "Risk Factors -- Absence
of Public Market."
------------------------
SEE "RISK FACTORS," BEGINNING ON PAGE 7, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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PRICE PROCEEDS
TO UNDERWRITING TO THE
PUBLIC(1) DISCOUNTS(2) COMPANY(3)
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Per Note................................ % % %
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Total................................... $ $ $
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(1) Plus accrued interest, if any, from the date of original issuance of the
Notes.
(2) The Company and the Guarantors have agreed to idemnify the Underwriters (as
defined) against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(3) Before deducting expenses of the Notes Offering payable by the Company
estimated at $ .
------------------------
The Notes are being offered, subject to prior sale, when, as and if
delivered to and accepted by BT Alex. Brown Incorporated and Lehman Brothers
Inc. (the "Underwriters"), and subject to approval of certain legal matters by
counsel for the Underwriters and certain other conditions. It is expected that
delivery of the Notes will be made in New York, New York on or about ,
1998.
BT ALEX. BROWN LEHMAN BROTHERS
------------------------
The date of this Prospectus is , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS NOTES OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
NOTES. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE
NOTES OFFERING, MAY BID FOR AND PURCHASE NOTES IN THE OPEN MARKET AND MAY IMPOSE
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
i
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which 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. Such statements include, but are not limited to,
statements under the captions "Prospectus Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this Prospectus as to the
Company's plans to implement its growth strategy, improve its financial
performance, expand its infrastructure, develop new products and services,
expand its sales force, expand its customer base and enter international
markets. In addition, from time to time, the Company or its representatives have
made or may make forward-looking statements, orally or in writing. Furthermore,
such forward-looking statements may be included in, but are not limited to,
various filings made by the Company with the Securities and Exchange Commission
(the "Commission"), or press releases or oral statements made by or with the
approval of an authorized executive officer of the Company. With respect to this
Registration Statement, the Private Securities Litigation Reform Act of 1995
does not apply to the Company's subsidiaries that are guaranteeing the Company's
obligations under the Notes.
Management wishes to caution the reader that the forward-looking statements
referred to above and contained herein in this Prospectus regarding matters that
are not historical facts involve predictions. No assurance can be given that the
future results will be achieved; actual events or results may differ materially
as a result of risks facing the Company. Such risks include, but are not limited
to, changes in business conditions, changes in the telecommunications industry
and the general economy, competition, changes in service offerings, and risks
associated with the Company's limited operating history, entry into developing
markets, managing rapid growth, international operations, dependence on
effective information systems, ability to consummate acquisitions or enter into
joint ventures with companies on terms acceptable to the Company, and
development of its network, as well as regulatory developments that could cause
actual results to vary materially from the future results indicated, expressed
or implied, in such forward-looking statements. See "Risk Factors."
ii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES,
THE TERMS THE "COMPANY" AND "TELSCAPE" REFER TO TELSCAPE INTERNATIONAL,
INC., A TEXAS CORPORATION, AND ITS SUBSIDIARIES, COLLECTIVELY.
THE COMPANY
Telscape is a rapidly growing emerging multinational telecommunications
carrier focused on Latin America. The Company provides international wholesale
long distance services for calls originating in the United States and
terminating in markets in Latin America. As a way to generate increased
international long distance traffic to countries it serves, the Company markets
long distance services principally to Hispanic consumers in the United States
through the distribution of prepaid telephone calling cards under the
TELEFIESTAT brand name. In addition to these wholesale and retail international
long distance services, the Company also provides a broad range of systems
integration and value-added voice and data services to major public and private
sector customers in Mexico.
Telscape intends to significantly expand its facilities-based
telecommunications operations over the next 18 months and to broaden its service
offerings in markets where it has established, or expects to establish, a
significant presence. In June 1998, Telereunion S.A. de C.V., a Mexican
corporation and an affiliate of the Company ("Telereunion S. A."), received a
30-year, facilities-based carrier license from the Mexican government allowing
it to construct and operate a network over which the Company can carry long
distance traffic in Mexico (the "Mexican Concession"). To deliver its
services, the Company, through Telereunion S.A., intends to construct a combined
fiber-optic and microwave long distance network, connecting the United States,
the Gulf region of Mexico and targeted Mexican cities (the "Mexican Network").
Telscape is a holding company, the principal assets of which are its
operating subsidiaries in the United States and Mexico. As a holding company,
Telscape is dependent upon dividends and distributions from its subsidiaries to
meet its cash needs. MSN Communications, Inc. ("MSN"), Telscape USA, Inc.
("Telscape USA"), Telereunion, Inc. ("Telereunion") and TSCP International,
Inc. ("Telscape International"), are wholly-owned subsidiaries of the Company,
and INTERLINK Communications, Inc. ("INTERLINK") is 90%-owned by the Company.
The Company's ownership interests in its Mexican subsidiaries are held through
Telereunion. The chart on page 44 illustrates the Company's operational
structure.
The Company believes that it is well-positioned to capitalize on the
opportunities presented by the large and growing international
telecommunications services market. According to Global Telecommunications
Traffic Statistics & Commentary 1997/98 published by TELEGEOGRAPHY in November
1997 (the "Telegeography Report"), revenues generated from the provision of
international long distance services increased to $61.3 billion in 1996 from
$23.9 billion in 1987, a compound annual growth rate of 11.0%. Management
believes that Latin American traffic, including traffic between the United
States and Latin America, will grow faster than the international
telecommunications market as a whole as a result of the (i) underlying economic
growth within Latin America, (ii) growth of regional trade as a result of free
trade initiatives such as the North American Free Trade Agreement ("NAFTA"),
Mercado Comun del Sur ("Mercosur") and the Andean Pact, (iii) deregulation and
privatization of telecommunications carriers in the region, (iv) projected
regional increases in telephone density, (v) growth in the Hispanic population
in the United States and (vi) increasing demand for bandwidth-intensive
applications. See "Business -- Industry."
Telscape intends to capitalize on the growth in the Latin American
telecommunications market by providing international long distance services to
and from targeted Latin American countries. The Company also intends to position
itself as an integrated telecommunications provider in Mexico by providing
domestic and international long distance services over the Mexican Network. The
Company believes that
1
<PAGE>
expanding its owned and leased transmission facilities in Latin America will
allow it to increase the percentage of minutes of traffic carried over its own
facilities and over transmission capacity owned or leased on a fixed cost basis
("on-net"), which will enable it to increase margins and profitability and
ensure quality of service on both international and domestic long distance
traffic. See "Business -- Network," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Gross Margin."
STRATEGY
The Company's objective is to become a leading provider of high quality,
competitively priced international long distance services between the United
States and Latin America, and a leading provider of international long distance
services, domestic long distance services and integrated value-added services to
customers in Mexico and other targeted countries in Latin America. The key
elements of the Company's strategy are to:
o Expand Latin American Presence.__The Company seeks to expand its
Latin American presence in order to capitalize on the relatively high
growth of traffic between the United States and Latin America. The
Company believes that management's international telecommunications
expertise, combined with Telscape's established reputation and
extensive operations in Mexico, will enable the Company to identify
and capitalize on the increasing deregulation in targeted Latin
American markets.
o Expand Network Facilities.__The Company intends to expand its network
by acquiring switching and transmission facilities, state-of-the-art
Asynchronous Transfer Mode ("ATM") technologies and additional
fiber optic and satellite transmission capacity for the provision of
international and domestic voice, video and data services. The
Company's objectives in expanding its network are to: (i) provide
on-net capacity to allow growth in its long distance services
business; (ii) increase profitability for switched services by
reducing the amount of the Company's traffic terminated by other long
distance carriers pursuant to resale arrangements; and (iii)
establish a platform to support advanced, bandwidth-intensive data
and media applications.
o Provide an Integrated Suite of Service Offerings.__The Company seeks
to provide its commercial customers in Mexico with a comprehensive
suite of telecommunications services, including international and
domestic long distance services, systems integration, call centers,
conference calling, Internet access and other broadband data
services. Management believes that Telscape is one of the few
companies to offer a wide array of high quality and competitively
priced telecommunications services to commercial customers in Mexico,
and expects to pursue opportunities to provide similar services as it
expands into other Latin American markets.
o Expand Scale and Scope of Retail Business.__The Company intends to
expand its retail business, provided by recently acquired MSN's
prepaid telephone calling cards ("Prepaid Cards"), through the
deployment of switching platforms in high-volume gateway cities such
as Houston, New York, Chicago, San Francisco and Los Angeles, which
will be capable of managing local and 800 Prepaid Card traffic. The
Company believes that these state-of-the-art programmable switches
will provide the Company with the advanced technology necessary to
handle the anticipated growth in this rapidly expanding market.
o Pursue Strategic Alliances, Joint Ventures and Acquisitions.__The
Company continues to pursue strategic alliances, joint ventures and
acquisitions to expand its business, increase its customer base, add
network and circuit capacity, enter additional markets and develop
new products and services. The Company seeks to acquire interests in
companies that have network facilities, service offerings or
technologies that complement those of the Company.
o Build Brand Awareness.__The Company seeks to build brand awareness of
its TELEFIESTAT and TELEREUNION brands. Management believes that it
will be able to continue building customer
2
<PAGE>
awareness of its TELEFIESTAT brand name through sales of its Prepaid
Cards to its United States customers as it opens new international
long distance markets throughout Latin America. Management also
intends to continue building customer awareness of its systems
integration and value-added services through the TELEREUNION brand
name, which it plans to leverage as it commences international and
domestic long distance services in Mexico.
For a more complete discussion of the Company's business strategy, see
"Business_--Strategy."
------------------------
THE NOTES OFFERING
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SECURITIES OFFERED........................... $125.0 million in aggregate principal
amount of % Senior Notes due 2008.
ISSUER....................................... Telscape International, Inc.
GUARANTORS................................... All of the Company's wholly-owned
U.S. subsidiaries (the "Guarantors"),
including, as of the Issue Date,
Telscape USA, Telereunion, MSN ans TSCP
International
MATURITY DATE................................ , 2008.
INTEREST PAYMENT DATES....................... Interest on the Notes will accrue
from the date of issuance and will be
payable semi-annually on and of
each year, commencing , 1999.
GUARANTEES................................... The Notes will be fully and
unconditionally guaranteed on an
unsecured senior basis (the
"Guarantees") by the Guarantors.
RANKING...................................... The Notes will be general unsecured
senior obligations of the Company and
will be PARI PASSU in right of
payment to existing and future senior
unsecured indebtedness of the
Company. As of June 30, 1998, all of
the Company's and the Guarantors'
Indebtedness would have ranked PARI
PASSU with or be effectively senior
to the Notes and the Guarantees,
respectively. The Notes will also be
effectively subordinated to all
secured indebtedness of the Company
and its subsidiaries to the extent of
the assets securing such
indebtedness. As of June 30, 1998,
after giving effect to the Notes
Offering, the Company would have had
approximately $136.1 million of
senior indebtedness outstanding, of
which $5.2 million would have been
secured. The Guarantees will be
general unsecured obligations of the
Guarantors and will be PARI PASSU in
right of payment to all existing and
future senior unsecured indebtedness
of the Guarantors. The Guarantees
will also be effectively subordinated
to all secured indebtedness of the
Guarantors to the extent of the
assets securing such indebtedness. As
of June 30, 1998, after giving effect
to the Notes Offering, the Guarantors
would have had approximately $4.8
million (exclusive of the Guarantees
of the Notes) of senior indebtedness
outstanding, of which $1.9 million
would have been secured.
OPTIONAL REDEMPTION.......................... The Notes will be redeemable, in
whole or in part, at the option of
the Company on or after , 2003, at
the redemption prices set forth
herein, plus accrued and unpaid
interest to the date of redemption.
In addition, at any time on or prior
to , 2001, the Company
may, at its option, redeem up to 35%
of the aggregate principal amount of
the Notes originally issued with the
net cash proceeds of one or more
Public Equity Offerings (as defined),
at a redemption price equal to %
of the aggregate principal amount of
3
<PAGE>
the Notes to be redeemed plus accrued
and unpaid interest to the date of
redemption; PROVIDED, HOWEVER, that,
after giving effect to any such
redemption, at least 65% of the
aggregate principal amount of the
Notes originally issued remains
outstanding.
CHANGE OF CONTROL............................ Upon a Change of Control (as
defined), each holder will have the
right, subject to certain conditions,
to require the Company to repurchase
such holder's Notes at a price equal
to 101% of the aggregate principal
amount thereof plus accrued and
unpaid interest to the date of
repurchase.
CERTAIN COVENANTS............................ The Indenture governing the Notes
(the "Indenture") will contain
certain covenants that limit the
ability of the Company and its
subsidiaries to, among other things,
incur additional indebtedness, pay
dividends or make investments and
certain other restricted payments,
consummate certain asset sales, enter
into certain transactions with af-
filiates, incur liens, impose
restrictions on the ability of a
subsidiary to pay dividends or make
certain payments to the Company and
its subsidiaries, merge or
consolidate with any other person or
sell, assign, transfer, lease, convey
or otherwise dispose of all or
substantially all of the assets of
the Company. In addition, under
certain circumstances, the Company
will be required to offer to purchase
the Notes, in whole or in part, at a
purchase price equal to 100% of the
aggregate principal amount thereof
plus accrued and unpaid interest, if
any, to the date of repurchase, with
the proceeds of certain Asset Sales
(as defined). All of such covenants
are subject to significant
qualifications and exceptions.
</TABLE>
For additional information regarding the Notes, see "Description of the
Notes."
RECENT DEVELOPMENTS
In July 1998, the Company filed a registration statement with the
Commission to offer 3.64 million shares of its Common Stock (the "Equity
Offering"). Due to recent market developments, on September 15, 1998, the
Company requested withdrawal of the Equity Offering from the Commission.
USE OF PROCEEDS
The Company intends to use the net proceeds from the Notes Offering as
follows: (i) approximately $98.0 million to complete the Mexican Network; (ii)
approximately $15.0 million to acquire international switching and transmission
facilities; and (iii) the balance to pursue joint ventures, strategic alliances
or acquisitions and for working capital and other general corporate purposes.
See "Use of Proceeds."
4
<PAGE>
RISK FACTORS
An investment in the Notes is subject to certain risks, including the
following:
o SUBSTANTIAL INDEBTEDNESS.__The Company will have substantial
indebtedness and will be highly leveraged after it consummates the
Notes Offering. The Company's high degree of indebtedness could
affect the Company's ability to obtain financing in the future,
could limit its flexibility in planning for changes in its
business, and will require a significant portion of its cash flow
to be used for the payment of principal and interest on the Notes,
limiting its availability for use in the Company's business.
o HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDARIES FOR
DISTRIBUTIONS TO REPAY NOTES.__As a holding company, the Company
relies on distributions and dividends from its operating
subsidiaries to meet its cash needs, including interest payments
on the Notes.
o FUTURE NET LOSSES.__The Company could incur significant net losses
in the next few years as it incurs additional costs associated
with the development and expansion of its network, including the
construction of the Mexican Network, and debt repayment
obligations, including interest on the Notes. The construction of
the Mexican Network could be delayed due to factors beyond the
Company's control. The Company may experience negative cash flows
in new markets it enters until an adequate customer base and
related revenues can be established.
o CONSTRUCTION OF MEXICAN NETWORK; CONSTRUCTION COSTS.__Construction
of the Mexican Network will require the Company to commit
significant amounts of capital. The failure to complete, delays in
the construction of, or significant cost overruns incurred in the
construction of the Mexican Network could adversely affect the
Company's ability to increase its on-net traffic, generate cash
flows and make interest payments on the Notes.
o COMPETITION.__The telecommunications industry is and will continue
to be highly competitive. Existing telecommunications providers,
many with significantly greater resources and brand name
recognition than the Company, and new entrants will continue to
compete with the Company for customers, which will likely result
in continued downward pricing pressure for the Company's services.
o SUBSTANTIAL GOVERNMENT REGULATION. In each country in which it
operates, the Company is subject to substantial government
regulation. Enforcement and interpretation of the
telecommunications laws in these countries are often unclear,
unpredictable or subject to influence by the incumbent telephone
carrier. The Company may, from time to time, be subject to fines,
penalties, confiscation of facilities and equipment and/or other
sanctions, including being denied the ability to offer its products
and services.
For a more complete discussion of these and other risk factors that should
be considered in evaluating an investment in the Notes, see "Risk Factors."
The Company's principal executive offices are located at 2700 Post Oak
Boulevard, Suite 1000, Houston, Texas 77056, and its telephone number is (713)
968-0968.
5
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The summary financial and other data set forth below is qualified in its
entirety by, and should be read together with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Pro Forma
Condensed Consolidated Financial Statements, including the Notes thereto, and
the other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA SIX MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED
------------------------------- DECEMBER 31, JUNE 30,
1995 1996 1997 1997(1) 1998
--------- --------- --------- ------------ ----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS AND OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA(2):
Revenues........................... $ 1,108 $ 5,705 $ 36,154 $ 65,368 $ 65,777
Cost of revenues................... 619 3,041 24,396 52,018 57,056
--------- --------- --------- ------------ ----------
Gross profit....................... 489 2,664 11,758 13,350 8,721
Selling, general and administrative
expenses.......................... 1,349 4,159 8,154 9,500 5,705
Depreciation and amortization...... 48 264 622 1,157 1,258
--------- --------- --------- ------------ ----------
Operating income (loss)............ (908) (1,759) 2,982 2,693 1,758
Interest income (expense), net..... 230 15 (95) (223) (251 )
Other income (expense), net........ (2) 99 (137) (123) (91 )
--------- --------- --------- ------------ ----------
Income (loss) before income taxes
and minority interests............ (680) (1,645) 2,750 2,347 1,416
Income tax benefit (expense)....... -- 53 (84) 11 (895 )
--------- --------- --------- ------------ ----------
Income (loss) before minority
interests......................... (680) (1,592) 2,666 2,358 521
Minority interests................. 7 (6) 6 6 (29 )
--------- --------- --------- ------------ ----------
Net income (loss).................. $ (673) $ (1,598) $ 2,672 $ 2,364 $ 492
========= ========= ========= ============ ==========
EARNINGS (LOSS) PER SHARE:
Basic.............................. $ (0.36) $ (0.52) $ 0.68 $ 0.59 $ 0.11
Weighted average shares
outstanding....................... 1,890,442 3,046,594 3,903,470 4,003,470 4,534,568
Diluted(3)......................... N/A N/A $ 0.53 $ 0.45 $ 0.06
Weighted average shares outstanding
for diluted calculation........... N/A N/A 5,152,211 5,418,711 7,778,072
OTHER OPERATING DATA(2):
EBITDA(4).......................... $ (860) $ (1,495) $ 3,604 $ 3,850 $ 3,016
Ratio of debt to EBITDA............ -- -- 0.88 0.83 5.12
Capital expenditures............... 46 441 1,682 5,696
Ratio of earnings to fixed
charges(5)........................ -- -- 7.07 4.93 2.51
Fixed charges in excess of
earnings(5)....................... 717 1,770 N/A N/A N/A
Cash flows provided by (used in)
operating activities.............. (817) (2,731) 4,588 5,516 441
Cash flows provided by (used in)
investing activities.............. 444 2,489 (1,799) (2,007) (16,721 )
Cash flows provided by (used in)
financing activities.............. -- 564 1,450 (56) 16,035
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, AS ADJUSTED(6)
------------------------------- JUNE 30, JUNE 30,
1995 1996 1997 1998 1998
--------- --------- --------- -------- --------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(2):
Cash, cash equivalents and short
term investments.................. $ 3,645 $ 495 $ 4,734 $ 4,939 $124,578
Working capital.................... 4,081 1,813 3,669 (2,552 ) 117,087
Property and equipment, net........ 154 983 2,679 13,084 13,084
Goodwill and other intangibles,
net............................... -- 3,246 17,674 26,332 26,332
Total assets....................... 4,498 9,371 39,635 69,045 194,045
Total long-term debt............... -- -- 2,676 9,463 134,463
Total stockholders' equity......... 3,590 5,765 22,088 28,592 28,592
</TABLE>
- ------------
(1) Adjusted to give effect to the Company's acquisitions of MSN and Integracion
de Redes, S.A. de C.V. ("Integracion"), as if such transactions and events
had been consummated on January 1, 1997.
(2) The Company's historical financial statements include the operations of its
subsidiaries from their respective dates of acquisition, or inception in the
case of poolings, as follows: Telscape USA -- April 10, 1996;
Telereunion -- May 10, 1996; Integracion -- July 1, 1997; N.S.I., S.A. de
C.V. ("NSI") -- October 1, 1997; and MSN -- January 1, 1998. INTERLINK's
operations will be included beginning June 1, 1998.
(3) Diluted earnings per share for the years ended December 31, 1995 and 1996
were not provided, as inclusion of additional shares under a diluted
analysis for loss periods is inappropriate due to the anti-dilutive effect.
For purposes of diluted earnings per share, interest expense on convertible
notes assumed to have been converted into common shares was added back to
net income as follows: $42 and $84 for the historical year ended December
31, 1997 and pro forma year ended December 31, 1997, respectively.
(4) EBITDA as used in this Prospectus represents net earnings (loss) before
interest, income taxes, depreciation and amortization. The Company has
included EBITDA data because it is a measure commonly used in the
telecommunications industry and is included herein to provide additional
information with respect to the Company's ability to meet its future debt
service, capital expenditures and working capital requirements. In addition,
the Company believes that certain investors find EBITDA to be a useful tool
for measuring the ability of the Company to service its debt. EBITDA is not
a measure of financial performance determined under generally accepted
accounting principles, should not be considered as an alternative to net
income as a measure of performance or to cash flows as a measure of
liquidity, and is not necessarily comparable to similarly titled measures
presented by other companies.
(5) The ratio of earnings to fixed charges was computed by dividing earnings by
fixed charges. For this purpose, earnings consist of income from continuing
operations, before income taxes and fixed charges of the Company and its
subsidiaries. Fixed charges consist of the Company's and subsidiaries'
interest expense and the portion of rent expense representative of an
interest factor. Where the ratio indicates less than a 1-to-1 coverage, the
dollar amount of the coverage deficiency is presented.
(6) As adjusted to give effect to the Notes Offering.
6
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE RISK FACTORS SET FORTH
BELOW, AS WELL AS THE OTHER INFORMATION APPEARING IN THIS PROSPECTUS, BEFORE
MAKING AN INVESTMENT IN THE NOTES.
SUBSTANTIAL INDEBTEDNESS
The Company will have substantial indebtedness after the Notes Offering. As
of June 30, 1998, after giving effect to the Notes Offering and the application
of the net proceeds therefrom, the Company's total indebtedness would have been
approximately $140.5 million, including $7.1 million of secured indebtedness,
its stockholders' equity would have been approximately $28.6 million and it
would have had total assets of approximately $194.0 million. For the six months
ended June 30, 1998, after giving effect to the Notes Offering and the
application of the net proceeds therefrom, the Company's earnings (as defined in
Footnote 5 to Summary Historical and Pro Forma Financial and Other Data) would
have been insufficient to cover fixed charges (including interest on the Notes)
by approximately $7.3 million. This indicates that the Company must
substantially increase its net cash flow in order to meet its debt service
obligations, including interest payments on the Notes. The Indenture limits the
incurrence of certain additional indebtedness by the Company and certain of its
subsidiaries. In the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding with respect to the Company, the holders of
any secured indebtedness will be entitled to proceed against the collateral that
secures such secured indebtedness and such collateral will not be available for
satisfaction of any amounts owed under the Notes. The Company anticipates that
it and its subsidiaries will incur substantial additional indebtedness in the
future. See the Company's Consolidated Financial Statements elsewhere in the
Prospectus, "Selected Consolidated Financial and Other Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Description of the Notes."
The level of the Company's indebtedness could have important consequences
to holders of the Notes, including the following: (i) the debt service
requirements of any additional indebtedness could make it more difficult for the
Company to make payments of interest on the Notes; (ii) the ability of the
Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes may be
limited; (iii) a substantial portion of the Company's cash flow from operations,
if any, must be dedicated to the payment of principal and interest on the Notes
and its other indebtedness and will not be available for use in its business;
(iv) the Company's level of indebtedness could limit its flexibility in planning
for, or reacting to, changes in its business; (v) the Company may become more
highly leveraged than some of its competitors, which may place it at a
competitive disadvantage; and (vi) the Company's high degree of indebtedness
will make it more vulnerable in the event of a downturn in its business. In
addition, the degree to which the Company is leveraged could prevent it from
repurchasing all of the Notes tendered to it upon the occurrence of a Change of
Control. See "Description of the Notes -- Change of Control."
The Company must substantially increase its net cash flow in order to meet
its debt service obligations, and there can be no assurance that the Company
will be able to meet such obligations, including its obligations under the
Notes. If the Company is unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, or if it otherwise fails to
comply with the various covenants governing its indebtedness, it would be in
default under the terms thereof, which would permit the holders of such
indebtedness to accelerate the maturity of such indebtedness and could cause
defaults under other indebtedness of the Company. Such defaults could result in
a default on the Notes and could delay or preclude payments of interest or
principal thereon.
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DISTRIBUTIONS TO REPAY
NOTES
Telscape is a holding company, the principal assets of which are its
operating subsidiaries in the United States and Mexico. As a holding company,
the Company's internal sources of funds to meet its cash needs, including
payment of expenses and principal and interest on the Notes, are dividends,
intercompany loans and other permitted payments from its direct and indirect
subsidiaries, as well as its own credit arrangements. Additionally, several of
the Company's subsidiaries are organized in jurisdictions outside the United
7
<PAGE>
States, and the Company may not have direct control over such subsidiaries. The
ability of the Company's operating subsidiaries to pay dividends, repay
intercompany loans or make other distributions to Telscape may be restricted by,
among other things, the availability of funds, the terms of various credit
arrangements entered into by such operating subsidiaries, the terms of any
agreements the Company enters into with owners of minority interests in certain
subsidiaries, joint venture partners or entities selling assets or businesses to
the Company, as well as statutory and other legal restrictions including
restrictions on the repatriation of money from foreign jurisdictions, and any
such payments may have adverse tax consequences. The failure to pay any such
dividends, make intercompany loans or make any such other distributions would
restrict Telscape's ability to make principal and/or interest payments on the
Notes, utilize cash flow from one subsidiary to cover shortfalls in working
capital at another subsidiary, and could otherwise have a material adverse
effect upon the Company's business, financial condition and results of
operations.
Holders of secured indebtedness will have a claim on the assets of the
Company and its subsidiaries securing such indebtedness that is prior to the
claims of the holders of the Notes and will have a claim that is PARI PASSU with
the claims of the holders of the Notes to the extent such security does not
satisfy such indebtedness. As of June 30, 1998, the Company (excluding its
subsidiaries) had approximately $5.2 million of secured indebtedness, and the
Guarantors had approximately $1.9 million of secured indebtedness. The Company
has no significant assets other than the ownership interests in its subsidiaries
and it is expected that such ownership interests may be pledged in the future to
secure one or more credit facilities.
FUTURE NET LOSSES
The Company could incur significant net losses over the next few years as
it incurs additional costs associated with the development and expansion of its
network, the expansion of its marketing and sales organization and the
introduction of new telecommunications services. Furthermore, the Company's
operations in new target markets could experience negative cash flows until an
adequate customer base and related revenues have been established. In addition,
the generation of revenues from the development of the Mexican Network may be
delayed due to factors outside of the Company's control, including, but not
limited to, delays in negotiating acceptable interconnection agreements with
Telefonos de Mexico, S.A. de C.V. ("Telmex"), delays in negotiating
rights-of-way for completion of the Mexican Network and delays in construction
of the Mexican Network, any of which could have the result of decreasing the
Company's operating cash flow. The Company must substantially increase its net
cash flow in order to meet its debt service obligations, including its
obligations on the Notes, and there can be no assurance that the Company will
achieve or, if achieved, will sustain profitability or positive cash flow from
operating activities in the future. If the Company cannot achieve and sustain
operating profitability or positive cash flow from operations, it may not be
able to meet its debt service or working capital requirements (including its
obligations with respect to the Notes), which could have a material adverse
effect on the business, operations and financial condition of the Company. The
Company's ability to grow and generate revenues will depend, among other things,
on its ability to expand the capacity of its network. The continued expansion,
operation and development of the Company's network will depend on, among other
factors, the Company's ability to (i) attract and retain customers and (ii)
attract and retain experienced and qualified personnel. See " -- Future Capital
Needs; Uncertainty of Additional Funding," " -- Construction of the Mexican
Network; Construction Costs" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
EXPANSION AND OPERATION OF THE NETWORK
The success of the Company is largely dependent on its ability to deliver
low-cost, uninterrupted international and domestic long distance telephone
services. Any system or network failure that causes interruptions in the
Company's operations could have a material adverse effect on its business,
financial condition or results of operations. At times, the Company's switching
equipment has experienced failures, which temporarily prevented customers from
using its services. The Company's operations are dependent on its ability to
expand successfully its network and integrate new and emerging technologies and
8
<PAGE>
equipment into its network, which are likely to increase the risk of system
failure and to cause strain upon the network. The Company's ability to expand
successfully into new markets is dependent on its ability to integrate its
equipment into the existing networks in those markets. The Company's ability to
enter a new market has in the past, and could in the future, be delayed by
technical specifications and other barriers to entry that exist in the market.
The Company's operations also are dependent on the Company's protection of its
hardware and other equipment from damage from natural disasters such as fires,
floods, hurricanes and earthquakes, or other sources of power loss,
telecommunications failures or similar occurrences. Significant or prolonged
network failures, or difficulties for customers in completing long distance
telephone calls, could damage the reputation of the Company and result in the
loss of customers. Such damage or losses could have a material adverse effect on
the Company's ability to obtain new subscribers and customers and retain its
existing customers, and on the Company's business, financial condition or
results of operations.
The Company's ability to increase revenues will be dependent on its ability
to expand the capacity of, and eliminate bottlenecks that may develop from time
to time on, the Company's network. The continued expansion, operation and
development of the Company's network will depend on, among other factors, the
Company's ability to: (i) obtain one or more switch sites in its targeted
markets; (ii) obtain interconnectivity to the local Public Switched Telephone
Network ("PSTN") and/or other carriers; (iii) obtain necessary licenses
permitting termination and origination of traffic; (iv) obtain access to or
ownership of transmission facilities linking a switch to other network switches;
and (v) open new offices in target markets. By expanding its network, the
Company will incur additional fixed operating costs that typically exceed,
particularly with respect to international transmission lines, the revenues
attributable to the transmission capacity funded by such costs until the Company
generates additional traffic volume for such expanded capacity. There can be no
assurance that the Company will be able to expand its network in a cost
effective manner or to operate the network efficiently.
Although the Company has not experienced significant quality problems to
date, the Company may from time to time experience general problems affecting
the quality of the voice and data transmission of some calls transmitted over
its network due to its anticipated expansion, which could result in poor quality
transmission and interruptions in service. To provide redundancy in the event of
technical difficulties with its network and to the extent the Company purchases
transit and termination capacity from other carriers, the Company relies upon
other carriers' networks. Whenever the Company is required to route traffic over
a non-primary choice carrier due to technical difficulties or capacity shortages
with its network or its primary choice carrier, those calls are more costly to
the Company and could result in lower transmission quality. Any failure by the
Company to operate, expand, manage or maintain its network properly could result
in customers diverting all or a portion of their calls to other carriers, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Conditions and Results of Operations."
As part of its plan to provide coverage from the United States to Mexico
and other targeted Latin American markets where fiber optic capacity cannot be
acquired or cannot be acquired on terms acceptable to the Company, Telscape
acquired satellite transmission equipment by purchasing INTERLINK. Prior to this
acquisition, the Company did not have significant experience in operating
satellite transmission facilities, and any problems that arise from the
operation or maintenance of these facilities could materially adversely affect
the Company's ability to provide telecommunications services to regions served
by such facilities. If the Company is not able to restore service quickly or to
secure redundant capacity on acceptable terms, the failure to maintain or
operate such facilities could have a material adverse effect on the Company's
business, financial condition or results of operations.
CONSTRUCTION OF THE MEXICAN NETWORK; CONSTRUCTION COSTS
The Company's ability to build the Mexican Network is essential to its
future success. The Company has targeted the Gulf region of Mexico for the
development of the Mexican Network, including the states of Tamaulipas and
Veracruz on the eastern coast of Mexico extending into the central region via
the state of Puebla. The Company expects to complete the Mexican Network over
the course of approximately twenty-
9
<PAGE>
four months. There are certain risks associated with the Mexican Network,
including, among other things, (i) the potential for cost overruns, (ii) the
potential for an untimely completion of the Mexican Network, (iii) the Company's
lack of experience in developing such a network, (iv) obtaining necessary rights
of way, (v) managing effectively the construction of the new fiber routes and
(vi) the potential that a competitor may develop a comparable network prior to
the completion of the Mexican Network, thus greatly diminishing the demand for
the Company's services. In addition, the successful construction of the Mexican
Network will depend to a significant extent on third party contractors retained
by the Company. Although the Company does not anticipate undue difficulty in
acquiring the necessary rights-of-way or in managing the network construction,
no assurance can be given that such rights will be acquired or that the
construction will be completed without significant delays, within its budget or
at all. Difficulties or delays with respect to any of the foregoing may
significantly delay or prevent the completion of the Mexican Network, which
would have a material adverse effect on the Company. See "Use of Proceeds,"
"Business -- Network -- Network Strategy" and "Business -- Network -- Network
Expansion."
PRICING PRESSURES AND RISKS OF INDUSTRY OVER-CAPACITY
Since the AT&T Corp. ("AT&T") divestiture in 1984, the long distance
transmission industry has generally been characterized by over-capacity and
declining prices. The Company believes that demand has increased over the last
several years, ameliorating the over-capacity and reducing pricing pressures.
However, the Company anticipates that prices for its services will continue to
decline. There can be no assurance that the Company's competitors, as well as
potential new entrants to the industry, will not construct new fiber optic and
other long distance transmission networks where the Company intends to construct
its Mexican Network. Because the cost of the actual fiber is a relatively small
portion of building new transmission lines, persons building such lines are
likely to install fiber that provides substantially more transmission capacity
than will be needed over the next several years. Further, recent technological
advances have also shown the potential to greatly expand the capacity of
existing and new fiber optic cable. The Company's cost-saving arrangements with
other carriers, which may involve the sale or lease of capacity or fibers on the
Company's Mexican Network, may result in competitors having capacity on the
Company's routes along the Mexican Network, which may in turn result in pricing
pressures with respect to traffic carried along these routes. If capacity
expansion in the industry results in capacity that exceeds overall demand in
general, or along any of the Company's routes, severe additional pricing
pressure could develop. Such pricing pressure could have a material adverse
effect on the Company.
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
As part of its business strategy, the Company has entered into, and in the
future may enter into, strategic alliances with, has acquired and in the future
may acquire assets or businesses from and has made and in the future may make
investments in, companies that are complementary to its current operations. Any
such future strategic alliances, investments or acquisitions would be
accompanied by the risks commonly encountered in such transactions. Such risks
include, among other things, the difficulty of assimilating the operations and
personnel of the companies, the potential disruption of the Company's ongoing
business, costs associated with the development and integration of such
operations, the inability of management to maximize the financial and strategic
position of the Company by the successful incorporation of licensed or acquired
technology into the Company's service offerings, the maintenance of uniform
standards, controls, procedures and policies, the impairment of relationships
with employees and customers as a result of changes in management and higher
customer attrition with respect to customers obtained through acquisitions.
Financial risks involved in acquisitions include the incurrence of indebtedness
by the Company in order to finance such acquisitions and the consequent need to
service such indebtedness.
In many Latin American countries, including Mexico, the jurisdiction of
organization of Telereunion S.A., foreign investors such as the Company may be
prohibited from owning a majority interest in any local entity providing certain
telecommunications services. The result of any such laws or regulations is that
the Company may not have a controlling interest in an entity through which
substantial investments and operations of the Company are made and conducted.
Expansion through joint ventures entails similar
10
<PAGE>
potential risks for the Company. The Company may not have a majority interest in
or control of the board of directors of any such local operating entity or its
operations or assets. There is also a risk that a minority or majority interest
owner or the Company's joint venture partner or partners may not have economic,
business or legal interests or goals that are consistent with those of the joint
venture or the Company. In addition, there is a risk that a minority or majority
interest owner or a joint venture partner may be unable to meet its economic or
other obligations and that the Company may be required to fulfill those
obligations.
Depending on the value and nature of the consideration paid by the Company
for acquisitions, such acquisitions may materially adversely affect the
Company's liquidity. In making acquisitions in the future, the Company
anticipates that it may compete for acquisitions with other companies, some of
which are larger and have greater financial resources than the Company. There
can be no assurance that the Company will be successful in consummating
acquisitions, thereby limiting the Company's ability to grow. The Indenture
limits the ability of the Company and its subsidiaries to incur indebtedness to
finance acquisitions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Description of the Notes -- Certain Covenants."
CERTAIN FACTORS RELATING TO MEXICO
ADVERSE MEXICAN ECONOMIC CONDITIONS AND GOVERNMENT POLICIES. A significant
portion of the Company's assets and revenues are and will be located in Mexico.
In addition, substantially all of the proceeds from the Notes Offering are to be
invested in the development of the Mexican Network. The Company's business is
affected by prevailing conditions in the Mexican economy and is, to a
significant extent, vulnerable to economic downturns and changes in government
policies. The Mexican government has exercised and continues to exercise
significant influence over many aspects of the Mexican economy. Accordingly,
actions taken or policies established by legislative, executive or judicial
authorities in Mexico that affect the economy of Mexico could have material
adverse effects on private sector entities in general and on the Company in
particular. There can be no assurance that future economic, political or
diplomatic developments in or affecting Mexico will not impair the Company's
business, results of operations, financial condition, liquidity (including the
ability to obtain financing) or prospects, or materially adversely affect the
market price of the Company's securities (including the Notes) or the ability of
the Company to meet its obligations. See " -- Risks Associated with
International Operations; Currency Fluctuations."
EXCHANGE RATES. From December 1994 through December 1996, Mexico
experienced an economic crisis characterized by exchange rate instability, a
devaluation of the peso, high inflation, high domestic interest rates, negative
economic growth (on a cumulative basis), a reduction of international capital
flows to both the private and public sectors, reduced consumer purchasing power
and high unemployment. This crisis or any future crisis of a similar nature,
including the devaluation of the peso, could have a material adverse effect on
the Company's financial position and results of operations. Additionally, any
future devaluation of the peso against the U.S. dollar could materially
adversely affect the ability of the Company to service its dollar-denominated
liabilities, including the Notes.
The value of the peso has been subject to significant fluctuations with
respect to the U.S. dollar in the past and may be subject to significant
fluctuations in the future. The following table summarizes the value of the peso
against the U.S. dollar at the beginning and end of the periods indicated.
TIME PERIOD PESOS PER U.S. DOLLAR % CHANGE DURING PERIOD
- ----------------------- --------------------- ----------------------
1/1/94 - 12/31/94 3.11 - 4.94 58.8%
1/1/95 - 12/31/95 4.94 - 7.68 55.5
1/1/96 - 12/31/96 7.68 - 7.85 2.2
1/1/97 - 12/31/97 7.85 - 8.08 2.9
1/1/98 - 8/31/98 8.08 - 9.96 23.3
Exchange rate fluctuations could have a material adverse effect on the
Company's business and its ability to service its dollar-denominated
liabilities, including the Notes.
11
<PAGE>
Substantially all of the Company's indebtedness is denominated in U.S.
dollars. In addition, the Company generally purchases equipment for capital
improvements in U.S. dollars. The Company believes that less than 10% of the
Company's revenues are currently transacted in pesos. Declines in the value of
the peso relative to other currencies will increase the costs in pesos to the
Company of this indebtedness and will result in foreign exchange losses and
increases in the peso cost of the Company's capital expenditures. In 1993, 1994,
1995, 1996 and 1997 and the six months ended June 30, 1998, the Company
experienced net foreign exchange losses (gains) of $(14,000), $(18,000), $2,000,
($161,000), $126,000 and $187,000, respectively, as a result of the effect of
the peso devaluation.
The Company may in the future incur additional non-peso-denominated
indebtedness. As a result of its plan to construct the Mexican Network, the
Company anticipates that it will generate additional peso-denominated
receivables in the future from the provision of domestic and international long
distance services originating in Mexico. As the Company's peso-denominated
revenues increase, the Company's foreign exchange risk will also increase. The
Company does not currently hedge against the risk of exchange rate fluctuations.
EXCHANGE CONTROLS. In recent years, the Mexican economy has suffered
balance of payment deficits and shortages in foreign exchange reserves. While
the Mexican government does not currently restrict the ability of Mexican or
foreign persons or entities to convert pesos to dollars or to transfer dollars
outside Mexico, no assurance can be given that the Mexican government will not
institute a restrictive exchange control policy in the future. Any such
restrictive exchange control policy would materially adversely affect the
Company's ability to convert pesos into dollars for purposes of making payments
to holders of the Notes, and could also have a material adverse effect on the
Company's business and financial condition and its ability to service its dollar
denominated liabilities.
DEVELOPMENTS IN OTHER EMERGING MARKET COUNTRIES. Prices of securities of
companies with significant Mexican operations may be, to varying degrees,
influenced by economic and market conditions in other emerging market countries.
Although economic conditions are different in each country, investors' reactions
to developments in one country may have effects on the prices of securities of
issuers in other countries, including Mexico. There can be no assurance that the
Company's securities (including the Notes) would not be materially adversely
affected by events in emerging market countries or that such events would not
affect the price of the Notes.
MANAGEMENT OF GROWTH
The Company's strategy of continuing its growth and expansion has placed,
and is expected to continue to place, a significant strain on the Company's
management, operational and financial resources and increased demands on its
systems and controls. The Company is continuing to develop its network by adding
switches, cable and satellite facilities and expanding its operations within
Latin America when business and regulatory conditions warrant. In order to
manage its growth effectively, the Company must continue to implement and
improve its operational and financial systems and controls, purchase and utilize
other transmission facilities, and expand, train and manage its employee base.
Inaccuracies in the Company's forecasts of traffic could result in insufficient
or excessive transmission facilities and disproportionate fixed expenses. There
can be no assurance that the Company will be able to develop a facilities-based
network or expand within its target markets at the rate presently planned by the
Company, or that the existing regulatory barriers to such expansion will be
reduced or eliminated. As the Company proceeds with its development, there will
be additional demands on the Company's customer support, billings systems and
support, sales and marketing and administrative resources and network
infrastructure. There can be no assurance that the Company's operating and
financial control systems and infrastructure will be adequate to maintain and
effectively manage future growth. The failure to continue to upgrade the
administrative, operating and financial control systems or the emergence of
unexpected expansion difficulties could materially adversely affect the
Company's business, results of operations and financial condition. See " --
Dependence on Effective Management Information Systems."
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DEPENDENCE ON EFFECTIVE MANAGEMENT INFORMATION SYSTEMS
The Company is dependent upon its information systems and switching
equipment to provide service to its customers, manage its network, collect
billing information and perform other vital functions. The Company is
particularly dependent upon its maintenance of an effective billing and
collection system, especially with respect to its Prepaid Card and wholesale
long distance businesses because of the high transaction volumes associated with
such businesses. The Company may experience technical difficulties with its
hardware or software which could materially adversely affect the Company's
business, financial condition or results of operations. See " -- Impact of the
Year 2000 Issue" and "Business -- Network."
COMPETITION
COMPETITION WITH PROVIDERS THAT HAVE GREATER RESOURCES THAN THE
COMPANY. The international and national telecommunications industry is highly
competitive and subject to rapid change precipitated by advances in technology
and regulation. Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources, larger
networks and a broader portfolio of services than the Company. Additionally,
many competitors have strong name recognition and "brand" loyalty,
long-standing relationships with the Company's target customers, and economies
of scale which can result in a lower relative cost structure for transmission
and related costs. These competitors include, among others, AT&T, MCI WorldCom,
Inc. ("MCI WorldCom") and Sprint Communications, Inc. ("Sprint"), which
provide long distance services in the United States; Telmex, Concessionaires,
and other registered value-added services providers in Mexico; as well as Post
Telegraph & Telephone operators ("PTTs") and emerging competitors in other
Latin American markets where the Company seeks to compete.
The Company anticipates that it will encounter additional competition as a
result of the formation of global alliances among large telecommunications
providers. Recent examples of such alliances include AT&T's alliance with
Unisource, known as "Uniworld;" Cable & Wireless Plc's recent alliance with
Italy's STET/Telecom Italia to serve international customers with a primary
focus on the Latin American and European regions; WorldCom, Inc.'s
("WorldCom") recent merger with MCI Communications, Inc. ("MCI"), and
subsequent alliance with Telefonica de Espana; and Sprint's alliance with
Deutsche Telekom and France Telecom, known as "Global One," and the joint
venture between Sprint and Telmex. Consolidation in the telecommunications
industry may create even larger competitors with greater financial and other
resources. The effect of the aforementioned or other similar mergers and
alliances could create increased competition in the telecommunications services
market and potentially reduce the number of customers that purchase wholesale
international long distance services from the Company.
COMPETITION WITH PREPAID CARD PROVIDERS. In the Prepaid Card business, the
Company currently competes with all of the first tier telecommunications
carriers as well as emerging multinational carriers such as PT-1 Communications,
Inc. ("PT-1"), SmarTalk Teleservices, Inc. ("SmarTalk"), RSL Communications,
Ltd. ("RSL") and IDT Corporation ("IDT"), many of which have greater
financial resources than the Company. Because certain of the Company's current
competitors also are or could be the Company's customers, the Company's business
would be materially adversely affected to the extent that a significant number
of such customers limit or cease doing business with the Company for competitive
or other reasons.
COMPETITION FROM PRICE SENSITIVITY AND FROM DEREGULATION. International
telecommunications providers such as the Company compete on the basis of price,
customer service, transmission quality, breadth of service offerings and
value-added services, and the Company's carrier and Prepaid Card customers are
especially price sensitive. Many of the Company's larger competitors enjoy
economies of scale that can result in a lower cost structure for termination and
network costs, which could cause significant pricing pressures within the
international communications industry. Many of the Company's smaller competitors
have the flexibility to change pricing strategies and introduce new service
offerings quickly. In recent years, prices for international and other
telecommunications services have decreased substantially, and are expected to
continue to decrease, in most of the markets in which the Company currently
competes or intends to compete. The intensity of such competition has recently
increased, and the Company expects that
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such competition will continue to intensify as the number of new entrants
increases as a result of the new competitive opportunities created by the U.S.
Telecommunications Act of 1996 (the "1996 Telecommunications Act"),
implementation by the Federal Communications Commission ("FCC") of the U.S.
commitment to the World Trade Organization ("WTO"), and privatization,
deregulation and changes in legislation and regulation in various of the
Company's foreign target markets.
The Company believes that competition in all of its markets is likely to
increase and that competition in non-U.S. markets is likely to become more
similar to competition in the U.S. market over time as such non-U.S. markets
continue to experience deregulatory influences. In each of the countries where
the Company markets or intends to market its services, the Company competes
primarily on the basis of price (particularly with respect to its sales to other
carriers), and also on the basis of customer service and its ability to provide
a variety of telecommunications products and services. There can be no assurance
that the Company will be able to compete successfully in the future. The Company
anticipates that deregulation and increased competition will result in
decreasing customer prices for telecommunications services. The Company believes
that the effects of such decreases will be at least partially offset by
increased telecommunications usage and decreased costs, but there can be no
assurance that this will be the case. To the extent this is not the case, there
could be a material adverse effect on the Company's margins and profits, and the
Company's business, financial condition and results of operations could be
materially and adversely affected. There can be no assurance that the Company
will be able to compete successfully in the future, or that such intense
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION IN MEXICO. In Mexico, the regulatory authorities have granted
concessions to 15 companies, including Telmex and Telereunion S.A., to construct
and operate public, long distance telecommunications networks in Mexico
("Concessionaires"). Some of these new competitive entrants have as their
partners major U.S. telecommunications providers including AT&T (Alestra, S.A.
de C.V. ("Alestra")), MCI (Avantel, S.A. de C.V. ("Avantel")) and Bell
Atlantic Corp. (Iusatel, S.A. de C.V. ("Iusatel")). In addition, the
regulatory authorities in Mexico have granted national concessions to provide
local exchange services to several telecommunications providers, including
Telmex and Telinor, S.A. de C.V. ("Telinor"), Megacable Comunicaciones de
Mexico, S.A. de C.V. ("Megacable"), Amaritel, S.A. de C.V. ("Amaritel"),
Union Telefonica Nacional, S.A. de C.V. ("Unitel"), MetroNet, S.A. de C.V.
("MetroNet") and Red de Servicios de Telecomunicaciones S.A. de C.V. ("Red de
Servicios") and several of Mexico's long distance Concessionaires. With regard
to the provision of services in Mexico, the Company competes or will compete in
Mexico with numerous other systems integration, value-added services, and voice
and data services providers, some of which focus their efforts on the same
customers targeted by the Company. In addition to these competitors, recent and
pending deregulation in Mexico may encourage new entrants.
Moreover, while the recently completed WTO Agreement (as defined) could
create opportunities for the Company to enter new foreign markets,
implementation of the WTO Agreement by the United States and other countries
could result in new competition from PTTs previously banned or limited from
providing services in the United States. For example, the joint venture between
Sprint and Telmex has applied to the FCC to enter the United States market and
to provide resold international switched services between the United States and
Mexico. Such application was approved subject to various conditions. Although
certain parties requested that the FCC reconsider its decision, the request was
denied. Increased competition in the United States, Mexico, and other Latin
American countries as a result of the foregoing, and other competitive
developments, including entry by Internet service providers into the
long-distance market, could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION WITH PTTS; FOREIGN REGULATORY HURDLES. The Company's success
depends upon its ability to compete with a variety of other telecommunications
providers in each of its markets, including the respective PTT in each country
in which the Company operates. The Company believes that PTTs generally have
certain competitive advantages due to their control over local connectivity and
close ties with national
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regulatory authorities. The Company also believes that, in certain instances,
some regulators have shown a reluctance to adopt policies and grant regulatory
approvals that would result in increased competition for the local PTT. If a PTT
were to successfully pressure national regulators to prevent the Company from
providing its services, the Company could be denied regulatory approval in
certain jurisdictions in which its services would otherwise be permitted,
thereby requiring the Company to seek judicial or other legal enforcement of its
right to provide services or to abandon its proposed operations. Any delay in
obtaining approval, or failure to obtain approval, could have a material adverse
effect on the Company's business, financial condition and results of operations.
If the Company encounters anti-competitive behavior or if national regulatory
authorities fail to adopt or implement procompetitive policies or safeguards in
countries in which the Company operates or intends to operate or if the PTT in
any country in which the Company operates uses its competitive advantages to the
fullest extent, the Company's business, financial condition and results of
operations could be materially adversely affected. See
"Business -- Competition" and "Business -- Regulation."
RISKS RELATED TO THE MEXICAN CONCESSION
The terms of the Mexican Concession are subject to regulation by the
Mexican government. There can be no assurance that additional concessions to
provide services similar to those expected to be provided by the Company will
not be granted to additional competitors, or that the value of the Mexican
Concession will not otherwise be affected by government action. The Mexican
government also has authority to temporarily seize all assets related to the
Mexican Concession in the event of natural disaster, war, significant public
disturbance or threats to internal peace and for other reasons of economic or
public order. In addition, the Mexican government has the statutory right to
expropriate any concession and claim all assets related thereto for reasons of
public interest. Mexican law provides for compensation in connection with losses
and damages related to temporary seizure or expropriation. However, there can be
no assurance as to the adequacy or timing of compensation obtained in any such
case.
Under the terms of the Mexican Concession, the Company must satisfy several
conditions, including limitations on the scope and location of the Mexican
Network and minimum capital requirements with respect to Telereunion S.A. There
can be no assurances that the Company will be able to comply with such terms.
Moreover, the failure of the Company to comply with such terms could cause a
termination of the Mexican Concession, and the Mexican government would not be
required to compensate the Company for such a termination. Such a termination
would prevent the Company from engaging in its proposed business and would
likely prevent the Company from having the ability to repay the Notes.
SUBSTANTIAL GOVERNMENT REGULATION
GENERAL. The global telecommunications industry is subject to substantial
government regulation, which may frequently change and which varies from country
to country, with enforcement and interpretation often unpredictable and/or
subject to influence by the local PTT. The Company has pursued and expects to
continue to pursue an aggressive strategy of providing its services to the
maximum extent it believes to be permissible under applicable laws and
regulations, which may result in the Company (i) providing services or using
transmission methods that are found to violate the laws or regulations of those
countries where it operates or plans to operate, (ii) losing, failing or being
unable to obtain necessary approvals or make filings subsequently found to be
required under such laws or regulations or (iii) being subject to fines,
penalties, the confiscation of facilities and equipment, or other sanctions,
including being denied the ability to offer its products and services.
If the Company's interpretation of applicable laws and regulations proves
incorrect, if the Company is subject to fines, penalties or other sanctions as a
result, or if the Company is unable to provide services or utilize transmission
methods which it presently provides or utilizes or intends to provide or
utilize, these events may have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, there can
be no assurance that future regulatory, judicial or legislative changes in any
or all of the markets in which the Company operates or intends to operate will
not have a material
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adverse effect on the Company's business, financial condition and results of
operations. See "Business_-- Regulation."
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The Company's success depends in significant part upon the continued
service of its senior management personnel and certain other employees with
longstanding industry relationships and technical knowledge of the Company's
operations including, in particular, E. Scott Crist, the Company's President and
Chief Executive Officer, and Manuel Landa, the Company's Chairman of the Board.
The Company does not maintain any "key person" life insurance. The Company has
entered into employment agreements with all of its key members of management.
The Company's future success also depends on its ability to attract, train,
retain and motivate highly skilled personnel. Competition for qualified,
high-level telecommunications personnel is intense and there can be no assurance
that the Company will be successful in attracting and retaining such personnel.
In particular, the Company is seeking to expand its middle-management personnel
in certain target markets, where the number of available qualified managers is
extremely limited. The loss of the services of one or more of the Company's key
personnel, or the failure to attract and retain additional key personnel, could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Management."
DEPENDENCE ON DISTRIBUTORS
The Company is dependent on distributors, particularly with respect to
sales of its TELEFIESTAT Prepaid Cards for international long distance
telecommunications services in the United States. Most of the Company's
distributors also sell services or products of other companies. Accordingly,
there can be no assurance that these distributors will devote sufficient efforts
to promoting and selling the Company's services, or that the Company will be
able to find capable distributors in the new markets into which it is entering.
The failure of these distributors to effectively distribute the Company's
TELEFIESTAT Prepaid Cards would substantially impair the Company's ability to
generate revenues from the sales of these cards, which could have a material
adverse effect on the Company's business, financial condition or results of
operations.
RISKS ASSOCIATED WITH COLLECTION OF RECEIVABLES; FRAUD
The Company expends considerable resources to collect receivables from
customers who fail to make payments in a timely manner. While the Company
continually seeks to minimize bad debt, and at times requires collateral to
support accounts receivable from certain customers, the Company's experience
indicates that a certain portion of past due accounts receivable will never be
collected and that such bad debt is a necessary cost of conducting business. As
of June 30, 1998, the Company reserved approximately $370,000 for accounts
receivable that are estimated to be uncollectible. In June 1998, one of the
Company's significant wholesale customers filed a petition for relief under
Chapter 11 of the U.S. Bankruptcy Code. As a result, the Company has reserved
approximately $540,000 for accounts receivable that are expected to be
uncollectible from this customer. There can be no assurance that, with regard to
any particular time period or periods or any particular geographic location or
locations, uncollectible receivables will not rise significantly above
historical or anticipated levels. Any significant increase in uncollectible
receivables could have a material adverse effect on the Company's business,
financial condition or results of operations. See "-- Dependence on Service
Providers for Prepaid Card Services."
The telecommunications industry has historically incurred losses due to
fraud. Although the Company has implemented anti-fraud measures in order to
control losses relating to fraudulent practices, there can be no assurance that
the Company will be able to control fraud effectively when operating in the
international or domestic telecommunications arena. The Company's failure to
control fraud effectively could have a material adverse effect on its business,
financial condition or results of operations. See "Business -- Customers,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Revenues" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
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FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
Through September 1999, the Company intends to invest approximately $113.0
million for infrastructure, including approximately $98.0 million towards
construction of the Mexican Network and approximately $15.0 million to acquire
switching and transmission facilities and enhanced service platforms. This
development and expansion of the Company's network facilities, together with
acquisitions and joint ventures to enter into new markets or expand in existing
markets, funding of working capital needs and investment in the Company's
management information systems will require significant investments. The Company
expects that the net proceeds from the Notes Offering and cash flow from
operations will provide the Company with sufficient capital to fund planned
capital expenditures and anticipated losses. There can be no assurance, however,
that the Company will not need additional financing sooner than anticipated. In
addition, the Company may be required to obtain additional financing in order to
repay the Notes at maturity. The need for additional financing will depend on
factors such as the rate and extent of the Company's international expansion,
increased investment in ownership rights in fiber optic cable, increased
acquisitions of new businesses, and increased sales and marketing expenses. In
addition, the amount of the Company's actual future capital requirements also
will depend upon many factors that are not within the Company's control,
including competitive conditions (particularly with respect to the Company's
ability to attract incremental traffic or acquire new operations at favorable
prices) and regulatory or other government actions. In the event that the
Company's plans or assumptions change or prove to be inaccurate or the net
proceeds of the Notes Offering, together with internally generated funds, prove
to be insufficient to fund the Company's growth and operations, then some or all
of the Company's development and expansion plans, including with respect to the
Mexican Network, could be delayed or abandoned, or the Company could be required
to seek additional financing.
The Company may seek to raise such additional capital from public or
private equity or debt sources. There can be no assurance that the Company will
be able to obtain the additional financing or, if obtained, that it will be able
to do so on a timely basis or on terms favorable to the Company. The Indenture
contains certain restrictive covenants that will affect, and in many respects
will significantly limit or prohibit, among other things, the ability of the
Company to incur additional indebtedness and to create liens on its assets. If
the Company is able to raise additional funds through the incurrence of debt,
and it does so, it would likely become subject to additional restrictive
financial covenants. In the event that the Company is unable to obtain such
additional capital or is unable to obtain such additional capital on acceptable
terms, the Company may be required to reduce the scope of its expansion, which
could materially adversely affect the Company's business, results of operations
and financial condition, its ability to compete and its ability to meet its
obligations on the Notes.
DEPENDENCE ON OPERATING AGREEMENTS WITH FOREIGN OPERATORS
The Company's wholesale long distance business is substantially dependent
on its ability to enter into: (i) operating agreements with PTTs in countries
that have yet to become deregulated so the Company can terminate traffic in, and
receive return traffic from, such countries; (ii) operating agreements with PTTs
and emerging carriers in foreign countries whose telecommunications markets have
deregulated so it can terminate traffic in such countries; and (iii)
interconnection agreements with the PTT in each of the countries where the
Company has operating facilities so it can terminate traffic in such countries.
The Company believes that it would not be able to serve its customers at
competitive prices without such operating or interconnection agreements.
Termination of such operating agreements by certain of the Company's foreign
carriers or PTTs would have a material adverse effect on the Company's business.
Moreover, there can be no assurance that the Company will be able to enter into
additional operating or interconnection agreements in the future. The failure to
enter into additional agreements could limit the Company's ability to increase
its revenues on a profitable basis. See "Business -- Network."
In many Latin American countries, including Mexico, the jurisdiction of
organization of Telereunion S.A., foreign investors such as the Company may be
prohibited from owning a majority interest in any local entity providing certain
telecommunications services. The result of any such laws or regulations is that
the
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Company may not have a controlling interest in an entity through which
substantial investments and operations of the Company are made and conducted.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS
A significant portion of the Company's operations, employees and assets are
located in Mexico. Additionally, expansion into international markets,
particularly in Latin America, is a key component of the Company's growth
strategy.
In many international markets, the PTT controls access to the local
networks, enjoys better brand name recognition and customer loyalty and
possesses significant operational economies, including a larger backbone network
and operating agreements with other PTTs. Moreover, PTTs generally have certain
competitive advantages due to their close ties with national regulatory
authorities, which have, in certain instances, shown reluctance to adopt
policies and grant regulatory approvals that would result in increased
competition for the local PTT. Pursuit of international growth opportunities may
require significant investments for extended periods of time before returns, if
any, on such investments are realized. Obtaining licenses in certain target
countries may require the Company to commit significant financial resources,
which investments may not yield positive net returns in such markets for
extended periods of time or ever. In addition, there can be no assurance that
the Company will be able to obtain the permits and licenses required for it to
operate, obtain access to local transmission facilities or markets or sell and
deliver competitive services in these markets.
In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks associated with conducting
business internationally that could have a material adverse effect on the
Company's international operations, including its strategy to open additional
offices in foreign countries and its ability to repatriate net income from
foreign markets. Such risks may include unexpected changes in regulatory
requirements, value-added tax, tariffs, customs, duties and other trade
barriers, difficulties in staffing and managing foreign operations, problems in
collecting accounts receivable, political risks, fluctuations in currency
exchange rates, foreign exchange controls which restrict or prohibit
repatriation of funds, technology export and import restrictions or
prohibitions, delays from customs brokers or government agencies, seasonal
reductions in business activity during the summer months in certain parts of the
world and potentially adverse tax consequences resulting from operating in
multiple jurisdictions with different tax laws. Although the Company's sales to
date have generally been denominated in U.S. dollars, some of the Company's
recent contracts are denominated in foreign currencies, and the value of the
U.S. dollar in relation to foreign currencies may also materially adversely
affect the Company's sales to international customers as well as the cost of
procuring, installing and maintaining equipment abroad. To the extent the
Company expands its international operations or begins to denominate prices in
foreign currencies, the Company will be exposed to increased risks of currency
fluctuation. The Company does not currently hedge against the risk of exchange
rate fluctuation, but may in the future choose to limit its exposure to foreign
currency risk through the purchase of forward foreign exchange contracts or
similar hedging strategies. However, there can be no assurance that any foreign
currency hedging strategy would be successful in avoiding exchange-related
losses. In addition, the Company's business could be materially adversely
affected by a reversal in the current trend toward deregulation of
telecommunications carriers. In certain countries, into which the Company may
choose to expand in the future, the Company may need to enter into a joint
venture or other strategic relationship with one or more third parties (possibly
with a PTT or other dominant carrier) in order to enter the market and/or
conduct its operations successfully. There can be no assurance that such factors
will not have a material adverse effect on the Company's future operations and,
consequently, on the Company's business, results of operations and financial
condition, or that the Company will not have to modify its current business
practices. In addition, there can be no assurance that laws or administrative
practices relating to taxation, foreign exchange or other matters of countries
within which the Company operates will not change. Any such change could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Certain Factors Relating to Mexico."
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DEPENDENCE ON FACILITIES-BASED CARRIERS
Telephone calls made by the Company's customers are transmitted primarily
over lines that the Company leases from facilities-based long distance carriers,
many of which are, or may become, competitors of the Company. The Company's
ability to maintain and expand its business is dependent upon whether the
Company continues to maintain favorable relationships with the facilities-based
carriers from which the Company leases transmission lines. Although the Company
believes that its relationships with carriers generally are satisfactory, the
deterioration or termination of the Company's relationships with one or more of
these carriers could have a material adverse effect upon the Company's cost
structure, service quality, network diversity, results of operations and
financial condition.
At present, a significant amount of the transmission capacity used by the
Company is obtained on a per-call (or usage) basis, subjecting the Company to
the possibility of unanticipated price increases and service cancellations.
Currently, usage rates generally are less than the rates the Company charges its
customers for connecting calls through these lines. Due to increased
competition, the Company may be forced to reduce the rates it charges to its
customers, which may result in the Company experiencing reduced or, in certain
circumstances, negative margins for some services. As its traffic volume
increases between particular international markets, the Company expects to cease
using variable usage arrangements and enter into fixed monthly or longer-term
leasing arrangements, subject to regulatory constraints. If the Company enters
into fixed-cost lease arrangements and incorrectly projects traffic volume in a
particular geographic area, the Company may not generate sufficient additional
revenue to offset the higher fixed costs. Moreover, certain vendors from which
the Company leases transmission lines, including Regional Bell Operating
Companies ("RBOCs") and other Local Exchange Carriers ("LECs") in the United
States, currently are subject to tariff controls and other price constraints
which in the future may be changed. Regulatory proposals are pending that may
affect the prices charged by the RBOCs and other LECs to the Company, which
could have a material adverse effect on the Company's margins, business,
financial condition and results of operations. If the tariff controls are lifted
as a result of the Detariffing Order (as defined), the Company will need to
negotiate contracts with these vendors, which could result in substantial legal
and administrative expense and a different cost structure for the Company's
services. See "-- Substantial Government Regulation" and
"Business -- Regulation."
DEPENDENCE ON SERVICE PROVIDERS FOR PREPAID CARD SERVICES
The Company has entered into service agreements with certain providers to
provide the Prepaid Card switching platform and the telecommunications services
related to the Prepaid Cards it markets and sells under the TELEFIESTAT brand
name. The Company intends to install its own Prepaid Card switching platform in
Houston, Texas, utilizing a Nortel DMS-250 switching platform. In addition, the
Company intends to use a portion of the net proceeds from the Notes Offering to
expand the Company's network facilities, including approximately $6.0 million
towards the deployment or purchase of Prepaid Card switching platforms in high
volume gateway cities such as Houston, New York, Chicago, San Francisco and Los
Angeles. There can be no assurance that the Prepaid Card switching platforms
will be completed on a timely basis, if at all. Until it installs platforms
sufficient to service its Prepaid Card business, the Company will continue to
utilize third parties to provide platforms for its Prepaid Card services. The
deterioration or termination of the Company's relationships with its platform
service providers could have a material adverse effect upon the Company's
revenue growth, cost structure, service quality, brand name recognition, network
diversity, results of operations and financial condition.
In May 1998, one of the Company's wholesale long distance customers filed a
petition for relief under Chapter 11 of the U.S. Bankruptcy Code. For the five
months ended May 31, 1998, this customer accounted for approximately 26% of the
Company's wholesale revenues and 7% of the Company's overall revenues.
Additionally, an affiliate of this customer provided switching services and the
Prepaid Card platform and arranged for other carriers to provide
telecommunications services for the Prepaid Cards. The Company had paid the
affiliate of the customer for the telecommunications services at the time the
Prepaid Cards were activated. Because the Company continued to provide service
to its Prepaid Card customers by working directly with the underlying service
providers, this resulted in the Company paying for certain of the
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telecommunications services a second time. The overall impact of the bankruptcy
filing to the Company's earnings, including additional Prepaid Card services
costs, the write-off of uncollectible receivables and the lost margin
contribution from the loss of a wholesale customer, resulted in a reduction of
operating income by approximately $2.0 million in the second quarter of 1998.
This bankruptcy is not expected to have a material impact on the Company's
operating results for the third quarter of 1998. The lost revenues from this
customer have been replaced by replacing the minutes previously purchased by
this customer with minutes from existing or new customers at market rates.
RAPID TECHNOLOGICAL DEVELOPMENT
The markets that the Company services are characterized by rapidly changing
technology, evolving industry standards, emerging competition and the frequent
introduction of new services, software and other products. The Company's success
is dependent in part upon its ability to enhance existing products, software and
services and to develop new products, software and services that meet changing
customer requirements on a timely and cost-effective basis. There can be no
assurance that the Company can successfully identify new opportunities and
develop and bring new products, software and services to market in a timely and
cost effective manner, or that products, software, services or technologies
developed by others will not render the Company's products, software, services
or technologies non-competitive or obsolete. In addition, there can be no
assurance that products, software or service developments or enhancements
introduced by the Company will achieve or sustain market acceptance or that they
will effectively address the compatibility and interoperability issues raised by
technological changes or new industry standards.
NEW AND UNCERTAIN MARKETS
Many of the overseas markets in which the Company currently markets or
intends to market telecommunications services are undergoing dramatic changes as
a result of privatization and deregulation. As a result of privatization and
deregulation, a new competitive environment is emerging in which major telephone
companies, media companies and utilities are entering the telecommunications
market and forming new alliances which are radically changing the landscape of
international and domestic telephone services. Open markets for
telecommunications services are expected to evolve in other parts of the world
as well. While the Company is focused on exploiting the imbalances brought about
by deregulation, the Company frequently enters new markets and is unable to
predict how the regulatory environments of such markets will evolve. There can
be no assurance that changes in the marketplace and new strategic alliances
among companies with greater resources than the Company will not materially
adversely affect the Company's ability to continue its efforts to increase its
overseas telecommunications customer base and its traffic volume, or its ability
to recover the cost of building out its international telecommunications
switching and transmission infrastructure.
CUSTOMER CONCENTRATION
The Company is dependent upon several key customers with respect to its
international wholesale business. One of the Company's customers accounted for
approximately 28% of its overall revenues for the year ended December 31, 1997.
For the six months ended June 30, 1998, no single customer accounted for over
10% of the Company's overall revenues. The Company could lose a significant
customer for many reasons, including the entrance into the market of significant
new competitors with lower rates than the Company, downward pressure on the
overall costs of transmitting international calls, transmission quality
problems, changes in U.S. or foreign regulations or unexpected increases in the
Company's cost structure as a result of expenses related to installing a global
network or otherwise. Recently, a wholesale customer of the Company that
accounted for approximately 26% of the Company's wholesale long distance
revenues for the five months ended May 31, 1998, filed a petition for relief
under Chapter 11 of the U.S. Bankruptcy Code. The Company has reserved
approximately $540,000 for accounts receivable that are expected to be
uncollectible from this customer. An affiliate of such customer provided
services for the Company's Prepaid Cards. See "-- Dependence on Service
Providers for Prepaid Card Services." Reserving for these receivables and the
loss of wholesale carrier revenues and gross margin contribution from this
customer
20
<PAGE>
negatively impacted the Company's earnings and EBITDA for the quarter ended June
30, 1998 and will negatively impact the Company's earnings and EBITDA for the
fiscal year ending December 31, 1998. The Company seeks to mitigate the risk of
customer concentration by expanding its wholesale customer base. However, there
can be no assurance that the Company will be able to attract and retain new
wholesale customers or that such customers will not experience similar financial
difficulties, default on their payment obligations or choose to route their
traffic through a carrier other than Telscape, any of which would have a
material adverse effect on the Company's business and results of operations. See
"-- Risks Associated with Collection of Receivables; Fraud."
RISK OF DEFAULT UNDER EXISTING AGREEMENTS
Certain of the Company's subsidiaries have entered into financing
agreements with an equipment lessor. These agreements permit the lessor, upon
the occurrence of certain events of default, to accelerate the entire unpaid
balance of amounts loaned to those subsidiaries for the purchase of switching
equipment and to foreclose on the equipment securing such obligations.
Accordingly, any failure by these subsidiaries to make payments when due on such
loans or to comply with certain affirmative and negative covenants set forth in
the agreements could materially adversely affect the Company's business,
financial condition and results of operation as well as its ability to provide
services through the use of these switches. For a more detailed discussion of
these agreements, see "Summary of Other Indebtedness -- Equipment Leases."
On July 27, 1998, the Company obtained a waiver from Southwest Bank of
Texas, N.A. under the Company's Revolving Credit Facility (as defined) to (i)
permit the Guarantee of the Notes by Telscape USA and MSN and (ii) waive
defaults under the minimum current ratio, minimum tangible net worth and
prohibition on quarterly loss covenants. If the Company remains in default under
the Revolving Credit Facility or defaults on covenants provided for in future
financing arrangements, and the Company is unable to obtain a waiver for such
defaults, the lenders could terminate such financing arrangements. The
termination of one or more of the Company's financing arrangements could have a
material adverse effect on the Company's working capital, ability to expand its
business or ability to execute its business plan. In addition, it is an event of
default under the Notes if the Company defaults on a financing obligation that
causes the acceleration of an amount in excess of $5.0 million.
COVENANTS
The Indenture will contain numerous financial and operating covenants that
will limit the discretion of the Company's management with respect to certain
business matters. These covenants will place significant restrictions on, among
other things, the ability of the Company to incur additional indebtedness, to
create liens or other encumbrances, to make certain payments and investments,
and to sell or otherwise dispose of assets and merge or consolidate with other
entities. See "Description of the Notes -- Certain Covenants." A failure to
comply with the obligations contained in the Indenture could result in an event
of default under the Indenture, which could result in acceleration of the Notes
and the acceleration of debt under other instruments evidencing indebtedness
that may contain cross-acceleration or cross-default provisions.
PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws and contractual restrictions to establish and protect its
technology and trade names. The Company believes that "Telscape" and the
"TELEFIESTA" Prepaid Cards, as well as the names and logos associated with
other of its services and products have achieved significant brand awareness
among its targeted markets, and the Company intends to protect and defend its
name, servicemarks and trademarks in the United States and internationally. The
Company has achieved registration for the "TELEFIESTA" mark and has filed for
protection of the "Telscape" name and logo, and Telereunion S.A. has a
national trademark registration in Mexico for "TELEREUNION." There can be no
assurance that the Company's trademark applications will result in any trademark
registrations. There can be no assurance that the steps taken by the Company
will be adequate to prevent misappropriation of its technology or other
proprietary rights, or that the Company's
21
<PAGE>
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology.
The Company is not aware of any third party challenges to the validity of
its trademarks, trademark applications, or of any claim by a third party of
trademark infringement with respect to its products, marks, registrations or
applications for registration. There can be no assurance that the Company's
efforts to protect its proprietary rights in the United States or other
countries will be successful. There can be no assurance that challenges or
claims will not be asserted in the future, or that the Company will have
sufficient funds to withstand such challenges or claims, regardless of their
merit. There can be no assurance that, if registered, any trademark will be held
valid and enforceable if challenged. The Company's inability to protect its
proprietary rights or continue to use its marks could have a material adverse
effect on the Company's operations. In addition, there can be no assurance that
licenses for any intellectual property that might be required in connection with
the Company's development of its services or products would be available on
reasonable terms if at all.
Although the Company does not believe that its products infringe the
proprietary rights of any third parties, and no third parties have asserted
patent infringement or other such claims against the Company, there can be no
assurance that third parties will not assert such claims against the Company in
the future or that any such claims will not be successful. The Company is aware
that patents have been recently granted to others based on fundamental
technologies in the communications, multimedia and Internet telephony areas and
patents may be issued which relate to fundamental technologies incorporated in
the Company's services and products. Because patent applications in the United
States are not publicly disclosed until the relevant patent is issued,
applications may have been filed which, if issued as patents, could relate to
the Company's services and products. The Company could incur substantial costs
and diversion of management resources in defending or pursuing any claims
relating to proprietary rights, which could have a material adverse effect on
the Company's business, financial condition or results of operations.
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which could
effectively block the Company's ability to provide services or products in the
United States or other countries. Such a judgment could have a material adverse
effect on the Company's business, financial condition or results of operations.
CONTROL BY PRINCIPAL STOCKHOLDERS
As of September 8, 1998, the officers and directors of the Company
beneficially owned approximately 57.8% of the Company's Common Stock on a fully
diluted basis. The Company's officers and directors are likely to continue to
exercise control or substantial influence over the Company's affairs, business
and election of members of the Company's Board of Directors. See"Principal
Stockholders."
RISKS RELATING TO A CHANGE OF CONTROL
Upon a Change of Control (as defined) holders of the Notes will have the
right to require the Company to repurchase all or any part of such holders'
Notes at a price equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest to the date of repurchase. Restrictions in the
Indenture may make more difficult or discourage a takeover of the Company,
whether favored or opposed by the management of the Company. While such
restrictions cover a wide variety of arrangements which have traditionally been
used to effect highly leveraged transactions, the Indenture may not afford the
Holders of Notes protection in all circumstances from the adverse aspects of a
highly leveraged transaction, reorganization, restructuring, merger or similar
transaction. There can be no assurance that the Company would have sufficient
financial resources available to satisfy all of its obligations under the Notes
(including its obligation to repurchase the Notes at 101% of the aggregate
principal amount thereof) in the event of a Change of Control. The Company's
failure to purchase the Notes would result in a default under the Indenture,
which could have material adverse consequences for the Company and the holders
of the Notes. See "Description of the Notes -- Change of Control." The
definition of "Change of Control" in the Indenture includes a sale, lease,
exchange or other transfer of "all or substantially all" of the assets of the
Company and its subsidiaries taken as a whole to a person or a group of persons.
There is no clearly
22
<PAGE>
established meaning for the phrase "all or substantially all" in the context
of an indenture. Because there is no precise established definition of this
phrase, the ability of a holder of the Notes to require the Company to
repurchase such Notes as a result of a sale, lease, exchange or other transfer
of all or substantially all of the Company's assets to a person or group of
persons may be uncertain.
FRAUDULENT CONVEYANCE CONSIDERATIONS; AVOIDANCE OF GUARANTEES
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Notes or
any Guarantee in favor of other existing or future creditors of the Company or a
Guarantor.
The incurrence by the Company of the Notes is subject to review under
relevant federal and state fraudulent conveyance laws in a bankruptcy case or a
lawsuit by or on behalf of unpaid creditors of the Company or a representative
of such creditors, such as a trustee or the Company as debtor-in-possession.
Under such laws, if a court were to find that, at the time the Notes were
issued, either (i) the Company issued the Notes with the intent of hindering,
delaying or defrauding creditors, or (ii) the Company received less than a
reasonably equivalent value or fair consideration for issuing the Notes and the
Company (a) was insolvent or rendered insolvent by reason of the issuance of the
Notes, (b) was engaged in business or a transaction, or was about to engage in
business or a transaction for which any property remaining with the Company
after issuance of the Notes constituted an unreasonably small amount of capital,
(c) intended to incur, or believed that it would incur, debts beyond its ability
to pay as they matured or (d) was a defendant in an action for money damages or
had a judgment for money damages docketed against it (if, in either case, after
final judgment, the judgment is unsatisfied), such court could void the
Company's obligations under the Notes and direct the repayment of any amounts
paid thereunder by the Company to a fund for the benefit of the Company's
creditors, or take other action detrimental to the holders of the Notes. Such
other action could include subordinating the Notes to claims of existing or
future creditors of the Company.
Similarly, indebtedness under the Guarantees of the Notes also may be
subject to review under relevant federal and state fraudulent conveyance laws in
a bankruptcy of a Guarantor or in a lawsuit brought by or on behalf of creditors
of a Guarantor under the same standards described above. Pursuant to the terms
of the Guarantees, the liability of each Guarantor is limited to the maximum
amount of indebtedness permitted, at the time of the grant of such Guarantee, to
be incurred in compliance with fraudulent conveyance or similar laws.
To the extent any Guarantee was avoided as a fraudulent conveyance, limited
as described above or held unenforceable for any other reason, holders of the
Notes would, to such extent, cease to have a claim in respect of such Guarantee
and, to such extent, would be creditors solely of the Company and any Guarantor
whose Guarantee was not avoided, limited or held unenforceable. In such event,
the claims of the holders of the Notes against the issuer of an avoided, limited
or unenforceable Guarantee would be subject to the prior payment of all
liabilities of such Guarantor. There can be no assurance that, after providing
for all prior claims, there would be sufficient assets to satisfy the claims of
the holders of the Notes.
ABSENCE OF PUBLIC MARKET
The Notes are a new issue of securities which have no established trading
market. The Underwriters have advised the Company that they intend to make a
market in the Notes after the consummation of the Notes Offering; however, the
Underwriters are not obligated to do so, and any such market-making, if
commenced, may be terminated at any time without notice. No assurances can be
given as to the liquidity of the trading market, if any, that may develop for
the Notes. The Company does not intend to apply for listing of the Notes on any
securities exchange.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs having been written
using two digits rather than four to define the applicable year, resulting in
date-sensitive software having the potential to recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to
23
<PAGE>
process transactions, send invoices or engage in similar normal business
activities. 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. If the systems
of other companies on whose services the Company depends or with whom the
Company's systems interface are not Year 2000 compliant, there could be a
material adverse effect on the Company.
USE OF PROCEEDS
The net proceeds from the Notes Offering are estimated to be approximately
$118.4 million after deducting discounts, commissions and expenses payable by
the Company. The Company intends to use the net proceeds from the Notes Offering
as follows: (i) approximately $98.0 million to complete the Mexican Network;
(ii) approximately $15.0 million to acquire international switching and
transmission facilities; and (iii) the balance to pursue joint ventures,
strategic alliances or acquisitions and for working capital and other general
corporate purposes.
Prior to the application of the net proceeds of the Notes Offering as
described above, the Company may use such proceeds to reduce short-term
borrowings, including borrowings under the Company's Revolving Credit Facility
(as defined). As of September 22, 1998 approximately $1.9 million of borrowings
were outstanding under the Revolving Credit Facility (see "Summary of Other
Indebtedness -- Revolving Line of Credit"). Such borrowings bear interest at a
rate equal to the prime rate plus 1%. The Revolving Credit Facility expires
July, 1999. To the extent proceeds from the Notes Offering are not used to
reduce borrowings under the Revolving Credit Facility, the Company will invest
such funds in high quality, liquid short-term obligations.
24
<PAGE>
CAPITALIZATION
The following table sets forth Telscape's capitalization as of June 30,
1998 (i) on an actual basis and (ii) on an as adjusted basis giving effect to
the sale of the Notes offered hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
AS OF JUNE 30, 1998
-------------------------
AS ADJUSTED
ACTUAL NOTES OFFERING
------- --------------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents............ $ 4,939 $118,350
Short-term debt and current
maturities of long-term
obligations........................ 5,993 5,993
Long-term debt (less current
portion):
% Senior Notes due 2008.... -- 125,000
Notes payable and capital lease
obligations, net of current
portion....................... 4,463 4,463
Deere Park Convertible
Debentures.................... 5,000 5,000
Total long-term
debt............... 9,463 134,463
Series B non-voting,
non-participating preferred stock,
par value $.001 per share, 380,000
shares authorized, no shares issued
and outstanding.................... -- --
Stockholders' equity:
Preferred stock, par value $.001
per share, 5,000,000 shares
authorized; without defined
preference rights............. -- --
Series A preferred stock, par
value $.001 per share,
1,000,000 shares authorized... -- --
Common stock, par value $.001
per share, 25,000,000 shares
authorized, 5,248,636 and
8,067,548 shares issued and
outstanding................... 5 5
Additional paid-in capital...... 31,575 31,575
Accumulated deficit............. (2,359) (2,359)
Treasury Stock.................. (629) (629)
------- --------------
Total stockholders'
equity.................. 28,592 28,592
------- --------------
Total capitalization....... $38,055 $163,055
======= ==============
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<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Consolidated Statements of
Operations set forth the historical statements of operations of the Company for
the year ended December 31, 1997, as adjusted for the acquisitions of MSN and
Integracion, and the related transactions and events described in the notes
thereto, as if such transactions and events had been consummated on January 1,
1997.
Management believes that the assumptions used provide a reasonable basis on
which to present such Unaudited Pro Forma Condensed Consolidated Financial
Statements. The Unaudited Pro Forma Condensed Consolidated Financial Statements
should be read in conjunction with the historical Financial Statements and notes
thereto included elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Unaudited Pro
Forma Consolidated Financial Statements are provided for informational purposes
only and should not be construed to be indicative of the Company's results of
operations or financial condition had the acquisitions of MSN and Integracion
and the transactions and events described above been consummated on the dates
assumed, may not reflect the results of operations or financial condition which
would have resulted had MSN and Integracion been operated as an integrated part
of the Company during such period, and are not necessarily indicative of the
Company's future results of operations or financial condition.
26
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
INTEGRACION
MSN (SIX MONTHS PRO FORMA
(YEAR ENDED ENDED ADJUSTMENTS
TELSCAPE DECEMBER 31, JUNE 30, (SEE NOTE
(HISTORICAL) 1997) 1997) 2) PRO FORMA
------------ ------------ ------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 36,154 $ 24,568 $ 4,646 $-- $65,368
Cost of revenues..................... 24,396 24,241 3,381 -- 52,018
------------ ------------ ------------- ----------- ---------
Gross profit......................... 11,758 327 1,265 -- 13,350
Selling, general and administrative
expenses........................... 8,154 1,246 524 (424)(2a) 9,500
Depreciation and amortization........ 622 35 22 478(2b) 1,157
------------ ------------ ------------- ----------- ---------
Operating income (loss).......... 2,982 (954) 719 (54) 2,693
Interest income (expense), net....... (95) -- 33 (161)(2c) (223)
Other income (expense)............... (137) (3) 17 -- (123)
------------ ------------ ------------- ----------- ---------
Income (loss) before income
taxes.......................... 2,750 (957) 769 (215) 2,347
Provision for income taxes........... (84) -- (290) 385(2d) 11
------------ ------------ ------------- ----------- ---------
Income (loss) before minority
interests...................... 2,666 (957) 479 170 2,358
Minority interests................... 6 -- -- -- 6
------------ ------------ ------------- ----------- ---------
Net income (loss)................ $ 2,672 $ (957) $ 479 $ 170 $ 2,364
============ ============ ============= =========== =========
Earnings per share (note 2e):
Basic............................ $ 0.68 $ 0.59
Diluted.......................... $ 0.53 $ 0.44
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
condensed
consolidated financial statements.
27
<PAGE>
1) GENERAL:
The unaudited pro forma condensed consolidated statements of operations of
the Company for the year ended December 31, 1997 reflect the Company's
historical statement of operations adjusted to include the operations of: (i)
Integracion, acquired effective July 1, 1997 and (ii) MSN, acquired effective
January 1, 1998, as if each of those acquisitions were consummated effective
January 1, 1997.
The pro forma financial information is not necessarily indicative of the
results that would have occurred had such transactions actually taken place at
the beginning of the periods specified nor does such information purport to
project the Company's financial position or results of operations for any future
date or period.
Effective July 1, 1997, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding shares of Integracion. Integracion is a systems
integrator engaged in the distribution and sale of data and network equipment
and also provides value-added services in network integration in Mexico.
Under the terms of the transaction, the Company paid the following
aggregate consideration to the selling shareholders of Integracion: i) $130,000
in cash, ii) $2,201,000 in non-interest bearing promissory notes maturing at
various dates through January 1, 2001, iii) $999,000 in non-interest bearing
convertible notes maturing on September 1, 1999, which are convertible into
333,000 shares of common stock of the Company at a price of $3.00 per share,
representing the quoted market price of the Company's common stock on the date
of the transaction; iv) warrants for the purchase of up to 100,000 shares of
common stock of the Company based on Integracion meeting certain performance
requirements and v) a covenant by the Purchasers to pay $280,000 in the event
that Integracion meets certain performance requirements over the cumulative
period beginning January 1, 1997 and ending December 31, 2000. The acquisition
was accounted for under the purchase method of accounting.
The consideration paid for Integracion measured at the acquisition date was
$2,745,000 and consisted of cash of $130,000, promissory notes with a discounted
value of $2,555,000 and transaction costs of $60,000. 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 $1,756,000 of
goodwill, which is being amortized over 15 years. During the year ended December
31, 1997, certain of the operating performance measures were met resulting in
80,000 warrants vesting. The remaining 20,000 warrants were forfeited. As a
result, $422,000 in additional contingent consideration and the related goodwill
was recognized on the acquisition of Integracion at December 31, 1997.
Effective January 1, 1998, the Company acquired all of the outstanding
common stock of MSN. MSN, through its TELEFIESTA brand, markets Prepaid Cards
across the United States primarily to the Hispanic community. Under the terms of
the transaction, the Company paid the following aggregate consideration to the
shareholders of MSN: i) $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
of MSN 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 consideration paid for MSN measured at the acquisition date was
$4,852,000 and consisted of cash of $3,250,000, $750,000 aggregate principal
amount of non-interest bearing promissory notes with a discounted value of
$672,000, common stock valued at $880,000 and transaction costs of $78,000. The
purchase price was allocated to the acquired company's assets and liabilities
based upon an estimate of fair values at the date of acquisition and resulted in
$6,091,000 of goodwill, which is being amortized over 15 years. The amounts
recorded on 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 expects that this final
determination will be completed by the end of the calendar year and does not
expect that such adjustments will be material.
28
<PAGE>
2) PRO FORMA CONSOLIDATING STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE YEAR
ENDED
DECEMBER 31, 1997
a) Reflects the reduction in salaries and bonuses earned by officers of
MSN which exceeds the amounts to which they have agreed prospectively.
b) Reflects the amortization of goodwill and depreciation expense,
resulting from the step-up in assets and recognition of goodwill on the
MSN and Integracion acquisitions, for the period from January 1, 1997
to the effective date of the respective acquisition.
c) Reflects interest expense on the promissory notes issued to the sellers
in connection with the acquisition of Integracion and MSN, for the
period from January 1, 1997 to the effective date of the respective
acquisition.
d) Reflects the income tax benefit on MSN as if MSN were a C-corporation
from January 1, 1997. MSN was an S-corporation when it was acquired by
the Company. Additionally, reflects the income tax effect of the pro
forma adjustments described in items a) through c) above.
e) Reflects the 100,000 shares of Common Stock issued as part of the
consideration paid for MSN and reflects an adjustment to net income for
common stockholders relating to interest expense on convertible notes
issued as part of the consideration paid for Integracion, as if such
Common Stock and convertible notes were issued on January 1, 1997.
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain consolidated financial information
for the Company for (i) the years ended December 31, 1993, 1994, 1995, 1996 and
1997, which have been derived from the Company's audited consolidated financial
statements and notes thereto, which in the case of the Consolidated Statement of
Operations and Consolidated Statement of Cash Flows for each of the three years
ended December 31, 1995, 1996 and 1997 and the Consolidated Balance Sheet Data
for each of the two years ended December 31, 1996 and 1997 are included
elsewhere in this Prospectus and (ii) for the six months ended June 30, 1997 and
1998. The selected consolidated financial data for the six months ended June 30,
1997 and 1998 have been derived from the unaudited consolidated financial
statements of the Company that have been prepared on the same basis as the
audited consolidated financial statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for the periods
presented. The following financial information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations", the Company's consolidated financial statements and notes
thereto appearing elsewhere herein and in the Company's Form 10-K for the year
ended December 31, 1994 and is qualified in its entirety by the other financial
information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------------- ------------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- ------------ ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE INFORMATION)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA(1):
Revenues........................... $ 1,722 $ 972 $ 1,108 $ 5,705 $ 36,154 $ 9,941 $ 65,777
Cost of revenues................... 887 439 619 3,041 24,396 5,994 57,056
--------- --------- --------- --------- ------------ ---------- ----------
Gross profit....................... 835 533 489 2,664 11,758 3,947 8,721
Selling, general and administrative
expenses.......................... 1,470 1,032 1,349 4,159 8,154 3,399 5,705
Depreciation and amortization...... 23 36 48 264 622 239 1,258
--------- --------- --------- --------- ------------ ---------- ----------
Operating income (loss)............ (658) (535) (908) (1,759) 2,982 309 1,758
Interest income (expense), net..... (84) 23 230 15 (95) -- (251 )
Other income (expense), net........ (14) (18) (2) 99 (137) (266 ) (91 )
--------- --------- --------- --------- ------------ ---------- ----------
Income (loss) before income taxes
and minority interests............ (756) (530) (680) (1,645) 2,750 43 1,416
Income tax benefit (expense)....... -- -- -- 53 (84) 167 (895 )
--------- --------- --------- --------- ------------ ---------- ----------
Income (loss) before minority
interests......................... (756) (530) (680) (1,592) 2,666 210 521
Minority interests................. 360 (18) 7 (6) 6 4 (29 )
--------- --------- --------- --------- ------------ ---------- ----------
Net income (loss).................. $ (396) $ (548) $ (673) $ (1,598) $ 2,672 $ 214 $ 492
========= ========= ========= ========= ============ ========== ==========
EARNINGS (LOSS) PER SHARE:
Basic.............................. $ (0.81) $ (0.44) $ (0.36) $ (0.52) $ 0.68 $ 0.05 $ 0.11
Weighted average shares
outstanding....................... 491,303 1,254,689 1,890,442 3,046,594 3,903,470 3,921,878 4,534,568
Diluted(2)......................... N/A N/A N/A N/A $ 0.53 $ 0.05 $ 0.06
Weighted average shares outstanding
for diluted calculation........... N/A N/A N/A N/A 5,152,211 3,998,660 7,778,072
OTHER OPERATING DATA(1):
EBITDA(3).......................... $ (635) $ (649) $ (860) $ (1,495) $ 3,604 $ 548 $ 3,016
Ratio of debt to EBITDA............ -- -- -- -- 0.88 -- 5.12
Capital expenditures............... 22 24 46 441 1,682 667 5,696
Ratio of earnings to fixed
charges(4)........................ -- -- -- -- 7.07 1.22 2.51
Fixed charges in excess of
earnings(4)....................... 534 649 717 1,770 N/A N/A N/A
Cash flows provided by (used in)
operating activities.............. (44) (1,035) (817) (2,731) 4,588 3,395 441
Cash flows provided by (used in)
investing activities.............. (22) (3,971) 444 2,489 (1,799) (667 ) (16,721 )
Cash flows provided by (used in)
financing activities.............. (244) (670) -- 564 1,450 (43 ) 16,035
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
30
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<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA(1):
Cash, cash equivalents and short term
investments........................ $ 98 $ 4,509 $ 3,645 $ 495 $ 4,734 $ 4,939
Working capital...................... (777) 4,817 4,081 1,813 3,669 (2,552 )
Property and equipment, net.......... 168 156 154 983 2,679 13,084
Goodwill and other intangibles,
net................................ -- -- -- 3,246 17,674 26,332
Total assets......................... 521 5,335 4,498 9,371 39,635 69,045
Total long-term debt................. 445 -- -- -- 2,676 9,463
Total stockholders' equity
(deficit).......................... (812) 4,446 3,590 5,765 22,088 28,592
</TABLE>
- ------------
(1) The Company's historical financial statements include the operations of its
subsidiaries from their respective effective dates of acquisition, or
inception in the case of poolings, as follows: Telscape USA, -- April 10,
1996, Telereunion S.A. -- May 10, 1996; Integracion -- July 1, 1997;
N.S.I. -- October 1, 1997; and MSN -- January 1, 1998. INTERLINK's
operations will be included beginning June 1, 1998.
(2) Diluted earnings per share for the years ended December 31, 1993, 1994,
1995, and 1996 were not provided as inclusion of additional shares under a
diluted analysis for loss periods is inappropriate due to the anti-dilutive
effect. For purposes of diluted earnings per share, interest expense of $42
on convertible notes assumed to have been converted into common shares was
added back to net income for the historical year ended December 31, 1997.
(3) EBITDA as used in this Prospectus represents net earnings (loss) before
interest, income taxes, depreciation and amortization. The Company has
included EBITDA data because it is a measure commonly used in the
telecommunications industry and is included herein to provide additional
information with respect to the Company's ability to meet its future debt
service, capital expenditures and working capital requirements. In addition,
the Company believes that certain investors find EBITDA to be a useful tool
for measuring the ability of the Company to service its debt. EBITDA is not
a measure of financial performance determined under generally accepted
accounting principles, should not be considered as an alternative to net
income as a measure of performance or to cash flows as a measure of
liquidity, and is not necessarily comparable to similarly titled measures
presented by other companies.
(4) The ratio of earnings to fixed charges was computed by dividing earnings by
fixed charges. For this purpose, earnings consist of income from continuing
operations, before income taxes and fixed charges of the Company and its
subsidiaries. Fixed charges consist of the Company's and subsidiaries'
interest expense and the portion of rent expense representative of an
interest factor. Where the ratio indicates less than 1-to-1 coverage, the
dollar amount of the coverage deficiency is presented.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE IN
THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED BELOW AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING INFORMATION WITH RESPECT TO THE COMPANY'S PLANS AND
STRATEGY FOR ITS BUSINESS, ARE FORWARD-LOOKING STATEMENTS. SEE "NOTE REGARDING
FORWARD-LOOKING STATEMENTS."
OVERVIEW
Telscape is a rapidly growing emerging multinational telecommunications
carrier focused on Latin America. The Company provides international wholesale
long distance services for calls originating in the United States and
terminating in markets in Latin America. As a way to generate increased
international long distance traffic to countries it serves, the Company markets
long distance services principally to Hispanic consumers in the United States
through the distribution of Prepaid Cards under the TELEFIESTAT brand name. In
addition to these wholesale and retail international long distance services, the
Company also provides a broad range of systems integration and value-added voice
and data services to major public and private sector customers in Mexico.
Telscape intends to significantly expand its facilities-based
telecommunications operations over the next 18 months and to broaden its service
offerings in markets where it has established, or expects to establish, a
significant presence. In June 1998, Telereunion S.A. received the Mexican
Concession, a 30-year, facilities-based carrier license from the Mexican
government allowing it to construct and operate a network over which the Company
can carry long distance traffic in Mexico. To deliver its services, the Company,
through Telereunion S.A., intends to construct the Mexican Network, a combined
fiber-optic and microwave long distance network, connecting the United States,
the Gulf region of Mexico and targeted Mexican cities. See "Risk
Factors -- Construction of the Mexican Network; Construction Costs,"
"Business -- Services" and "Business -- Network."
The Company's objectives in constructing the Mexican Network are to: (i)
provide on-net capacity to allow growth in its long distance services business;
(ii) increase profitability and lower its costs for switched services by
reducing its off-net capacity expenses; and (iii) use the expanded network as a
platform to support advanced, bandwidth-intensive data and media applications.
The Company estimates that the aggregate cost of constructing the Mexican
Network will be approximately $98.0 million. The principal components of such
cost are expected to be: (i) fiber optic cable and microwave, between 25% and
30% of total construction costs; (ii) engineering and construction, between 58%
and 63% of total construction costs; (iii) electronics, approximately 8% of
total construction costs; and (iv) acquiring rights-of-way, approximately 4% of
total construction costs. The Company will seek to acquire rights-of-way from
railroads, highway commissions, pipeline owners, utility companies and others.
See "Risk Factors -- Construction of the Mexican Network; Construction Costs,"
"Business -- Services" and "Business -- Network."
In May 1996, Telscape began to focus on providing telecommunication
services to and in Latin America. The Company acquired all of the stock of
Telereunion, the owner of 97.0% of Vextro de Mexico S.A. de C.V. ("Vextro").
Vextro is a Mexico-based systems integration company, with an emphasis on voice
solutions. In September 1996, the Company expanded its operations to include
international long distance by acquiring Orion Communications, Inc., a
U.S.-based reseller of long distance services ("Orion"). In 1997, the Company
expanded its systems integration service offerings by acquiring Integracion and
N.S.I., both focused on data services and based in Mexico City, Mexico.
In January 1998, Telscape acquired MSN, a leading provider of Prepaid Cards
that are marketed under the TELEFIESTAT brand name to Hispanic consumers
residing in the United States. The MSN acquisition enhances Telscape's
international long distance business by providing a retail platform, enhancing
its ability to market additional products and services to Hispanic customers and
increasing its ability to generate significant returns of U.S.-outbound traffic
to Latin America. The Company plans to leverage the TELEFIESTAT brand
recognition in Mexico, El Salvador and other Latin American countries after
obtaining the required licenses.
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<PAGE>
In May 1998, the Company acquired CMSD for $8.2 million in cash, subject to
post-closing adjustments. The CMSD Acquisition provides the Company with a
teleport facility in California, thereby enhancing the Company's position as an
integrated telecommunications provider and assuring the Company's ability to
provide satellite capacity to its targeted markets in Latin America.
In June 1998, Telereunion S.A. received the Mexican Concession from the
SCT. The Company believes that the Mexican Concession will enhance its service
offerings to business customers in Mexico while allowing it to reduce its cost
of international termination in Mexico.
Telscape intends to capitalize on the deregulating markets of Latin America
by providing international long distance services to and from targeted Latin
American countries. The Company also intends to position itself as an integrated
telecommunications provider in Mexico through the construction of the Mexican
Network under its recently granted Mexican Concession. The Company believes that
owning a long distance network in Mexico, combined with an expanding
international telecommunications network, will increase the percentage of
minutes of traffic carried on-net, enable it to increase margins and
profitability and ensure quality of service on both international and domestic
long distance traffic. See "Business -- Network."
REVENUES
During 1997, the Company derived its revenues principally from the
provision of systems integration and value-added services in Mexico and from the
sale of U.S. outbound international long distance services to Latin America. In
the first two quarters of 1998, with the addition of Prepaid Card revenues
generated by recently acquired MSN, the Company's revenue mix changed.
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, Communications
Distributors, Inc., accounted for approximately 28% of the Company's overall
revenues. For the six months ended June 30, 1998, no single customer represented
greater than 10% of the Company's overall revenues.
The Company also provides domestic and international long distance services
through the sale of Prepaid Cards. The Company has in the past entered into, and
may in the future enter into, arrangements with third parties whereby these
parties provide, at a fixed cost to the Company, the long distance
telecommunications services for the Prepaid Cards that the Company sells. The
Company recognizes revenues from the sale of Prepaid Cards under these
agreements at the time of shipment. In other cases, third parties provide
telecommunications services for the Prepaid Cards based on customer usage. The
Company recognizes revenues from the sale of Prepaid Cards under these
agreements at the time of customer usage.
In May 1998, one of the Company's wholesale long distance customers filed a
petition for relief under Chapter 11 of the Bankruptcy Code. For the five months
ended May 31, 1998, this customer accounted for approximately 26% of the
Company's wholesale long distance revenues and 7% of the Company's overall
revenues. Additionally an affiliate of this customer provided switching services
and the Prepaid Card platform and arranged for other carriers to provide
telecommunications services for the Prepaid Cards. The Company had paid the
affiliate of this customer for these services at the time the Prepaid Cards were
activated. Because the Company continued to provide services to its Prepaid Card
customers by working directly with the underlying service providers, this
resulted in the Company paying for certain of the telecommunication services on
the Prepaid Cards a second time. The overall impact of the bankruptcy filing to
the Company's earnings, including additional Prepaid Card services costs, the
write-off of uncollectible receivables and the lost margin contribution from the
loss of a wholesale customer, resulted in a reduction of operating income of
approximately $2.0 million in the second quarter of 1998. This bankruptcy is not
33
<PAGE>
expected to have a material impact to the operating results for the third
quarter of 1998. The lost revenues from this customer have been replaced by
replacing the minutes previously purchased by this customer with existing or new
customers at market rates.
GROSS MARGIN
The Company has enjoyed strong gross profits from its international long
distance and systems integration services to date; however, as these markets
become more competitive, the Company 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 providing long distance services in
deregulating markets, particularly in Latin America, and on providing
value-added services, where it can enjoy higher gross profit percentages. Gross
profits as a percentage of revenues from the Company's newly-acquired Prepaid
Card business are significantly lower than those of the wholesale international
long distance and systems integration businesses. As such, overall gross profit
as a percentage of revenues has declined in the first quarter of 1998 and may
continue to decline to the extent that Prepaid Card revenues increase as a
percentage of overall revenues.
The following table sets forth for the periods indicated certain financial
data as a percentage of revenues:
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................... 55.9 53.3 67.5 60.3 86.7
Gross profit......................... 44.1 46.7 32.5 39.7 13.3
Selling, general and administrative
expenses........................... 121.7 72.9 22.6 34.2 8.7
Depreciation and amortization........ 4.3 4.6 1.7 2.4 1.9
Operating income (loss).............. (81.9) (30.8) 8.2 (3.1) 2.7
Other income (expense)............... 20.6 2.0 (0.6) (2.7) (0.5)
Income (loss) before income taxes and
minority interest.................. (61.3) (28.8) 7.6 0.4 2.2
Income tax benefit (expense)......... 0.0 0.9 (0.2) 1.7 (1.4)
Income (loss) before minority
interests.......................... (61.3) (27.9) 7.4 2.1 0.8
Minority interests in subsidiaries... 0.6 (0.1) 0.0 0.0 0.0
Net income (loss).................... (60.7) (28.0) 7.4 2.1 0.8
</TABLE>
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1997
REVENUES increased from $9.9 million in 1997 to $65.8 million in 1998. This
increase of $55.8 million, or 562%, was due principally to the acquisition of
MSN completed in the first quarter of 1998, which provided total revenues of
$32.4 million. Wholesale international long distance revenues increased $11.1
million from $5.7 million for the six months ended June 30, 1997 to $16.8
million for the six months ended June 30, 1998. In addition, revenues from
systems integration services increased $11.1 million from $4.3 million for the
six months ended June 30, 1997 to $15.4 million for the six months ended June
30, 1998. This increase in systems integration services revenues is due to the
acquisitions of Integracion, and N.S.I., completed during 1997 and to the
overall growth in revenues from these services. The acquisition of INTERLINK
provided an additional $1.2 million in revenues.
COST OF REVENUES increased from $6.0 million in 1997 to $57.1 million in
1998, or $51.1 million. The 852% increase in cost of revenues was due
principally to the incremental cost of revenues associated with the acquisition
of MSN, the increase in the sale of international long distance services and, to
a lesser extent, the incremental cost of revenues attributable to the
acquisitions of Integracion, N.S.I. and INTERLINK. The cost of revenues as a
percentage of revenues increased from 60.3% to 86.7%, or 26.4%, due principally
to the higher cost of revenues as a percentage of revenues associated with the
sale of Prepaid
34
<PAGE>
Cards. In addition, cost of revenues was negatively impacted by the additional
costs, estimated at $766,000, incurred on the Company's Prepaid Card services as
a result of the bankruptcy of a customer as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from $3.4
million in 1997 to $5.7 million in 1998, or $2.3 million. The 67.8% increase in
SG&A was due principally to the incremental SG&A related to the operations of
Integracion, N.S.I., MSN and INTERLINK and, to a lesser extent, increased
staffing at existing operations of the systems integration business and the
wholesale long distance business to meet the additional resource requirements
from the growth of these operations. In addition, SG&A was negatively impacted
by the write off of receivables, approximately $541,000, due from the customer
which filed for bankruptcy as discussed above.
Overall SG&A as a percentage of revenues decreased from 34.2% to 8.7%, or
25.5%. This decrease was due principally to the lower SG&A expenses as a
percentage of revenue associated with MSN and to the growth in overall revenues
rapidly outpacing the growth in SG&A expenses. This improvement was partially
offset by the write off of receivables due from the customer which filed for
bankruptcy as discussed above.
DEPRECIATION AND AMORTIZATION increased from $239,000 in 1997 to $1.3
million in 1998, or $1.0 million. This increase is due to an increase in
goodwill amortization primarily due to the vesting of performance based warrants
issued in connection with the Telereunion acquisition, which resulted in
additional goodwill being recognized on December 31, 1997, and goodwill
recognized on the INTERLINK, MSN, Integracion and N.S.I. acquisitions.
Depreciation increased as a result of the Company's continuing expansion of its
international wholesale long distance network, which includes purchases of
switches and other telecommunications equipment and facilities. The Company
expects depreciation expense to increase as it continues to expand its
telecommunications network.
INTEREST INCOME (EXPENSE) decreased from ($0) in 1997 to ($251,000) in
1998, or ($251,000). This decrease was mainly due to an increase in the
Company's level of borrowings, including notes issued in connection with the
Integracion and MSN acquisitions, and the Deere Park Convertible Debentures and
Gordon Brothers Convertible Debentures issued in connection with the INTERLINK
acquisition.
OTHER INCOME (EXPENSE), NET decreased from ($266,000) in 1997 to ($91,000),
or ($175,000). In 1997 the Company wrote off its $196,000 investment in Elterix,
an operating joint venture, and incurred a litigation settlement expense of
$128,000.
INCOME TAX BENEFIT (EXPENSE) changed from an income tax benefit of $167,000
in 1997 to an income tax expense of ($895,000) in 1998. The tax benefit realized
in 1997 is a result of the Company's utilization of its loss carryforwards to
offset taxable income and the recognition of a portion of the deferred tax
benefits related to the Company's tax loss carryforward. The effective tax rate
for the six months ended June 30, 1998, is higher than the U.S. and Mexico
statutory rates of 34% due to permanent differences, the most significant of
which is the nondeductible nature of goodwill amortization.
NET INCOME (LOSS) increased from $214,000 for the six months ended June 30,
1997 to $492,000 for the six months ended June 30, 1998 due to a combination of
the factors dicsussed above.
FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31,
1996
REVENUES increased from $5.7 million in 1996 to $36.2 million in 1997. This
increase of $30.5 million, or 535%, was due principally to the significant
growth in the Company's international long distance business and, to a lesser
extent, the acquisitions of Telereunion, Integracion and NSI. The Company's
revenues from international long distance services grew $16.8 million from
$640,000 in 1996 to $17.4 million, or 2,625%. Revenues from systems integration
services and equipment sales increased $13.7 million from $5.1 million to $18.8
million, or 269%. Although some of the growth is attributable to the effect of
including Telereunion for a full year in 1997, Telereunion also experienced
growth in revenues in 1997.
COST OF REVENUES increased from $3.0 million in 1996 to $24.4 million in
1997, or $21.4 million. The increase in cost of revenues was due principally to
the incremental cost of revenues associated with the significant growth in the
international long distance business and, to a lesser extent, the incremental
cost of
35
<PAGE>
revenues associated with the acquisitions of Telereunion, Integracion and NSI.
The cost of revenues as a percentage of revenues increased from 53.3% to 67.5%,
or 14.2%. The increase in cost of revenues as a percentage of revenues was due
principally to a significant change in the Company's product mix. During 1997,
the Company's decline in the margins earned in the systems integration
businesses in Mexico and Poland were offset by higher margins earned in the
international long distance services business.
SG&A increased from $4.2 million in 1996 to $8.2 million in 1997. The
increase in SG&A was due principally to the incremental SG&A associated with the
acquisitions of Telereunion, Integracion and NSI. and, to a lesser extent, the
additional administrative staff added to handle the significant growth in the
international long distance business. In 1996, the Company also incurred certain
non-recurring expenses of approximately $350,000 relating to non-cash
compensation expense that was recorded in 1996 in compliance with "FAS 123:
Accounting for Stock-Based Compensation," approximately $100,000 in fees
associated with the Company's merger with Orion (which, upon consummation of the
merger, was renamed Telscape USA) (the "Telscape USA Acquisition"), and
approximately $146,000 in consulting fees. These consulting fees were paid under
agreements which have been terminated.
Overall SG&A as a percentage of revenues decreased from 72.9% to 22.6%, or
50.3%. This decrease was due principally to the significant growth in revenues
in each of the Company's core businesses while containing costs.
DEPRECIATION AND AMORTIZATION increased from $264,000 in 1996 to $622,000
in 1997, or $358,000. This increase was due to an increase in goodwill
amortization primarily due to the Integracion and N.S.I. acquisitions completed
during 1997 and a full year's amortization of goodwill in 1997 associated with
the Telereunion acquisition.
INTEREST INCOME (EXPENSE), NET decreased from $15,000 in 1996 to ($95,000)
in 1997, or ($110,000). This decrease was mainly attributable to interest
expense relating to notes issued in connection with the Integracion acquisition.
OTHER INCOME (EXPENSE), NET decreased from $99,000 in 1996 to ($137,000) in
1997, or $236,000. The decrease in other income was due principally to the
Company recognizing a foreign exchange loss of ($126,000), primarily as a result
of the Polish operations as compared to a foreign exchange gain of $161,000,
primarily from the Mexican operations, in 1996. The Company also wrote off its
investment in a joint venture in Poland, realizing a loss of $196,000 and
incurring certain litigation settlement expenses of $128,000.
INCOME TAX BENEFIT (EXPENSE) decreased from a benefit of $53,000 in 1996 to
($84,000) in 1997. This decrease is primarily due to tax expense from the
Company's Mexican operations offset by a benefit realized from a reversal of
valuation allowances on U.S. Federal net operating losses.
NET INCOME (LOSS) increased from ($1.6) million in 1996 to $2.7 million in
1997. The change in net income was due to a combination of the factors discussed
above.
FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES increased from $1.1 million in 1995 to $5.7 million in 1996. This
increase of $4.6 million, or 418%, was due principally to the acquisition of
Telereunion and, to a lesser extent, the Telscape USA Acquisition. Revenues for
the Polish operations increased only slightly from $1.11 million in 1995 to
$1.14 million in 1996.
COST OF REVENUES increased from $619,000 in 1995 to $3.0 million in 1996,
or $2.4 million. The increase in cost of revenues was due principally to the
incremental cost of revenues attributable to the acquisition of Telereunion and,
to a lesser extent, the Telscape USA Acquisition. This increase was offset
partially by a decrease of $121,000 in the Polish operations. The cost of
revenues as a percentage of revenues decreased from 55.9% to 53.3%, or 2.6%. The
decrease in cost of revenues as a percentage of revenues was due principally to
the improvements in the Polish operations and the addition of higher margin
sales from the Telscape USA Acquisition.
SG&A increased from $1.4 million in 1995 to $4.2 million in 1996, or $2.8
million. The increase in SG&A was due principally to the incremental SG&A
attributable to the acquisition of Telereunion and, to a lesser extent, the
Telscape USA Acquisition. The Company also incurred certain non-recurring
expenses of
36
<PAGE>
approximately $596,000. These expenses included approximately $350,000 of
non-cash compensation expense that was recorded in 1996 in compliance with "FAS
123: Accounting for Stock-Based Compensation," approximately $100,000 in fees
associated with the Telscape USA Acquisition, and approximately $146,000 in
consulting fees. These consulting fees were paid under agreements which have
been terminated. In addition, the Company had an increase in certain recurring
non-cash expenses, such as approximately $77,000 in depreciation and
approximately $140,000 for the amortization of goodwill associated with the
Telereunion acquisition.
On approximately the same revenues, SG&A for the Polish operations
decreased by $84,000 due principally to a reduction in work force. Overall SG&A
as a percentage of revenues decreased from 121.7% to 72.9%, or 48.8%. This
decrease was due principally to the lower SG&A as a percentage of revenues
associated with Telereunion and, to a lesser extent, efficiency improvements in
the Polish operations. These improvements were offset by the non-recurring
expenses and additional recurring expenses described above.
DEPRECIATION AND AMORTIZATION increased from $48,000 in 1995 to $264,000 in
1996, or $216,000. This increase was due to an increase in goodwill amortization
related to the Telereunion acquisition and the incremental depreciation expense
associated with those operations.
INTEREST INCOME (EXPENSE), NET decreased from $230,000 in 1995 to $15,000
in 1996, or $215,000. This decrease was mainly due to a reduction in cash and
cash equivalent balances in 1996 as compared to 1995.
OTHER INCOME (EXPENSE), NET increased from ($2,000) in 1995 to $99,000 in
1996, or $101,000. The increase in other income was due principally to the
recognition of a $63,000 loss in connection with the forfeiture of an earnest
money deposit for an aborted acquisition attempt. This loss was offset by an
increase in the Company's foreign exchange gain of approximately $160,000.
INCOME TAX BENEFIT (EXPENSE) increased from no provision in 1995 to a tax
benefit of $53,000 in 1996, resulting primarily from the increase in deferred
tax assets in Vextro.
NET INCOME (LOSS) decreased from ($673,000) in 1995 to ($1.6) million in
1996. The decrease in net income was due to a combination of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3,395,000 and $441,000 for
the six months ended June 30, 1997 and June 30, 1998, respectively. The decrease
in net cash provided by operations in 1998 as compared to 1997 was due primarily
to an increase of value added tax receivables of approximately $2.1 million,
additional costs associated with the Company's Prepaid Card services and the
write off of receivables associated with the bankruptcy of a customer.
Net cash used in investing activities was ($667,000) and ($16,271,000) for
the six months ended June 30, 1997 and June 30, 1998, respectively. In the six
months ended June 30, 1998, the Company expended approximately $5.7 million on
purchases of, or deposits on, property and equipment as part of the Company's
network expansion strategy. In addition, the Company acquired MSN for $2.3
million, net of cash acquired, and INTERLINK for $8.3 million, net of cash
acquired.
Net cash provided by (used in) financing activities was ($43,000) and
$16,035,000 for the six months ended June 30, 1997 and June 30, 1998,
respectively. In December 1997, the Company announced its intention to redeem
publicly traded warrants to purchase an aggregate of 525,000 shares of Common
Stock. This announcement resulted in 475,535 warrants being exercised prior to
the redemption date. The Company realized net proceeds from these exercises of
$3.7 million, of which $2.7 million was received subsequent to year-end. The
Company raised $10.0 million from the issuance of Deere Park Convertible
Debentures (as defined) and Gordon Brothers Convertible Debentures (as defined).
In addition, the Company realized $2.2 million in proceeds from the exercise of
options and warrants.
As of June 30, 1998, the Company had cash and cash equivalents of
$4,939,000 and negative working capital of $2,522,000. Included in current
liabilities is $5.0 million in Gordon Brothers Convertible Debentures which
mature on May 29, 1999.
In the first and second quarter of 1998, the Company continued its
strategic plans to significantly expand the Company's facilities and capacity
related to its long distance services and Prepaid Card business
37
<PAGE>
lines. Through June 30, 1998, the Company has expended or placed purchase orders
for equipment for a total in excess of $9.0 million. Management does not expect
that cash generated from operations will be adequate to fund these capital
investments.
RECENT FINANCINGS AND SOURCES OF CAPITAL
From January 1, 1998 through July 15, 1998 the Company raised a total of
approximately $15.0 million, through various financing, and capital raising
transactions, as described below:
On May 1, 1998 the Company issued $3,000,000 in 8% Convertible Subordinated
Debentures (the "Deere Park Convertible Debentures") maturing three years from
closing (the "First Draw") to Deere Park Capital Management, LLC, an Illinois
limited liability company ("Deere Park"). On May 28, 1998, the Company issued
an additional $1,000,000 of the Deere Park Convertible Debentures (the "Second
Draw"). On June 30, 1998, the Company issued an additional $1,000,000 of the
Deere Park Convertible Debentures (the "Third Draw"). The Deere Park
Convertible Debentures are convertible by the holder into shares of Common Stock
at a price equal to $26 per share for the First Draw, $29 per share for the
Second Draw and $26 per share for the Third Draw, until November 1, 1998, and
thereafter, at the lesser of (i) $26 per share for the First Draw, $29 per share
for the Second Draw and $26 per share for the Third Draw or (ii) a price equal
to the average of the three highest of the five lowest closing prices of the
Common Stock for the 20 trading days preceding the conversion date. If the
Common Stock trades below $15 per share for the First Draw, $16.66 per share for
the Second Draw and $15 for the Third Draw for three consecutive trading days,
the Company may redeem all or part of such Deere Park Convertible Debentures at
107% of face value plus any accrued interest in the event the holder elects to
convert. The Company's obligation to make interest payments on the Deere Park
Convertible Debentures terminates if the price of Common Stock closes for twenty
consecutive trading days at or above $30 per share for the First Draw, at or
above $33.50 per share for the Second Draw and at or above $30 per share for the
Third Draw, adjusted, without limitation, for any stock splits or combinations.
In connection with the Deere Park Convertible Debentures, Deere Park also
received warrants to purchase an aggregate of 8,952 shares of Common Stock at an
exercise price of $16.76 per share (subject to adjustment for stock splits and
other share adjustments) for the First Draw, warrants to purchase an aggregate
of 2,427 shares of Common Stock at $20.60 per share (subject to adjustment for
stock splits and other share adjustments) for the Second Draw and warrants to
purchase an aggregate of 6,382 shares of Common Stock at $15.67 per share
(subject to adjustment for stock splits and other share adjustments) for the
Third Draw. The warrants have a term of three years from the effectiveness of a
registration statement covering such warrants. The Deere Park Convertible
Debentures are PARI PASSU in right of payment to the Notes.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Deere Park Convertible Debentures
(the "Deere Park Exit Fee"). The Deere Park Exit Fee varies depending upon the
date of payment, and is equal to (i) 6.6% if the payment is made within 90 days
after the closing of each respective draw, (ii) 7.2% if payment is made after 90
days and up to 180 days after the closing of each respective draw, (iii) 8.8% if
payment is made after 180 days and up to 270 days after the closing of each
respective draw and (iv) 10.0% if payment is made after 270 days after the
closing of each respective draw. The Deere Park Exit Fee is adjusted on a pro
rata basis to the extent that the prepayment is made between periods except that
a minimum Deere Park Exit Fee of 6.6% is required if the prepayment is made
prior to 90 days after closing.
On May 29, 1998, the Company issued $5,000,000 in 8% Convertible Debentures
(the "Gordon Brothers Convertible Debentures") maturing one year from closing
to Gordon Brothers Capital, LLC, a Delaware limited liability company ("Gordon
Brothers"). The Gordon Brothers Convertible Debentures are convertible by
Gordon Brothers into shares of Common Stock at a price equal to $29.00 per share
until November 1, 1998, and thereafter, at the lesser of (i) $29.00 per share or
(ii) a price equal to the average of the three highest of the five lowest
closing prices of the Common Stock for the 20 trading days preceding the
conversion date. If the Common Stock trades below $16.66 for three consecutive
trading days, the Company may redeem all or part of such Gordon Brothers
Convertible Debentures at 107% of face value plus any accrued interest in the
event the holder elects to convert. The Company's obligation to make interest
payments on the Gordon Brothers Convertible Debentures terminates (i) in the
event the Common Stock closes, for twenty consecutive trading days, at or above
$33.50 per share, adjusted, without limitation,
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<PAGE>
for any stock splits or combinations, (ii) when a registration statement
covering the Gordon Brothers Convertible Debentures is effective and (iii) if
there exists no event of default under the Gordon Brothers Convertible
Debentures. The Gordon Brothers Convertible Debentures are secured by a pledge
of the Company's stock in Telereunion and the Company's preferred stock in
INTERLINK. In addition, the Gordon Brothers Convertible Debentures are
guaranteed by INTERLINK and such guaranty is collateralized by a security
agreement covering all of INTERLINK's assets. In connection with the Gordon
Brothers Convertible Debentures, Gordon Brothers also received warrants to
purchase an aggregate of 12,136 shares of Common Stock at an exercise price of
$20.60 per share. The warrants have a term of three years from the effectiveness
of the registration statement covering such warrants. The Gordon Brothers
Convertible Debentures are senior secured indebtedness of the Company to the
extent of the assets securing such indebtedness.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Gordon Brothers Convertible
Debentures (the "Gordon Brothers Exit Fee"). The Gordon Brothers Exit Fee
varies depending upon the date of payment, and is equal to (i) 6.5% if the
payment is made within 90 days after May 29, 1998, (ii) 13.0% if payment is made
after 90 days and up to 180 days after May 29, 1998, (iii) 19.0% if payment is
made after 180 days and up to 270 days after May 29, 1998 and (iv) 25.0% if
payment is made after 270 days and up to 365 days after May 29, 1998. The Gordon
Brothers Exit Fee with respect to any payment made after May 28, 1999 shall be
equal to (a) 25.0% plus (b) 25.0% multiplied by the number of days elapsed from
May 28, 1999 divided by 365. The Gordon Brothers Exit Fee is adjusted on a pro
rata basis to the extent that a prepayment is made between periods during the
first twelve months except that a minimum Gordon Brothers Exit Fee of 6.5% is
required if the prepayment is made prior to 90 days after closing.
Approximately $8.2 million of the proceeds from the Deere Park Convertible
Debentures and the Gordon Brothers Convertible Debentures were used to finance
the CMSD Acquisition and the remainder was utilized for capital investments and
general working capital purposes.
On March 12, 1998, the Company entered into the Revolving Credit Facility
with a commercial bank which provided for borrowings up to $1.3 million subject
to adequate levels of eligible accounts receivable. Borrowings are secured by
the accounts receivable of Telscape USA and MSN. This facility provides that
borrowings will bear interest at floating rates of prime plus 1% and expires in
six months. On May 19, 1998, the Company renegotiated the terms of the Revolving
Credit Facility to provide for borrowings of up to $2.5 million and extended the
term of the facility to June 30, 1999. As of June 30, 1998, the Company had
drawn $1.9 million on this facility. The Company has also negotiated terms with
certain of its equipment vendors which call for extended payment terms and
increased credit lines, including two lines of credit each of up to $2.0
million, with 60 day and 90 day payment terms, respectively.
Telscape USA and MSN have obtained a waiver under the Revolving Credit
Facility to (i) permit the Guarantee of the Notes by Telscape USA and MSN and
(ii) waive the defaults under the minimum current ratio, minimize tangible net
worth and prohibition on quarterly loss covenants.
In June 1998, members of the management team of the Company exercised
certain options and warrants resulting in approximately $1.2 million in proceeds
to the Company.
In June 1998, the Company financed the purchase of $1.4 million of
equipment by entering into an equipment lease arrangement with a financing
company which provides for monthly lease payments of $27,500, including
principal and interest, through May 31, 2003. The lease obligation is secured by
the financed equipment.
On July 6, 1998, the Company financed the purchase of $972,000 of equipment
by entering into two equipment lease arrangements with a financing company which
provide for monthly lease payments of $22,100, including principal and interest
through July 6, 2003. The lease obligations are secured by the financed
equipment.
On July 14, 1998, the Company financed the purchase of $243,000 of
equipment by entering into an equipment lease arrangement with a financing
company which provides for monthly lease payments of $6,600 including principal
and interest through July 14, 2002. The lease obligation is secured by the
financed equipment.
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<PAGE>
In July 1998, the Company received a commitment from a financing company to
fund equipment purchases of up to $6.0 million dollars through May 1999. The
financing is structured as loans maturing three years from funding at interest
rates 550 basis points above the Federal Reserve Treasury Constant Maturity
Rate. The Company expects to close this transaction in September 1998.
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, additional
lease financing and the sale of debt and equity securities (or a combination of
both). There can be no assurance that the cash generated from operations will be
sufficient or that the Company will be able to obtain additional financing on
commercially reasonable terms, if at all. Additional funding through the
incurrence of debt or sale of additional equity (or a combination of both) may
be required to meet the Company's growth plans, although there can be no
assurance that such additional funds can be obtained on acceptable terms, if at
all. If necessary funds are not available, the Company's business and results of
operations and the future expansion of its business could be materially
adversely affected.
ESCROW AGREEMENT
Pursuant to the Texas Securities Act of 1957, the Texas State Securities
Commissioner has the discretion to require that an issuer offering and selling
securities to the residents of Texas in a public offering deposit certain
outstanding securities in escrow. In that regard, certain former officers and
directors of the Company, as well as two other individuals (collectively, the
"Escrow Shareholders"), are parties to a Stock Escrow Agreement (the "Escrow
Agreement") dated August 8, 1994. The Escrow Agreement was required by the
Texas State Securities Commissioner as a condition to the registration of
securities in Texas in connection with the Company's initial public offering.
The Escrow Agreement provides that a total of 415,503 shares of Common Stock
("Escrow Shares") and 55,779 shares of Common Stock issuable upon the exercise
of options ("Escrow Options") be held in escrow for a period of not less than
two years and not more than ten years. The terms of the Escrow Agreement provide
further that Escrow Shares and Escrow Options may be released from escrow
provided certain performance requirements of the Company ("Performance
Requirements") are met. For instance, if the Common Stock trades at a price per
share of at least $11.81 for at least ninety (90) consecutive trading days then
the Escrow Shares and Escrow Options are automatically released from escrow.
During the first quarter of 1998, the Company and the Escrow Shareholders
entered into agreements, which resulted in (i) the early termination of the
Escrow Agreement in July 1998, (ii) the repurchase by the Company of certain of
the Escrow Shares at a significant discount to market and (iii) the resolution
of a disagreement with certain of the Escrow Shareholders concerning the
validity of the Escrow Options. The agreements called for the Escrow
Shareholders to sell a total of 101,417 Escrow Shares to the Company for
$985,580, or $9.72 per share, of which 25% was paid by the Company upon
execution of the agreements and 75% was scheduled to be paid on July 6, 1998. In
addition, the Escrow Shareholders signed a lock-up agreement (the "Escrow
Lock-Up"), ending on July 6, 1998, for any Escrow Shares which were not sold to
the Company; provided, however, that if any of the Performance Requirements were
met during the Escrow Lock-Up, the Escrow Lock-Up would terminate automatically.
Finally, certain of the Escrow Shareholders agreed to the termination of
approximately 40,000 of the Escrow Options, which had an exercise price of $0.80
per share. On May 1, 1998, the Company agreed to reduce the number of Escrow
Shares required to be sold to the Company, resulting in a reduction in the total
number of Escrow Shares being repurchased to 86,417 Escrow Shares for total
consideration of $873,000, or $10.10 per share.
On July 6, 1998, the Company assigned the rights to purchase 80,257 of the
Escrow Shares to Preferred Capital Markets, Inc. ("Preferred"). In return for
the assignment, Preferred reimbursed the Company for the 25% down payment in an
amount of $276,000 and paid the Company $449,000 for the assignment. The Company
has no further obligations in connection with the Escrow Shares.
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 pay in United States 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
40
<PAGE>
United States 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. United
States-originated calls will be paid in United States dollars; however, the
Company also expects to derive a certain portion of its revenues from calls
originated outside of the United States, thus exposing the Company to additional
exchange rate risk. The Company may choose to limit its exposure to foreign
currency risk through the purchase of forward foreign exchange contracts or
similar hedging strategies. There can be no assurance that any foreign currency
hedging strategy would be successful in avoiding exchange-related losses.
The Company does not currently hedge against the risk of foreign exchange
rate fluctuations.
YEAR 2000 PLANS
The year 2000 issue exists because many computer systems and applications,
including those embedded in telecommunications equipment and facilities, use two
digit rather than four digit date fields to designate the applicable year. As a
result, the systems and applications may not properly recognize the year 2000 or
process data which includes it, potentially causing data miscalculations or
inaccuracies or operations malfunctions or failures. The year 2000 is also a
leap year, which may also lead to incorrect calculations, functions or system
failure. This issue exists for many kinds of software, including software for
mainframes, PCs and embedded systems. The Company has initiated the process of
gathering, testing, and producing information about the Company's technologies
impacted by the year 2000 transition. As part of this effort, the Company is
reviewing its network and supporting infrastructure for the telecommunications
services it provides, its operational and financial information technology
systems, and the year 2000 compliance of the Company's key vendors.
Though the year 2000 could affect the Company's internal systems,
management believes the impact will be minimal because the Company has purchased
the majority of its hardware and software systems within the last year or will
be replacing existing systems as part of a Company wide information systems
upgrade. The newer hardware and software systems generally have been engineered
to be year 2000 compliant. In addition, the Company is in the process of
building and expanding its telecommunications network, and in doing so is
ensuring that these new systems are year 2000 compliant.
In accordance with Emerging Issues Task Force Consensus No. 96-14,
"Accounting for the Costs Associated with Modifying Computer Software for the
Year 2000," the Company will expense all costs as incurred. The extent of the
costs to ready the Company for the year 2000 transition have not been fully
determined; however, the Company does not believe that such costs will have a
material adverse impact on the Company's financial position or its results of
operations. However, if the Company is unable to ready its network and systems
for the year 2000 transition, or if its key suppliers or other companies upon
which the Company depends or with whom the Company's systems interface are not
year 2000 compliant, there could be a material adverse effect on the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "REPORTING
COMPREHENSIVE INCOME," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF A BUSINESS ENTERPRISE,"
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers.
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<PAGE>
SFAS No. 130 and No. 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.
SFAS No. 132, "EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS." The new standard standardizes the disclosure
requirements for pensions and other post-retirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets. The statement is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Adoption of SFAS No. 132 is expected to have a
material effect on the Company's financial statement disclosures.
SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES," requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them at fair
value. If certain conditions are met, a derivative may be specifically
designated as a hedge, the objective of which is to match the timing of gain or
loss recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to have a material effect on its
financial statements.
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<PAGE>
BUSINESS
OVERVIEW
Telscape is a rapidly growing emerging multinational telecommunications
carrier focused on Latin America. The Company provides international wholesale
long distance services for calls originating in the United States and
terminating in markets in Latin America. As a way to generate increased
international long distance traffic to countries it serves, the Company markets
long distance services principally to Hispanic consumers in the United States
through the distribution of Prepaid Cards under the TELEFIESTAT brand name. In
addition to these wholesale and retail international long distance services, the
Company also provides a broad range of systems integration and value-added voice
and data services to major public and private sector customers in Mexico.
Telscape intends to significantly expand its facilities-based
telecommunications operations over the next 18 months and to broaden its service
offerings in markets where it has established, or expects to establish, a
significant presence. In June 1998, Telereunion S.A. received the Mexican
Concession, a 30-year, facilities-based carrier license from the Mexican
government allowing it to construct and operate a network over which the Company
can carry long distance traffic in Mexico. To deliver its services, the Company,
through Telereunion S.A., intends to construct the Mexican Network, a combined
fiber-optic and microwave long distance network, connecting the United States,
the Gulf region of Mexico and targeted Mexican cities.
The Company believes that it is well-positioned to capitalize on the
opportunities presented by the large and growing international
telecommunications services market. According to the Telegeography Report,
revenues generated from the provision of international long distance services
increased to $61.3 billion in 1996 from $23.9 billion in 1987, a compound annual
growth rate of 11.0%. Management believes that Latin American traffic, including
traffic between the United States and Latin America, will grow faster than the
international telecommunications market as a whole as a result of the (i)
underlying economic growth within Latin America, (ii) growth of regional trade
as a result of free trade initiatives such as NAFTA, Mercosur and the Andean
Pact, (iii) deregulation and privatization of telecommunications carriers in the
region, (iv) projected regional increases in telephone density, (v) growth in
the Hispanic population in the United States and (vi) increasing demand for
bandwidth-intensive applications. See "-- Industry."
Telscape intends to capitalize on the growth in the Latin American
telecommunications market by providing international long distance services to
and from targeted Latin American countries. The Company also intends to position
itself as an integrated telecommunications provider in Mexico by providing
domestic and international long distance services over the Mexican Network. The
Company believes that expanding its owned and leased transmission facilities in
Latin America will allow it to increase the percentage of minutes of traffic
carried on-net, which will enable it to increase margins and profitability and
ensure quality of service on both international and domestic long distance
traffic. See "Risk Factors -- Construction of the Mexican Network; Construction
Costs," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Gross Margin."
HISTORY
The Company was founded in 1992 with the objective of becoming a
significant participant in the emerging Eastern European telecommunications
equipment market through its 90% interest in Digital Telecommunications
Systems/ZWUT, a Polish limited liability company. In May 1996 the Company began
shifting its strategic focus to the provision of telecommunications services in
Latin America. Revenues from the Company's operations in Poland during 1997
represented less than 5% of the Company's revenues. In November 1996, the
Company's name was changed from "Polish Telephones and Microwave Corporation"
to "Telscape International, Inc." to more accurately reflect the Company's
overall strategy. This shift in strategic focus was completed in December 1997
with the sale of the Company's Polish subsidiary.
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<PAGE>
In May 1996, the Company acquired all of the stock of Telereunion, a 97%
owner of Vextro de Mexico S. A. de C.V. ("Vextro"). Vextro is a systems
integration company, with an emphasis on voice solutions, based in Mexico. In
September 1996, Orion Communications, Inc., a U.S.-based reseller of long
distance services ("Orion"), was merged into Telscape USA, a subsidiary of the
Company. The management capabilities that came with the Orion merger enabled the
Company to expand its strategy to include international long distance.
In July 1997, the Company acquired Integracion of Mexico City, Mexico, a
data and network integrator. The acquisition of Integracion marked the Company's
entry into the fast growing data and network market. In October 1997, the
Company acquired N.S.I. also of Mexico City, Mexico, also a data and network
integrator. Management of the Company believes that these acquisitions, coupled
with Vextro, strategically position the Company in Mexico to address the
technological convergence of data, voice and video transmission. The Company is
one of the three largest systems integrators in Mexico.
In January 1998, the Company added to its international long distance
operations the business of MSN, a leading provider of Prepaid Cards targeted at
Hispanic communities in the United States. The transaction adds a well-known
brand name, TELEFIESTAT, and a retail distribution platform to the Company's
business mix, and the Company intends to utilize that brand name in certain
Latin American countries as regulations and licenses permit.
In June 1998, the Company, through its newly-formed subsidiary INTERLINK,
acquired California Microwave Services Division, Inc. INTERLINK provides the
Company with a teleport facility in California, thereby enhancing the Company's
position as an integrated telecommunications provider and contributing to the
Company's ability to provide satellite capacity to its targeted markets in Latin
America.
In June 1998, Telereunion S.A. received the Mexican Concession. The Company
believes that the Mexican Concession will enhance its service offerings to
business customers in Mexico while allowing it to reduce its cost of
international termination in Mexico.
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<PAGE>
The following chart illustrates the operational structure of the Company.
<TABLE>
<CAPTION>
<S> <C>
------------------------------
| Telscape International, Inc. |
| Texas Corporation |
------------------------------
|
---------------------------------------------------------------------------------------------
| | | | |
| | | | |
----------------------------- ------------------------ ----------------------- | ------------------------------
| MSN Communications, Inc. | | Telscape USA, Inc. | | Telereunion, Inc. | | |INTERLINK Communications, Inc.|
| California Corporation | | Texas Corporation | | Delaware Corporation | | | Delaware Corporation |
| (Prepaid Cards) | | (U.S. Domestic Long | ----------------------- | | (U.S. Satellite Teleport) |
----------------------------- | Distance Wholesaler) | | | ------------------------------
------------------------ | |
| |
| |
| ------------------------------
| | TSCP International, Inc. |
| | Texas Corporation |
| | (International Long Distance |
| | Wholesaler) |
| ------------------------------
|
--------------------------------------------------------------------------------------------------
| | | |
| | | |
------------------------------- ----------------------------------- ---------------------- |
| Vextro de Mexico, S.A. de C.V.| | Integracion de Redes, S.A. de C.V.| | N.S.I.,S.A. de C.V. | ---------------------------
| Mexican Corporation | | Mexican Corporation | | Mexican Corporation | | Telereunion International,|
| (Systems Integration) | | (Systems Integration) | | (Systems Integration)| | S.A. de C.V. |
------------------------------- ----------------------------------- ---------------------- | Mexican Corporation |
| (Mexico Concession |
| Operations) |
---------------------------
|
|
|
|
--------------------------
| Telereunion, S.A. de C.V.|
| Mexican Corporation |
| (Concessionaire) |
--------------------------
</TABLE>
INDUSTRY
OVERVIEW
The international telecommunications industry is undergoing a period of
fundamental change that has resulted, and is expected to continue to result, in
significant growth in international telecommunications traffic and revenues.
According to the World Telecommunication Development Report 1996/97 published by
the ITU on February 20, 1997 (the "ITU Report"), the 1998 revenue of the
global telecommunications industry is projected to exceed $1 trillion. According
to the Telegeography Report, revenues generated from the provision of
international long distance services increased to $61.3 billion in 1996 from
$23.9 billion in 1987, a compound annual growth rate of 11.0%. Management
believes that Latin American traffic, including traffic between the United
States and Latin America, will continue to grow faster than the international
telecommunications market as a whole as a result of (i) underlying economic
growth within Latin America, (ii) growth of regional trade as a result of free
trade initiatives such as NAFTA, Mercosur and the Andean Pact, (iii)
deregulation and privatization of telecommunications carriers in the region,
(iv) projected regional increases in telephone density and (v) increasing demand
for bandwidth-intensive applications.
The Company believes that numerous factors have driven the growth in demand
for international telecommunications products and services. Those factors
include: (i) the globalization of the world's economies and the worldwide trend
toward deregulation of the telecommunications sector, (ii) declining prices and
a wider selection of products and services driven by greater competition
resulting from deregulation, (iii) increased telephone accessibility resulting
from technological advances and greater investment in telecommunications
infrastructure, including deployment of wireless networks, (iv) increased
international business and leisure travel and (v) growth of computerized
transmission of voice and data
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<PAGE>
information. These trends have sharply increased the use of, and reliance upon,
telecommunications products and services throughout the world. The Company
expects these trends to continue for the foreseeable future.
The growth in the use of telecommunications services and the rapidly
changing international telecommunications market have created a significant
opportunity for carriers such as the Company, that can offer high quality, low
cost comprehensive telecommunications products, systems and services. The
Company believes that a high percentage of the world's businesses and
residential consumers continue to be subject to high prices with poor quality
and lack of availability of service which have been characteristic of many PTTs.
Demand for improved service and lower prices has created opportunities for
private companies to compete in the international telecommunications market and
has spurred a broadening of products and services. New technologies have
contributed to improved quality and increased transmission capacity and speed.
The Company therefore believes that recent and on-going deregulation and
increasing access to telecommunications facilities in emerging markets will
bring a high level of growth in the demand for telecommunications services
outside the United States, particularly in Latin America.
By eroding the traditional monopolies held by PTTs, many of which are or
were wholly or partially government owned, deregulation is providing U.S.-based
providers the opportunity to negotiate more favorable agreements with both the
traditional PTTs and emerging foreign providers. In addition, deregulation in
certain foreign countries is enabling U.S.-based providers to establish local
switching and transmission facilities in order to terminate their own traffic
and begin to carry international long distance traffic originating in those
countries. Deregulation, privatization, the expansion of the resale market and
other trends influencing the international telecommunications market are
resulting in decreased termination costs, a proliferation of routing options and
increased competition.
Advances in technology have created multiple ways for telecommunications
carriers to provide customer access to their networks and services. Overall,
these changes have resulted in a trend towards bypassing traditional
international long distance operating agreements as international long distance
companies seek to operate more efficiently. In markets that have not deregulated
or are in the process of implementing deregulation, international long distance
carriers have used advances in technology to develop innovative alternative
methods to meet customer demand.
Recent legislation and an agreement among numerous countries are expected
to lead to increased liberalization of the majority of the world's
telecommunication markets. Specifically, the WTO Agreement created a framework
under which 69 countries committed to liberalize their telecommunications laws
to permit increased competition and, in most cases, foreign ownership in their
telecommunications markets, beginning in 1998; the 1996 Telecommunications Act
established a framework for increasing competition in the U.S.
telecommunications services market; and the European Union's Services Directive
abolished exclusive rights for the provision of voice telephony services
throughout the European Union ("EU") and the local PSTN of any member country
of the EU by January 1, 1998.
The Company believes that these initiatives, as well as other proposed
legislation and agreements, will provide increased opportunities for emerging
competitive carriers such as Telscape to provide telecommunications services in
targeted markets. Deregulation has encouraged competition, which in turn has
prompted carriers to offer a wider selection of services and reduce prices. The
Company's projections for substantially increased international minutes of use
and revenue are based in part on its belief that reduced pricing as a result of
deregulation and competition will result in a substantial increase in the demand
for telecommunications services in most markets.
LATIN AMERICA. The telecommunications market in Latin America is
undergoing a period of deregulation, privatization, increased competition and
rapid growth. According to the Telegeography Report, growth in the demand for
telecommunications services across Latin America in 1995-1996 increased at a
rate of 13.6%, which has been faster than the global average and substantially
faster than the increased demand in Europe and Africa.
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<PAGE>
The Company seeks to focus on the opportunities created by deregulation and
market growth in the rapidly changing international telecommunications markets
in Latin America. Countries in the Latin American region generally are
experiencing a solid period of economic, business and infrastructure growth,
reduced inflation, and economic and political stability. Substantial
opportunities exist for providers of telecommunications equipment, system
integration, value-added services, and voice and data services as Latin American
countries move toward privatization and greater liberalization of their
telecommunications markets.
The Company believes that the small- to medium-sized business segment is
the target market in many countries in Latin America for value-added services
such as teleconferencing, advanced facsimile, advanced phone, unified messaging,
frame relay and ATM. Unlike larger businesses which have the resources and
traffic volume to support the internal development of a wide range of
value-added services, developing and maintaining such services is not economical
for smaller businesses. Accordingly, to meet these needs smaller businesses may
either purchase such services or outsource their telecommunications services to
third parties specializing in such services, such as the Company. The Company
believes that its experience and expertise in providing these services will
enable it to compete in this market.
The Company believes that it is well-positioned to capitalize on these
opportunities by providing high quality, low-cost comprehensive
telecommunications services. As a rule, Latin American countries have extremely
low telephone density, and the markets have been subject to characteristically
inefficient, poor-quality service, as well as the unavailability of new and
innovative systems and services. In addition, the Latin American markets in
which the Company is offering services or in which it seeks to compete generally
are characterized by a lack of fiber optic cable capacity. Existing
satellite-based capacity offers limited capability to meet the increasing demand
for bandwidth-intensive applications in the Company's targeted countries in the
region. There exists a critical and growing demand for the type of high-quality,
innovative systems, products and services that the Company is currently
providing and seeks to provide in expanding in its current markets and
exploiting the opportunities in new markets throughout Latin America.
The Company believes that the Latin American region is poised for growth in
telecommunications usage based on the political and economic changes in many
Latin American countries that have modernized their economies, increased
transparency in business and governmental practice and sustained strong economic
growth. In addition, telecommunications growth will be spurred as a result of
the recent and ongoing privatizations by many Latin American governments of
their previously state-owned telecommunications monopolies, as well as ongoing
liberalization of the regulatory frameworks in many countries in the region to
promote competition in telecommunications services.
MEXICO. The market for telecommunications services in Mexico is undergoing
rapid expansion. According to the TeleGeography Report, the volume of
telecommunication traffic to Mexico increased 14.6% in 1995 and 16.2% in 1996.
The 1996 traffic along the U.S.-Mexico route accounted for 12.5% of the U.S.
international market and 86.6% of the Mexican international telecommunications
market. According to a report issued by the FCC's Common Carrier Bureau in June
1997, revenues for sales on the U.S.-Mexico route exceeded $1.7 billion in 1995.
As a result of legislation enacted in 1995, Mexico began the process of
opening its telecommunications market to competition. National and international
long distance services were opened to competition in August 1996, subject to the
issuance of individual concessions. Pure switched international resale is not
allowed in Mexico to date. Value-added services are fully open to competition
and subject to a simple registration process.
The Company believes that it is well-positioned to take advantage of the
growing demand for telecommunications services between the United States and
Mexico. The Company currently provides a full range of systems integration and
value-added services to major public and private customers. Additionally, in
June 1998, Telereunion S.A. received the Mexican Concession from the SCT,
allowing it to originate and terminate domestic and international long distance
services in Mexico.
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OTHER LATIN AMERICAN MARKETS. The Company seeks to focus on the
opportunities created by deregulation of telecommunications services in other
telecommunications markets in Latin America. Latin American markets have
undergone rapid expansion as a result of regional and global deregulation.
Countries within Latin America have different national regulatory schemes
and are in varying stages of deregulation. The requirements for the Company to
obtain the necessary approvals to offer value-added services and various other
telecommunications services, including voice telephony, vary from country to
country. Specifically, the Company has recently obtained the authority to
provide inbound and outbound international long distance as well as certain
other telecommunications services in El Salvador.
STRATEGY
The Company's objective is to become a leading provider of high quality,
competitively priced international long distance services between the United
States and Latin America, and a leading provider of international long distance
services, domestic long distance services and of integrated value-added services
to customers in Mexico and other targeted countries in Latin America. The key
elements of the Company's strategy are to:
o EXPAND LATIN AMERICAN PRESENCE. The Company seeks to expand its Latin
American presence in order to capitalize on the relatively high growth
of traffic between the United States and Latin America. The Company
believes that management's international telecommunications expertise,
combined with Telscape's established reputation and extensive
operations in Mexico, will enable the Company to identify and
capitalize on the increasing deregulation in targeted Latin American
markets.
o EXPAND NETWORK FACILITIES. The Company intends to expand its network
by acquiring switching and transmission facilities, state-of-the-art
ATM technologies and additional fiber optic and satellite transmission
capacity for the provision of international and domestic voice, video
and data services. In the next 18 months, Telscape intends to invest
approximately $113.0 million for infrastructure, including
approximately $98.0 million towards construction of the Mexican
Network and approximately $15.0 million to acquire switching and
transmission facilities and enhanced service platforms. The Company's
objectives in making these investments are to: (i) provide on-net
capacity to allow growth in its long distance services business; (ii)
increase profitability for switched services by reducing the amount of
the Company's traffic terminated by other long distance carriers
pursuant to resale arrangements; and (iii) use the expanded network as
a platform to support advanced, bandwidth-intensive data and media
applications.
o PROVIDE AN INTEGRATED SUITE OF SERVICE OFFERINGS. The Company seeks
to provide its commercial customers in Mexico with a comprehensive
suite of telecommunications services, including international and
domestic long distance services, systems integration, call centers,
conference calling, Internet access and other broadband data services.
The Company believes that providing multiple service offerings
improves customer retention and the profitability of individual
customer relationships. Management believes that Telscape is one of
the few companies to offer a wide array of high quality and
competitively priced telecommunications services to commercial
customers in Mexico, and expects to pursue opportunities to provide
similar services as it expands into other Latin American markets.
o EXPAND SCALE AND SCOPE OF RETAIL BUSINESS. Management believes that
the acquisition of MSN, a leading provider of Prepaid Cards, positions
the Company for expanded growth in the retail sector of the
international telecommunications market. The Company intends to expand
its retail business through the deployment or purchase of switching
platforms in high-volume gateway cities such as Houston, New York,
Chicago, San Francisco and Los Angeles, which will be capable of
managing local and 800 Prepaid Card traffic. The Company believes that
these state-of-the-art programmable switches will provide the Company
with the advanced technology necessary to handle the anticipated
growth in this rapidly expanding market.
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o PURSUE STRATEGIC ALLIANCES, JOINT VENTURES AND ACQUISITIONS. The
Company continues to pursue strategic alliances, joint ventures and
acquisitions to expand its business, increase its customer base, add
network and circuit capacity, enter additional markets and develop new
products and services. The Company seeks to acquire interests in
companies that have network facilities, service offerings or
technologies that complement those of the Company. Since 1996, the
Company has completed six acquisitions, including a U.S.-based
provider of satellite telecommunications services with access to
satellites covering Central and South America, a U.S.-based Prepaid
Card provider focused on Hispanic consumers in the United States and
Latin American markets, three data and systems integration businesses
in Mexico and a U.S.-based reseller of long distance services. See
"Risk Factors -- Risks Associated with Acquisitions, Investments and
Strategic Alliances."
o BUILD BRAND AWARENESS. The Company seeks to build brand awareness of
its TELEFIESTAT and TELEREUNION brands. Management believes that it
will be able to continue building customer awareness of its
TELEFIESTAT brand name through sales of its TELEFIESTAT Prepaid Cards
to its U.S. customers as it opens new international long distance
markets throughout Latin America. In addition, the Company intends to
distribute its TELEFIESTAT Prepaid Cards in targeted Latin American
countries as continued deregulation and market conditions permit.
Management also intends to continue building customer awareness of its
systems integration and value-added services through the TELEREUNION
brand name, which it plans to leverage as it commences international
and domestic long distance services in Mexico.
SERVICES
Telscape provides its customers with long distance services and systems
integration solutions, including value-added voice and data services. Financial
information about the Company's business segments for each of the three years
ended December 31, 1995, 1996 and 1997 and the six months ended June 30, 1997
and 1998 are disclosed in the Notes to the Consolidated Financial
Statements -- Footnote 9. Segment Information.
LONG DISTANCE SERVICES
INTERNATIONAL WHOLESALE SERVICES. The Company provides its wholesale
carrier services to other carriers in the United States. In offering these
services, the Company leverages the rates that it is able to obtain through (i)
its extensive relationships in the long distance telecommunications industry;
(ii) its ability to generate a high volume of long distance traffic to targeted
Latin American countries; and (iii) the advantageous rates negotiated with
competitive carriers in targeted Latin American countries. The Company believes
that its understanding of the rapidly changing conditions of the
telecommunications industry in many Latin American markets distinguishes it from
many U.S.-based emerging international carriers and allows the Company to
compete in Latin American markets with first tier carriers. By developing the
Mexican Network, the Company expects to increase the amount of wholesale
international traffic it carries on-net. For the six months ended June 30, 1998,
the Company generated revenues from its wholesale carrier services business of
$16.8 million, representing 26% of the Company's consolidated revenues.
PREPAID CARDS. The Company sells Prepaid Cards under the TELEFIESTAT brand
name, providing access to more than 200 countries and territories. The Company's
Prepaid Cards are marketed primarily to Hispanic communities in the United
States that generate high levels of international traffic to targeted Latin
American countries where the Company has favorable termination agreements. The
Company's TELEFIESTAT Prepaid Cards are sold through distributors to over 20,000
independent retail outlets in 100 cities throughout the United States. The
Company believes that the TELEFIESTAT Prepaid Cards offer competitive rates to
selected Latin American and other international markets. For the six months
ended June 30, 1998, the Company generated revenues from its Prepaid Card
business of $32.4 million, representing 49% of the Company's consolidated
revenues.
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SYSTEMS INTEGRATION
The Company provides a full range of voice, video and data systems
integration solutions, and audio, data and video conferencing services and
enhanced facsimile services to business customers in Mexico, including
multi-national Fortune 500 companies. The Company has also provided call center
services to the U.S. Embassy in Mexico since the fourth quarter of 1997.
Systems integration involves the identification of customer needs, the
development of customized solutions, the installation of telecommunications
equipment and the integration of such equipment with the client's
telecommunications and information systems, post-sales services such as
maintenance contracts, outsourcing and network management and monitoring
services. Although the Company expects that systems integration revenues will
not increase as rapidly as those from the Company's other lines of business, it
will remain an important part of the Company's strategy to introduce commercial
customers to the Company's other telecommunications services. For the six months
ended June 30, 1998, the Company generated revenues of $15.4 million from
systems integration services, representing 23% of the Company's consolidated
revenues.
Since 1992, the Company has been one of five distributors in Mexico of
Nortel telecommunications equipment. The Company also distributes voice and
teleconferencing products manufactured by Polycom, Centigram and VTEL, and
distributes, installs and maintains data and networking equipment manufactured
by 3Com Corporation, Nortel and Newbridge Networks, ADC Kentrox and Cisco.
As traditional telecommunications services become more of a commodity,
Telscape believes that value-added services will become an increasingly
important component of the Company's service offerings. The Company believes it
can leverage its systems integration expertise to provide outsourced network
management services, allowing the Company to offer a single-source, turn-key
solution to its private and public commercial customers. For the six months
ended June 30, 1998, the Company generated revenues from its value-added
services of less than 5% of the Company's consolidated revenues.
The Company anticipates that traditional long distance and local exchange
services will increasingly involve sophisticated, application-oriented services
such as audio, data and video conferencing, enhanced facsimile, telemarketing,
interactive voice response ("IVR"), help-desk, advanced Internet and other
content and service intensive value-added services. The Company has provided
value-added services in Mexico since 1995, giving it both technical and
marketing experience needed to compete in the value-added services market.
The Company's expanding presence in value-added telecommunications services
resulted in an outsourcing contract, signed in the third quarter of 1997, with
the U.S. Embassy in Mexico City. The contract term is through the fourth quarter
of 1998 when the U.S. government has the option to renew the contract for up to
four additional one-year terms. The system is designed to automate the delivery
of visa applications and enables callers to request visa information from either
a live operator or from an automated touch-tone system. The Company began
implementing the system in December 1997 and management believes the early
results are very positive. The number of calls the Company handles has increased
from an average of approximately 1,000 calls per day during December 1997 to an
average of approximately 4,300 calls per day during June 1998. In connection
with this contract, the Company established a call center in Mexico City, which
the Company believes will serve as a platform for additional growth.
NETWORK
The Company currently manages its own telecommunications network and also
utilizes the transmission capacity of several carriers. The Company believes
that increasing the percentage of traffic it carries on-net will enable it to
increase margins and profitability and ensure quality. In addition, the
Company's use of multiple carriers increases cost efficiencies by establishing
additional routing capability and enabling the Company to obtain sufficient
capacity to support its rapid growth.
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NETWORK STRATEGY
The Company's network is comprised of leased, partitioned and owned
switches, fixed cost point-to-point fiber optic cable leases and leased
satellite capacity to provide connectivity for many Central and South American
cities. The Company intends to expand its network primarily by using traditional
circuit-based technology, acquiring additional satellite and fiber optic
transmission capacity and installing switching equipment in targeted U.S. and
Latin American markets. In countries in which the Company currently operates
without a switch and in each new market the Company enters, the Company intends
to install switching facilities and integrate them into its network to improve
the Company's overall cost structure. The Company expects that it will be able
to realize significant cost savings by routing an increasing portion of its
Mexican domestic long distance and international traffic on-net.
In the near future, the Company intends, to the extent technically
possible, to further develop its network by employing state-of-the-art ATM
technologies, giving it the flexibility to transmit packetized voice, data and
video signals over its network. The Company believes that using ATM technology
in its network construction gives it a competitive advantage over carriers using
the traditional, time division multiplexing technology that will eventually need
to be replaced to accommodate the increased demands for data and video
transmission capacity.
The Company intends to market certain domestic long distance services
directly to customers in the Gulf region of Mexico primarily through the
development of the Mexican Network. The Company's Mexican Network will support
multiple lines of international and domestic national telephone services in
Mexico, as well as provide Telscape with an essential element for its plan to
become a significant market force in Mexico by securing for the Company control
over its bandwidth and quality transmission requirements. The Company has
targeted the Gulf region of Mexico for these services because (i) the region
currently lacks extensive telecommunications infrastructure, (ii) other major
competitors of the Company have not targeted the region for development, (iii)
there is a developed business community with a high potential for long distance
usage in the region, (iv) the region is sufficiently populated to permit the
efficient use of new infrastructure and (v) the region is in close proximity to
the United States. The Company believes that this focused approach to building a
network is superior to constructing a nationwide network.
INTERNATIONAL ORIGINATION AND TERMINATION FACILITIES
SWITCHING FACILITIES. The Company owns and operates a Nortel DMS-250,
state-of-the-art digital switch consisting of approximately 9,000 ports in
Houston, Texas. The Company has selected Nortel as its primary switch vendor and
has installed public switched network architecture to manage one of its Prepaid
Card platforms. The Company currently operates additional switching platforms in
Houston, Texas, and six Latin American countries and anticipates installing
switches in four other Latin American countries during 1998. The Company also
currently partitions a switch in New York.
As part of the Company's strategy to expand its Prepaid Card operations, it
plans to install or purchase additional Prepaid Card switching platforms in
selected cities in North America. These switches will be capable of managing
local and 800 Prepaid Card traffic in high-volume gateway cities such as
Houston, New York, Chicago, San Francisco and Los Angeles.
SATELLITE FACILITIES. The Company operates, or will operate in the near
term, earth stations in several markets in Central and South America. In
connection with the CMSD Acquisition, the Company acquired a teleport facility
in Mountain View, California. The Company believes that this acquisition
enhances its position as an integrated telecommunications provider. INTERLINK
has agreements with satellite providers to its targeted markets in Latin America
which generally provide for cancellation upon 30 days notice by either party. By
the end of 1998, the Company anticipates operating earth stations in several
other major cities of Central and South America.
The earth stations are either owned by Telscape or the Company has access
to the earth stations pursuant to contractual arrangements with local operators.
Telscape's strategy is to create a platform that enables the near-term
implementation of value added services such as Internet access, data
transmission, fax and video and call centers, where market and regulatory
conditions permit.
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NETWORK CAPACITY. The Company purchases transmission services on a per
minute basis and leases transmission capacity on a fixed cost basis from a
variety of local and long distance carriers. The Company is currently expanding
its leased on-net capacity in an attempt to lower costs in its largest
distribution areas. The Company obtains private line capacity from approximately
six local, domestic and international carriers, including MCI, WorldCom and IXC.
The Company's agreements with these carriers fix the private line cost for a
minimum of one year. The Company's agreements with its carriers provide that
some international per minute rates may fluctuate with rate change notice
periods varying from five days to one month. The variable nature of the cost of
services and many of the Company's contracts and agreements subject the Company
to the possibility of unanticipated cost increases and the loss of
cost-effective routing alternatives.
TELECOMMUNICATIONS NETWORK MANAGEMENT AND INFORMATION SYSTEMS. The
Company's network management and information systems enable it to (i)
economically and efficiently route traffic over the Company's network and the
networks of other carriers, (ii) offer reliable services with high call
completion rates and voice quality and (iii) manage an advanced voice, data and
video multi-service platform. The Company believes that these systems,
particularly their ability to provide flexible, high quality service to
international destinations, provide it with a competitive advantage relative to
many other providers of telecommunications services. The Company monitors its
network and initiates changes to its overall switch network and traffic routing
where appropriate to optimize routing and minimize costs. Because a substantial
portion of the traffic carried by the Company terminates internationally and
call completions vary by carrier, the Company monitors the call completion
efficiencies of its suppliers. The Company intends to continue configuring large
portions of its network with Common Channel Signaling System 7 ("SS7"). SS7
reduces voice call setup and connect time delays and provides additional
technical capabilities and efficiencies for call routing and network
engineering.
NETWORK OPERATIONS CENTER. The Company is developing a network operations
center ("NOC") in Mexico City, Mexico which will be used to monitor and
control all switches and other transmission equipment used in its network. The
NOC is expected to operate seven days a week, 24 hours per day, 365 days a year.
The Company plans to use a portion of the net proceeds of the Offerings to
install a new NOC in Houston, Texas, and to upgrade the existing Mexico City
NOC. See "Use of Proceeds." Each of the NOCs will be capable of monitoring and
controlling the network in most regions.
NETWORK EXPANSION
MEXICAN NETWORK. The Company plans to develop the Mexican Network
consisting of a fiber optic cable and microwave transmission facilities network
in the Gulf region of Mexico. The Mexican Network will provide connectivity from
Reynosa to Coatzacoalcos and Minatitlan, and through Puebla to Mexico City. The
Company will seek to acquire rights-of-way from railroads, highway commissions,
pipeline owners, utility companies and others. The Company intends to lease
from, and exchange capacity with, other long distance providers to connect with
the central (Mexico City, Guanajuato and Guadalajara) and northeast (Monterrey)
regions of Mexico, and to install a switching facility in Mexico City and at the
U.S./Mexico border. The Gulf region of Mexico contains approximately 38.0% of
the population of Mexico. The Company believes that more than half of the
domestic business long distance traffic and nearly half of the domestic
residential long distance traffic originates in the region that will be serviced
by the Mexican Network. Portions of the Mexican Network will be located near
Petroleos Mexicanos ("Pemex") operations, the largest user of
telecommunications services in Mexico. Pemex is a systems integration customer
of the Company.
The Mexican Network has been designed to accommodate the increasing demand
of bandwidth. The fiber optic component constitutes two cables of twenty-four
optical strands each. The Company anticipates that two strands will be used in
the first five years of operation, leaving a considerable reserve for future
expansions or dark fiber capacity available for lease to other carriers. The
bandwidth of the fiber optic multiplexors to be utilized during the first five
years is 155Mbps, equal to 2,268 high quality (64 kbps) voice channels or 76
E1s. The Company believes that the additional fiber capacity will be used to
support emerging bandwidth-intensive data and multimedia applications.
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The optical transmission capacity can be expanded on an as-needed basis, by
several methods which include the utilization of compression techniques, ATM
technology, higher capacity multiplexor substitution and Dense Wavelength
Division Multiplexing ("DWDM") technologies. The bandwidth considerations for
the microwave section of the long haul transmission media have been limited by
the actual mid-term projected demand in each specific city; however, this
transmission capacity can be grown gradually by increasing bandwidth in radio
equipment or by substituting radios with fiber optic facilities on a case-by-
case basis.
The Company believes that owning a network will enable the Company to
significantly reduce expenditures for leasing off-net capacity because the new
fiber routes: (i) could carry much of the traffic that would otherwise be
transmitted off-net; and (ii) may enable the Company to exchange its fiber
capacity for other carriers' network capacity.
OBJECTIVES. The Company's objectives in constructing the Mexican Network
are to: (i) provide on-net capacity to allow growth in its long distance
services business; (ii) increase profitability for switched services by reducing
its off-net, capacity expenses; and (iii) use the expanded network as a platform
to support advanced, bandwidth-intensive data and media applications.
CONSTRUCTION AND COST. The Company plans to complete the Mexican Network
in two phases along the following routes (which are subject to change depending
on the availability of certain cost-saving arrangements and the ability to
minimize construction costs and maximize the benefits from the routes to be
constructed):
(i) PHASE I. The Company anticipates that the first phase of
construction will involve the installation of a central node with an
international teleport in Mexico City and fiber optic cable up the eastern
Mexican coast to connect with the Company's U.S. network. During Phase I,
the Company intends to lease from other carriers transmission capacity
connecting the Company's network to Monterrey and Guadalajara. The Company
estimates that this phase will cost approximately $95.0 million to
complete.
(ii) PHASE II. The Company anticipates that the second phase of
construction will involve connecting its network, primarily by means of
microwave, to medium and smaller sized cities in the Gulf of Mexico region.
The Company estimates that this phase will cost approximately $3.0 million
to complete.
The Company anticipates that Phase I will begin in the first quarter of
1999 and will be completed in approximately 12-14 months and Phase II will be
completed approximately six to eight months thereafter.
The Company estimates the aggregate cost of the Mexican Network will be
$98.0 million. The principal components of such cost are expected to be: (i)
fiber optic cable and microwave, between 25% and 30% of total construction
costs; (ii) engineering and construction, between 52% and 58% of total
construction costs; (iii) electronics, approximately 8% of total construction
costs; and (iv) rights-of-way, approximately 4% of total construction costs. The
Company will seek to acquire rights-of-way from railroads, highway commissions,
pipeline owners, utility companies and others.
FUNDING THE NETWORK EXPANSION. Although the Company estimates the
aggregate cost of the Mexican Network to be approximately $98.0 million, it will
seek to realize significant cost savings and/or lower the aggregate cost by: (i)
adding additional fibers to the network and selling such fibers to other
carriers; (ii) exchanging excess fibers or capacity on the Company's expanded
network for excess fibers or capacity on the other carriers' networks; and (iii)
obtaining the right to install Company-owned fibers in new fiber optic routes
being constructed by other carriers along the proposed network routes in
exchange for the Company sharing construction costs with the other carrier,
allowing the other carrier to use excess Company fiber elsewhere in the
Company's network or allowing the other carriers to add its own fibers to
segments of the network.
For a discussion of the risks associated with the Mexican Network, see
"Risk Factors -- Expansion and Operation of the Network," "Risk
Factors -- Construction of the Mexican Network; Construction Costs" and "Risk
Factors -- Substantial Indebtedness."
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SALES, MARKETING AND DISTRIBUTION
LONG DISTANCE SERVICES
INTERNATIONAL WHOLESALE SERVICES. The Company's carrier resale department
markets its international outbound switched and dedicated services on a
wholesale basis to other telecommunications companies through a direct sales
effort. At September 25, 1998, the Company had approximately 19 wholesale
carrier agreements in place. To provide a more complete package of international
rates to its customers, the Company intends to establish strategic relationships
with entities that have gateways to international destinations. When
appropriate, the Company will establish in-country relationships for the
termination of international long distance. For a discussion of the risks
associated with customer concentration in the Company's wholesale services, see
"Risk Factors -- Customer Concentration" and "Summary -- Recent
Developments."
PREPAID CARDS. The Company markets its Prepaid Cards under the TELEFIESTAT
brand name. The Company's TELEFIESTAT Prepaid Cards are sold through
distributors to over 20,000 independent retail outlets in 100 cities throughout
the United States. The Company has focused on building a substantial network of
wholesale distributors that sell to sub-distributors and directly to retail
outlets. The sub-distributors generally sell only to retail outlets.
The Company targets heavily populated metropolitan areas in the United
States with substantial Hispanic populations that generate significant
international calling volume. Many of the Company's distributors are members of
such ethnic communities or otherwise have personal or business relationships in
such communities. In developing relationships with distributors, the Company
also focuses on expansion into new geographic and metropolitan areas with
substantial Hispanic populations. The Company believes that the success of its
Prepaid Cards has created significant brand loyalty and encourages distributors
and retail outlets to actively market the Company's products. The Company
regularly provides distributors and retail outlets with point of purchase
advertising and explanatory materials. The Company frequently adds new Prepaid
Card products to its service offerings, and adjusts its pricing for particular
traffic segments in order to target certain customer groups, respond to
competitive pressures and otherwise increase market share.
For a discussion of the risks associated with the Company's Prepaid Cards,
see "Risk Factors -- Dependence on Service Providers for Prepaid Card
Services" and "Summary -- Recent Developments."
SYSTEMS INTEGRATION
To serve the complex needs of its customers, the Company has formed a team
of sales and technical personnel that combines strong sales capabilities with
specialized technical expertise in product-specific areas such as PBX, voice
processing, Internet, video conferencing and ATM and frame relay networks.
Management believes that this sales approach allows the Company to provide
innovative solutions to complex systems integration projects.
In Mexico, the Company promotes its systems integration sales through a
combination of advertising, trade shows, direct mail and telemarketing. The
Company has historically utilized its own direct sales force but has recently
developed a dealer network to broaden its distribution channel. The Company's
product managers focus on cultivating relationships with one or more vendors and
with coordinating sales efforts for their specific product lines.
The Company markets its value-added telecommunications services through
advertising in trade magazines, telemarketing, direct mail and attending trade
shows. The Company believes that its systems integration service base provides
an excellent platform for the follow-up sales of advanced telecommunications
services, since many of the Company's customers have developed confidence in the
Company's ability to implement complex projects.
The Company's direct sales effort begins with understanding the customer's
business. Sales personnel then identify potential areas where the Company's
value-added services could improve the customer's business, suggesting specific
services, customizing those services to meet the customer's specific needs,
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implementing value-added solutions and monitoring the results and potential
changes in the customer's needs.
CUSTOMERS
LONG DISTANCE SERVICES
INTERNATIONAL WHOLESALE SERVICES. The Company's wholesale customers are
primarily other international carriers that seek termination services in one or
more Latin American countries. During the six months ended June 30, 1998, no
single customer represented more than 10% of the Company's overall revenues. See
"Risk Factors -- Customer Concentration."
PREPAID CARDS. The Company markets its Prepaid Cards primarily to Hispanic
communities in the United States that generate high levels of international
traffic to targeted Latin American countries where the Company has favorable
termination agreements. The Company sells its Prepaid Cards through a network of
distributors, who distribute the Prepaid Cards to over 20,000 independent retail
outlets in 100 cities throughout the United States. During the six months ended
June 30, 1998, no single distributor represented more than 10% of the Company's
overall revenues. See "Risk Factors -- Dependence on Distributors."
SYSTEMS INTEGRATION
The Company performs substantially all of its systems integration services
for customers located in Mexico. During the six months ended June 30, 1998, no
single customer represented more than 10% of the Company's overall revenues.
CUSTOMER SUPPORT AND BILLING
Telscape believes that reliable, sophisticated and flexible billing and
information systems are essential to its ability to remain competitive in the
global telecommunications market. Accordingly, the Company has invested
substantial resources in an IBM AS-400 platform for rating and billing services.
The Company is also developing and implementing proprietary management
information systems, as well as other commercially available software packages.
The Company's billing system enables the Company to (i) accurately analyze
its network traffic, revenues and margins by customer and by route on a daily
basis; (ii) validate carrier settlements; and (iii) monitor least cost routing
of customer traffic. These reports produce efficiencies by reducing the need for
monitoring by the Company's employees. The Company believes that the accuracy
and efficiency of its management information systems provide it with a
significant strategic advantage over other emerging carriers.
COMPETITION
The international and national telecommunications industry is highly
competitive, is subject to rapid change precipitated by advances in technology
and deregulation and is significantly influenced by the pricing and marketing
decisions of larger industry participants. The Company's success depends upon
its ability to compete with a variety of other telecommunications providers in
each of its markets, including the respective PTT in each country in which the
Company operates. Other competitors of the Company include large,
facilities-based, multinational carriers and smaller facilities-based wholesale
long distance service providers in the United States and overseas that have
emerged as a result of deregulation, switched-based resellers of international
long distance services, providers of systems integration and/or value-added
services, Prepaid Card providers and global alliances among some of the world's
largest telecommunications carriers. The Company anticipates that it will
encounter additional competition as a result of the formation of global
alliances among large telecommunications providers. Recent examples of such
alliances include AT&T's alliance with Unisource, known as "Uniworld;" Cable &
Wireless Plc's recent alliance with Italy's STET/Telecom Italia to serve
international customers with a primary focus on the Latin American and European
regions; WorldCom's recent merger with MCI, and subsequent alliance with
Telefonica de Espana; and Sprint's alliance with Deutsche Telekom and France
Telecom, known as "Global One", and the joint venture between Sprint and
Telmex. Consolidation in the telecommunications
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industry may create even larger competitors with greater financial and other
resources. The effect of the aforementioned or other similar mergers and
alliances could create increased competition in the telecommunications services
market and potentially reduce the number of customers that purchase wholesale
international long distance services from the Company. In the Prepaid Card
business, the Company currently competes with all of the first tier
telecommunications carriers as well as emerging multinational carriers such as
SmarTalk, RSL and IDT, many of which have greater financial resources than the
Company. Because certain of the Company's current competitors also are or could
be the Company's customers, the Company's business would be materially adversely
affected to the extent that a significant number of such customers limit or
cease doing business with the Company for competitive or other reasons.
International telecommunications providers such as the Company compete on
the basis of price, customer service, transmission quality, breadth of service
offerings and value-added services, and the Company's carrier and Prepaid Card
customers are especially price sensitive. In addition, many of the Company's
competitors enjoy economies of scale that can result in a lower cost structure
for termination and network costs, which could cause significant pricing
pressures within the international communications industry. In recent years,
prices for international and other telecommunications services have decreased
substantially, and are expected to continue to decrease, in most of the markets
in which the Company currently competes or intends to compete. The intensity of
such competition has recently increased, and the Company expects that such
competition will continue to intensify as the number of new entrants increases
as a result of the new competitive opportunities created by the 1996
Telecommunications, implementation by the FCC of the U.S. commitment to the WTO,
and privatization, deregulation and changes in legislation and regulation in
various of the Company's foreign target markets. There can be no assurance that
the Company will be able to compete successfully in the future, or that such
intense competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources, larger
networks and a broader portfolio of services than the Company. Additionally,
many competitors have strong name recognition and "brand" loyalty,
long-standing relationships with the Company's target customers, and economies
of scale which can result in a lower relative cost structure for transmission
and related costs. These competitors include, among others, AT&T, Sprint, and
MCI WorldCom, which provide long distance services in the U.S.; Telmex,
Concessionaries, and other registered value-added services providers in Mexico;
as well as PTTs and emerging competitors in other Latin American markets where
the Company seeks to compete. In Mexico, the regulatory authorities have granted
concessions to 15 companies, including Telmex and Telereunion S.A., to construct
and operate public, long distance telecomunications networks in Mexico. Some of
these new competitive entrants have as their partners, major U.S.
telecommunications providers including AT&T (Alestra), MCI WorldCom (Avantel),
Bell Atlantic (Iusatel). In addition, the regulatory authorities in Mexico have
granted concessions to several competitive local exchange providers, such as
Telinor, Megacable, Amaritel, Unitel, MetroNet and Red de Servicios and several
of Mexico's long distance Concessionaires. With regard to the provision of
services in Mexico, the Company competes or will compete in Mexico with numerous
other systems integration, value-added services, and voice and data services
providers, some of which focus their efforts on the same customers targeted by
the Company. In addition to these competitors, recent and pending deregulation
in Mexico and various other Latin American countries may encourage new entrants.
Moreover, while the recently completed WTO Agreement could create opportunities
for the Company to enter new foreign markets, implementation of the accord by
the United States and other countries could result in new competition from PTTs
previously banned or limited from providing services in the United States. For
example, the joint venture between Sprint and Telmex has applied to the FCC for
authority to enter the U.S. market and to provide resold international switched
services between the United States and Mexico. Such application was approved
subject to various conditions, but certain parties requested that the FCC
reconsider its decision. The FCC's decision on reconsideration is currently
pending. Increased competition in such countries as a result of the foregoing,
and other competitive developments, including entry by Internet service
providers into the long-distance market, could have a material adverse effect on
the Company's business, financial condition and results of operations.
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The Company believes that PTTs generally have certain competitive
advantages due to their control over local connectivity and close ties with
national regulatory authorities. The Company also believes that, in certain
instances, some regulators have shown a reluctance to adopt policies and grant
regulatory approvals that would result in increased competition for the local
PTT. If a PTT were to successfully pressure national regulators to prevent the
Company from providing its services, the Company could be denied regulatory
approval in certain jurisdictions in which its services would otherwise be
permitted, thereby requiring the Company to seek judicial or other legal
enforcement of its right to provide services or to abandon its proposed market
entry. Any delay in obtaining approval, or failure to obtain approval, could
have a material adverse effect on the Company's business, financial condition
and results of operations. If the Company encounters anti-competitive behavior
in countries in which it operates or intends to operate or if the PTT in any
country in which the Company operates uses its competitive advantages to the
fullest extent, the Company's business, financial condition and results of
operations could be materially adversely affected.
REGULATION
GENERAL. The global telecommunications industry is subject to
international treaties and agreements, and to laws and regulations which vary
from country to country. Enforcement and interpretation of these treaties,
agreements, laws and regulations can be unpredictable and are often subject to
informal views of government officials and ministries that regulate
telecommunications in each country. In certain countries, including certain of
the Company's target Latin American markets, such government officials and
ministries may be subject to influence by the local PTT. To the best of the
knowledge of management, the Company is in compliance with all rules, regulation
and laws applicable to the Company except where non compliance will not have a
material adverse effect on the Company.
The Company has pursued and expects to continue to pursue a strategy of
providing its services to the maximum extent it believes to be permissible under
applicable laws and regulations. To the extent that the interpretation or
enforcement of applicable laws and regulations is uncertain or unclear, the
Company's aggressive strategy may result in the Company (i) providing services
or using transmission methods that are found to violate the laws or regulations
of those countries where it operates or plans to operate or (ii) failing to
obtain approvals or make filings subsequently found to be required under such
laws or regulations. If the Company's interpretation of applicable laws and
regulations proves incorrect, it could lose, or be unable to obtain, regulatory
approvals necessary to provide certain of its services or to use certain of its
transmission methods, or to lose its investments in that country. There can be
no assurance that the Company will not be subject to fines, penalties or other
sanctions, including being denied the ability to offer its products and
services, as a result of violations regardless of whether such violations are
knowing or willful and regardless of whether such violations are corrected. To
the Company's knowledge, it is not currently subject to any material regulatory
inquiry or investigation.
In numerous countries where the Company operates or plans to operate, local
laws or regulations limit the ability of telecommunication companies to provide
telecommunications services in competition with state-owned or state-sanctioned
monopoly carriers. There can be no assurance that future regulatory, judicial,
legislative or political considerations will permit the Company to offer all or
any of its products and services in such countries, that regulators or third
parties will not raise material issues regarding the Company's compliance with
applicable laws or regulations, or that such regulatory, judicial, legislative
or political decisions will not have a material adverse effect on the Company.
If the Company is unable to provide the services which it presently provides or
intends to provide or to use its existing or contemplated transmission methods
due to its inability to obtain or retain the requisite governmental approvals
for such services or transmission methods or because it is subjected to adverse
regulatory inquiry, investigation or action, or for any other reason related to
regulatory compliance or lack thereof, such developments could have a material
adverse effect on the Company's business, financial condition and results of
operations.
On February 15, 1997, the United States and 68 other countries signed the
WTO Agreement, agreeing to open their respective telecommunications markets to
competition and foreign ownership and to adopt regulatory measures to protect
market entrants against anticompetitive behavior by dominant telephone
companies. Although the Company believes that the WTO Agreement could provide
the Company with
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significant opportunities to compete in markets that were not previously
accessible, reduce its costs and provide more reliable services, it could also
provide similar opportunities to the Company's competitors. There can be no
assurance that the pro-competitive effects of the WTO Agreement will not have a
material adverse effect on the Company's business, financial condition and
results of operations or that members of the WTO will implement the terms of the
WTO Agreement.
UNITED STATES. In the United States, to the extent that the Company offers
services as a carrier, the provision of the Company's services is subject to the
provisions of the Communications Act, the 1996 Telecommunications Act and the
regulations of the FCC thereunder. There can be no assurance that future
regulatory, judicial and legislative changes will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, to the extent that the interpretation or enforcement of applicable
laws and regulations is uncertain or unclear, the Company's aggressive strategy
may result in the Company (i) providing services or using transmission methods
that are found to violate the Communications Act or FCC regulations or (ii)
failing to obtain approvals or make filings subsequently found to be required
under such laws or regulations. If the Company's interpretation of applicable
laws and regulations proves incorrect, it could lose, or be unable to obtain,
regulatory approvals necessary to provide certain of its services or to use
certain of its transmission methods. There can be no assurance that the Company
will not be subject to fines, penalties or other sanctions as a result of
violations regardless of whether such violations are knowing or willful and
regardless of whether such violations are corrected. There can be no assurance
that if the Company's interpretation of applicable laws and regulations proves
incorrect and/or if the Company is subject to fines, penalties or other
sanctions as a result, that these events will not have a material adverse effect
on the Company's business, financial condition and results of operations.
U.S. INTERNATIONAL LONG DISTANCE SERVICES. To the extent the Company
offers services as a carrier, it is subject to FCC rules requiring authorization
from the FCC prior to leasing international capacity, acquiring international
facilities, and/or purchasing switched minutes, and initiating international
service between the United States and foreign points, as well as to FCC rules
which also regulate the manner in which the Company's international services may
be provided, including the circumstances under which the Company may provide
international switched services by using private lines or routing traffic
through third countries. FCC rules also require prior authorization before
transferring control of or assigning FCC authorizations, and impose various
reporting and filing requirements on companies providing international services
under an FCC authorization. In order to offer international long distance
services, the Company is also required to file and has filed with the FCC a
tariff containing the rates, terms and conditions applicable to its
international telecommunications services. MSN has filed a tariff with respect
to international services. The Company has a continuing obligation to ensure
that the tariffs accurately reflect the terms and conditions associated with its
service offerings. The Company is also required to file certain carrier to
carrier agreements with the FCC. The FCC also requires carriers such as the
Company to report any affiliations, as defined by the FCC, with foreign
carriers. The FCC may also impose restrictions on affiliations with certain
foreign telecommunications companies. Failure to comply with the FCC's rules
could result in fines, penalties or forfeiture of the Company's FCC
authorizations, each of which could have a material adverse effect on the
Company business, financial condition and results of operations.
THE FCC'S PRIVATE LINE RESALE POLICY. The FCC's private line resale policy
currently prohibits a carrier from reselling international private leased
circuits to provide switched services (known as "ISR") to or from a country
unless the FCC has designated that country as one that affords U.S. carriers
equivalent opportunities to engage in similar activities in that country or that
the country is a member of the WTO and the local PTT offers U.S. carriers
settlement rates at or below the FCC-prescribed benchmark for terminating the
U.S. carriers' traffic. Thus far, the FCC has found that Australia, Austria,
Belgium, Canada, Denmark, France, Germany, Italy, Japan, Luxembourg, the
Netherlands, New Zealand, Norway, Sweden, Switzerland and the United Kingdom
meet this standard. In separate proceedings, the FCC issued, on August 6, 1998,
a proposed rulemaking that could provide opportunities to allow ISR on
additional routes. There can be no assurance, however, that the FCC or any other
country's regulatory authority will change their policies in a way that would
have a beneficial impact on the Company or that would not have a
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material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, it is possible, although not likely, that
the FCC could take the view that certain arrangements by which the Company
provides international services do not comply with the existing Private Line
Resale Policy. If the FCC, on its own motion or in response to a challenge filed
by a third party, determines that such arrangements do not comply with FCC
rules, among other measures, it may issue a cease and desist order, impose fines
on the Company or, in extreme circumstances, revoke or suspend its FCC
authorizations.
THE FCC'S POLICIES ON TRANSIT AND REFILE. The FCC is currently considering
the 1995 Request to limit or prohibit the practice whereby a carrier routes,
through its facilities in a third country, traffic originating from one country
and destined for another country. The FCC has permitted transiting. Under
certain arrangements referred to as "refiling," the carrier in the destination
country does not consent to receiving traffic from the originating country and
does not realize the traffic it receives from the third country is actually
originating from a different country. The FCC to date has made no pronouncement
as to whether refiling arrangements are inconsistent with U.S. or ITU
regulations, although it is considering these issues in connection with the 1995
Request. The Company believes that it is possible, although not likely, that the
FCC will determine that refiling violates U.S. and/or international law, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
INTERNATIONAL SETTLEMENTS POLICY. The ISP establishes the framework
governing U.S. carriers' relationships with their foreign correspondents.
Specifically, the ISP governs the settlements between U.S. carriers and their
foreign correspondents of the cost of terminating traffic over each other's
networks and prevents foreign carriers from discriminating among U.S. carriers
in bilateral accounting rate negotiations. The ISP requires: (1) the equal
division of accounting rates; (2) non-discriminatory treatment of U.S. carriers;
and (3) proportionate return of inbound traffic. The FCC recently enacted
certain changes in its rules designed to permit alternative arrangements outside
of its ISP as a means of encouraging competition and achieving lower, cost-based
accounting rates as foreign markets deregulate. Specifically, the FCC has
decided to allow U.S. carriers, subject to certain competitive safeguards, to
propose methods to pay for international call termination that deviate from
traditional bilateral accounting rates and the ISP. The FCC has also established
lower ceilings ("benchmarks") for the rates that U.S. carriers can pay foreign
carriers for the termination of international services. Moreover, the FCC
recently changed its rules to implement the WTO Agreement, in part by allowing
U.S. carriers, under certain circumstances, to accept special concessions from
foreign carriers. Furthermore, on August 6, 1998, the FCC released a proposed
order that could substantially eliminate the necessity of compliance with the
ISP for arrangements with non dominant carriers in WTO member countries. While
these rule changes provide the Company with more flexibility to respond more
rapidly to changes in the global telecommunications market, they also provide
similar flexibility to the Company's competitors.
U.S. DOMESTIC LONG DISTANCE SERVICES. The Company's ability to provide
domestic long distance service in the United States is subject to regulation by
the FCC and relevant state PSCs that regulate the offering of interstate and
intrastate telecommunications services, respectively. No formal authority is
required for the offering of interstate services. The Company, however, is
required by the FCC to file tariffs listing the rates, terms and conditions of
domestic long distance services provided. MSN has a tariff with respect to
domestic long distance services on file. The FCC adopted the October 29, 1996
Order (the "Detariffing Order") eliminating the requirement that non-dominant
interstate carriers, such as the Company, maintain FCC tariffs. However, on
February 13, 1997, the U.S. Court of Appeals for the DC Circuit stayed the
Detariffing Order, pending judicial review of the order. No final decision has
been rendered on the appeal.
Prior to the initiation of intrastate service, depending on the state, the
Company generally must obtain certification from or register with the relevant
state PSC. Providers of intrastate services may also be required to file tariffs
or rate schedules, and may be subject to certain reporting obligations with the
relevant PSC. Telscape USA has obtained the authorizations or has registered
with state regulatory authorities in 40 states. MSN has certification in eight
states, plus pending applications in two additional states. The Company has not
yet filed tariffs in the states that require tariffs to be filed, because the
Company is not
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currently offering intrastate interexchange service in any state. For the same
reason, the Company has not filed any reports with state PSCs. Failure to comply
with state law and/or the rules, regulations and policies of the PSCs may result
in challenges by third parties, and/or actions by the PSCs including
conditioning, modifying or revoking state authorization to provide
telecommunications services within the respective state and/or subject the
provider to fines and penalties.
In addition, the FCC has adopted certain measures to implement the 1996
Telecommunications Act that will impose new regulatory requirements, including
the requirement that the Company contribute some portion of its
telecommunications revenues to a "universal service fund" designated to fund
affordable telephone service for consumers, schools, libraries and rural health
care providers. These contributions became payable beginning in 1998 for all
interexchange carriers. The quarterly contribution percentages for 1998 equal
approximately 3.15% of interstate and international gross end user
telecommunications revenues for the high cost and low income fund, and
approximately 0.75% of intrastate, interstate and international gross end user
telecommunications revenues for the schools, libraries and healthcare fund. The
Company cannot predict the amount of universal service fund contributions for
1999, or thereafter, until the FCC issues contribution factors for such periods.
To date, the Company has not made any contributions to the universal service
fund because it provides its wholesale long distance services to other carriers
who are responsible for these contributions. In the future, the Company may be
required to make such contributions as it establishes its own platform for its
Prepaid Card services.
MEXICO. In June 1998, Telereunion S.A. received a 30-year facilities-based
carrier license from the SCT, allowing it to originate and terminate long
distance services and to provide data and other value-added services in Mexico.
The FTL opened the local and long distance telecommunications service markets to
competition and imposed varying levels of regulation on Mexican
telecommunications providers. Pursuant to the FTL, the SCT and the COFETEL
implemented the provisions of the FTL. The FTL imposes regulations on public
carriers. Facilities-based public carriers, those that use the radio spectrum,
satellite links or any form of land-based cables to provide telecommunications
services, must obtain concessions prior to providing service. Concessionaires
may also resell the facilities and services of other Concessionaires. Vendors
(resellers) of telecommunications services may not own their own facilities but
need only obtain a permit to provide service. Although the FTL provides for the
existence of resellers, the Mexican government has not issued the implementing
rules and regulations to allow their entry into the market. Consequently,
Mexican law does not currently permit pure switched international resale.
Carriers wishing to offer value-added services need only register with the
COFETEL's Telecommunications Registry.
In addition to the FTL, the Mexican Long Distance International Rules (the
"International Rules") establish the specific regulatory framework that
governs international long distance services. Among other matters, the
International Rules (i) mandate uniform accounting rate and proportionate return
for three years for all international traffic; (ii) require Concessionaires to
obtain additional specific authorization to install and operate international
gateways; (iii) implicitly prohibit ISR for three years; and (iv) regulate
international correspondent agreements, which must reflect the uniform
accounting rate and proportionate return rules. The International Rules prohibit
all telecommunications operators, except those Concessionaires that have
obtained the specific authorization from the COFETEL, to install and operate
international gateway switches. Those Concessionaires that have not received
such specific authorization, as well as any other companies that provide
telecommunications services, such as providers of value-added services, cellular
concessionaires and paging service providers cannot directly transmit
international switched traffic. To date, the SCT and the COFETEL have granted 15
companies, including Telmex and Telereunion S.A., concessions for the
installation, operation and exploitation of long distance public
telecommunications networks, of which eight have received authorization to
install and operate international gateway facilities. In addition, the SCT and
the COFETEL have granted eight concessions for local switched services as well
as numerous registrations for value added services.
Pursuant to the Foreign Investment Law and the Telecom Law, concessions for
public telecommunication networks may only be granted to Mexican citizens or
Mexican companies. Foreign investors may own minority interests in
Concessionaires, but may not own more than 49% of the voting ownership interest
of the company except for companies that provide cellular service. NAFTA removed
certain Mexican
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restrictions on foreign investment and U.S. companies may now maintain 100%
ownership interests in companies that provide value-added services in Mexico.
Pursuant to Mexican law, only Mexican citizens or companies incorporated and
domiciled in Mexico can register as providers of value-added services.
The Company, through its Mexican subsidiaries, is currently registered with
the COFETEL as a value-added services provider. In June 1998, Telereunion S.A.
received the Mexican Concession, a 30-year facilities-based carrier license from
the SCT, allowing it to construct and operate a network on which the Company can
carry long distance traffic in Mexico.
TELMEX CHARGES.__In connection with the liberalization of the Mexican
telecommunications market, the Mexican government, through the Secretaria de
Comunicaciones y Transportes (the "SCT") and the Comision Federal de
Telecommunicaciones (the "COFETEL"), has granted concessions to 15
Concessionaires, including Telmex and Telereunion, S.A., to construct and
operate public, long distance telecommunications networks in Mexico. The SCT
authorized Telmex to charge each of the Concessionaires, upon interconnection
with the Telmex system, a portion of the infrastructure cost incurred by Telmex
to upgrade its system to allow interconnection (the "Common Cost Charges"), as
well as interconnection and access costs (the "Additional Charges"). The
Mexican regulatory authorities were requiring the Concessionaires to pay Telmex
an interconnection rate equal to $.057 cents per minute and an additional access
fee equivalent to 58% of the settlement rate on every incoming international
call, in addition to other high access fees for routing calls through Telmex's
network. An independent third-party had estimated the aggregate amount of the
Common Cost Charges to be approximately $422.0 million, which excluded the cost
of administering and operating such upgrades, which remained subject to
determination by another independent third party. The Mexican regulatory
authorities accepted such estimate in a ruling dated May 28, 1997, which was
challenged by Telmex and three of the Concessionaires already interconnected
with Telmex (Alestra, Avantel and Miditel) in administrative proceedings before
the SCT and the courts. Specifically, Telmex requested an increase in the Common
Cost Charges and full payment in a single installment, and the three
Concessionaires were seeking a reduction in the Common Cost Charges and payment
on an installation, as well as a reduction in the Additional Charges.
On August 24, 1998, the SCT announced that Telmex and four of the six
Concessionaires interconnected to Telmex (Alestra, Protel, Iusatel, and
Marcatel) reached an agreement regarding the Common Cost Charges and the
Additional Charges. The new agreement reduces the interconnection rate charged
by Telmex by 52% to $.027 cents per minute, eliminates the 58% access fee on
incoming international calls and reduces other access fees charged by Telmex for
routing calls over its network. The agreement also provides that the
Concessionaires must pay Telmex $703.4 million as Common Cost Charges, which
includes the cost of administering and operating the upgrades done by Telmex to
its network, which had not been determined in the May 28, 1997 ruling by the
SCT, plus 12% annual interest. The $703.4 million will be paid in two manners:
(i) a first lump sum payment by the Concessionaires (excluding Telmex and
Telnor) equal to 15% of the Common Cost Charges on December 31, 1998, and (ii)
recurring payments by each Concessionaire based on their pro rata use of
Telmex's network, which will be charged at an interconnection rate of $.053
cents per minute. The total Common Cost Charges must be paid by the year 2004.
Any additional Concessionaires that interconnect with Telmex in the future, such
as the Company, will have to pay their proportionate share of the 15% initial
payment to those Concessionaires that have already paid it, plus the $.053 cents
per minute to Telmex. Two Concessionaires (Avantel and Miditel) refused to form
part of the agreement and therefore are continuing their legal challenge against
Telmex. These two Concessionaires will have to individually negotiate the terms
of interconnection with Telmex, provided that if they cannot reach an agreement
with Telmex within 60 days, the COFETEL may intervene and mandate the applicable
terms of interconnection. Should the Company decide not to form part of the
agreement, it will also have to individually negotiate interconnection terms
with Telmex.
OTHER LATIN AMERICAN MARKETS. The Company's provision of services
elsewhere in Latin America is subject to the developing laws and regulations
governing the competitive provision of telecommunications services in each Latin
American country in which it provides or seeks to provide services. Each such
Latin American country in which the Company currently conducts or intends to
conduct business has a different national regulatory scheme. Historically, Latin
American countries have prohibited Voice Telephony except
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by the PTT. The available opportunities and the requirements for the Company to
obtain necessary approvals to offer value-added services, systems integration,
or the full range of telecommunications services, including Voice Telephony,
vary considerably from country to country. The Company currently plans to
provide a limited range of services in certain Latin American countries, as
permitted by regulatory conditions in those markets, and to expand its
operations as these markets implement liberalization to permit competition in
the full range of telecommunications services. The nature, extent and timing of
the opportunity for the Company to compete in these markets will be determined,
in part, by the actions taken by the governments in these countries to implement
competition and the response of incumbent carriers to these efforts. There can
be no assurance that any of these countries will implement competition in the
near future or at all, that the Company will be able to take advantage of any
such liberalization in a timely manner, or that the Company's operations in any
such country will be successful. There can be no assurance that the Company has
received all necessary approvals, filed applications for such approvals,
received comfort letters or obtained all necessary licenses from the applicable
regulatory authorities to offer telecommunications services in the Latin
American countries where it currently provides services or those in which it
seeks to provide services in the future, or that it will do so in the future.
The Company's failure to obtain, or retain necessary approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Liberalization in Latin America is proceeding rapidly and the Company seeks
to keep pace with competition even where PTTs retain a legally mandated monopoly
on Voice Telephony. The Company is currently offering or plans to offer certain
systems integration, enhanced services, or value-added services in a number of
Latin America countries where the PTT retains the legally mandated monopoly on
Voice Telephony. While the Company believes that it will not be found to be
offering Voice Telephony in these countries prior to the expiration of the PTT's
monopoly on such services, the Company has received no assurance from the
respective PTTs or from the respective regulating authorities that this will be
the case. It is possible that the Company could be fined, or that the Company's
facilities or equipment could be confiscated, or that the Company would not be
allowed to provide specific services in these countries, among other sanctions,
if the Company were found to be providing Voice Telephony before the date in
which the PTT's monopoly on Voice Telephony ceases. Such actions could have a
material adverse impact on the Company's business, financial condition and
results of operations.
Moreover, the Company may be incorrect in its assumption that (i) each
Latin American country will abolish, on a timely basis, the respective PTT's
monopoly to provide Voice Telephony within and between other countries, (ii)
deregulation will continue to occur and (iii) the Company will be allowed to
continue to provide and to expand its services in the Latin American countries.
There can be no assurance that any or all of the Latin American countries will
not adopt laws or regulatory requirements that will adversely affect the
Company. Additionally, there can be no assurance that future regulatory,
judicial or legislative changes in any or all of the Latin American will not
have a material adverse effect on the Company or that regulators or third
parties will not raise material issues with regard to the Company's compliance
with applicable laws or regulations. If the Company is unable to provide the
services it is presently providing or intends to provide or to use its existing
or contemplated transmission methods due to its inability to receive or retain
formal or informal approvals for such services or transmission methods, or for
any other reason related to regulatory compliance or the lack thereof, such
events could have a material adverse effect on the Company's business, financial
condition and results of operations.
INTELLECTUAL PROPERTY
The Company uses the names "Telscape International" and "Telscape" as
its primary business names, and has filed for federal trademark protection for
the "Telscape" name and distinctive logo. These filings are pending, and the
Company has no assurance that they will be granted. The Company owns a federal
trademark registration for the "TELEFIESTA"T Prepaid Cards. Telereunion S.A.
has a national trademark registration in Mexico for "Telereunion." The
Company's affiliate that recently received the Mexican Concession. The Company
regards its trademarks, servicemarks, tradenames and logos as valuable assets
and believes they have value in the marketing of its products and services. The
Company intends to
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protect and defend its name, servicemarks and trademarks in the United States
and internationally. See "Risk Factors -- Proprietary Rights."
EMPLOYEES
As of September 22, 1998, the Company had 387 full-time employees, with 314
residing in Mexico and 73 residing in the United States. Of the total employees,
there are six in product development, 58 in sales and marketing, 52 in general
and administrative and 271 in operations, engineering and manufacturing and
assembly. None of the Company's employees are subject to a collective bargaining
agreement, and the Company has not experienced any work stoppage. The Company
believes that its relations with its employees are good.
PROPERTIES
The Company's international headquarters are located in Houston, Texas,
where the Company leases approximately 5,700 square feet of an office building.
The Company also leases additional facilities in Houston, Texas totaling 9,800
square feet relating to its Prepaid Card operations and to house
telecommunications equipment relating to its long distance services operations.
The Company leases facilities in Mexico City, Guadalajara and Tijuana, totaling
approximately 34,000 square feet and consisting of office and warehousing
facilities. The Company leases facilities in Sunnyvale and Mountain View,
California totalling 69,524 square feet.
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MANAGEMENT
OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The officers, directors and other key employees of the Company, and their
ages, as of September 23, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ---------------------------------------------------------
<S> <C> <C>
E. Scott Crist....................... 34 Director; President; Chief Executive Officer
Manuel Landa......................... 37 Director; Chairman of the Board; Executive Vice President
of Operations; Chief Executive Officer of Telereunion;
President of Vextro
Todd M. Binet(1)..................... 33 Director; Executive Vice President; Secretary; Treasurer;
Chief Financial Officer
Oscar Garcia......................... 37 Director; Vice President of Telereunion; Vice President
of Operations of Vextro
Ricardo Orea......................... 37 Director; Vice President of Telereunion; Vice President
of Sales and Marketing of Vextro
Stuart Newman........................ 42 President of MSN
Bryan T. Emerson..................... 37 Vice President of International Business
Jose Luis Apan....................... 36 Director of Marketing of Telereunion
Carlos de Lara....................... 38 Chief Technology Officer
E. Russell Hardy..................... 58 Chief Executive Officer of INTERLINK
Marco A. Castilla.................... 32 Vice President of International Affairs and Corporate
Counsel
Jesse E. Morris...................... 30 Corporate Controller; Assistant Treasurer
Darrel O. Kirkland(1)(2)............. 57 Director
Enrique Orihuela(1)(2)............... 51 Director
Jack M. Fields, Jr................... 46 Director
</TABLE>
- ------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
E. SCOTT CRIST has served as President and Chief Executive Officer of the
Company since July 1996. Prior to joining the Company, Mr. Crist was a founder
of Orion Communications, Inc., a reseller of long distance and Internet access
services, where he served as President from June 1996 to July 1996. He was also
President and Chief Executive Officer for Matrix Telecom, a long-distance
company which ranked #7 on THE INC. MAGAZINE list of the 500 fastest growing
private companies, from September 1995 through June 1996. He also founded in May
1993, DNS Communications ("DNS"), a long-distance reseller. He served as DNS's
Chief Executive Officer from its inception until DNS's merger with Matrix
Telecom. From March 1991 to January 1993 he served as Vice President of
Acquisitions for Trammell Crow Group, where he specialized in U.S. capital
market transactions. Mr. Crist has an M.B.A. from the J.L. Kellogg School at
Northwestern University, and received a B.S. MAGNA CUM LAUDE in Electrical
Engineering with an emphasis on telecommunications design from North Carolina
State University.
MANUEL LANDA has served as the Company's Chairman of the Board and as a
member of the Board of Directors since May 1996. Mr. Landa co-founded
Telereunion, has served as President of Vextro since 1989, and has served as
Chief Executive Officer and a Director of Telereunion since August 1995. From
1986 until he joined Telereunion, Mr. Landa served as Export Sales Manager for
Condumex, the largest Mexican manufacturer of electrical products with exports
to the United States, Canada, Latin America and Europe. While at Condumex, Mr.
Landa also served as Plant Manager, in which capacity he directed the Insulating
Materials Division. Prior to joining Condumex, Mr. Landa worked in the consumer
and industrial electronics business of Philips, a Dutch company, where he served
as Design Engineer for its Industrial Audio-Video Division. Mr. Landa also
worked for IPESA, a Mexican construction and engineering firm, on projects in
the petrochemical, industrial and touristic sectors of Mexico. Mr. Landa
received a degree in
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Electronic and Communications Engineering from La Salle University in Mexico
City, where he graduated MAGNA CUM LAUDE. He also has a diploma in Total Quality
Management from the Instituto Tecnologico de Estudios Superiores Monterrey.
TODD M. BINET has served as the Company's Executive Vice President and
Chief Financial Officer since January 1997, and as a member of the Board of
Directors since March 1997. Mr. Binet has over 10 years of business and
management experience. Prior to joining the Company, he served as an officer and
director of St. James Capital Corp., the general partner to St. James Capital
Partners, a merchant banking fund, from January 1996 to December 1996. Prior to
his service with St. James, from July 1992 to December 1995, Mr. Binet served as
Treasurer and Corporate Counsel for Alamo Group Inc., an international company
listed on the New York Stock Exchange ("NYSE"). Mr. Binet received a B.B.A. in
finance from Southern Methodist University and graduated CUM LAUDE. He also
received an M.B.A. from the Wharton School of Business and holds a J.D. from the
University of Pennsylvania. Mr. Binet also holds a license to practice law in
the state of Texas, although the license is currently inactive.
OSCAR GARCIA has served as a member of the Board of Directors of the
Company since May 1996. Mr. Garcia co-founded Vextro and Telereunion, has served
as Vextro's Vice President of Operations since 1988 and as a Vice President of
Telereunion since August 1995. From 1987 until he co-founded Vextro, Mr. Garcia
served as Engineering Manager for Infosistemas, which at that time was the
exclusive AT&T telephone equipment distributor in Mexico. Prior to that, Mr.
Garcia was Sales Support Manager for Macrotel de Mexico S.A. de C.V., a
subsidiary of Macrotel, Inc., a Florida telephone key systems company with
exports to Mexico and Latin America. Before that, Mr. Garcia held the position
of design engineer for the R&D department of GTE, at that time the leading U.S.
telecommunications company involved in PBX and KSU manufacturing in Mexico. Mr.
Garcia holds an undergraduate degree in Electronic and Communications
Engineering from La Salle University in Mexico City, a diploma in Marketing from
La Salle University and a degree in Business Administration from Berkley
University in Mexico City.
RICARDO OREA has served as a member of the Board of Directors of the
Company since May 1996. Mr. Orea co-founded Vextro and Telereunion, has served
as Vextro's Vice President of Sales and Marketing since 1988 and as a Vice
President of Telereunion since August 1995. Prior to joining Vextro, Mr. Orea
was Electronic Control Systems Plant Manager for Asea Brown Boveri, a Swedish
electrical control and switchgear equipment manufacturer. Before that, Mr. Orea
worked for GTE in its Purchasing and Logistics Department as System Integrator
and Supplier Development Manager. Earlier, he was Technical Service Manager for
MISA, a Mexican computer mainframes and telecommunications maintenance service
company which served major financial accounts and universities. Mr. Orea
received an undergraduate degree in Electronic and Communications Engineering
from La Salle University in Mexico City and has a diploma in Business
Administration from Berkley University in Mexico City.
STUART NEWMAN has served as President of MSN since it was founded in 1996.
Mr. Newman first entered the telecommunications industry in 1979 at Amtel
Consulting, where he was responsible for certain Fortune 500 customers in Texas.
He helped corporate clients establish networks and was involved in auditing
billing systems. From 1994 to 1996, Mr. Newman served as Executive Vice
President for Carribbean Telephone & Telegraph, Inc., a switch based provider of
long distance services. In 1992 Mr. Newman founded New West Telecom, Inc., one
of the nation's first Prepaid Card companies.
BRYAN T. EMERSON has served as the Company's Vice President of
International Business since joining the Company in August 1996. From December
1993 to March 1995, Mr. Emerson served as International Sales Manager for C & L
Communications, Inc., a NYSE company, where he was responsible for distributing
telecommunications equipment in Mexico, Spain and Japan. From May 1992 to
December 1993, Mr. Emerson served as Vice President of Marketing for ISDN de
Mexico, S.A. de C.V. He also served as a Product Manager for WilTel, where he
specialized in developing such products as original switched, 800, conference
calling, voice mail, and travel and domestic card services for domestic and
international services. Mr. Emerson was also responsible for identifying and
signing distributor contracts between WilTel and companies in Mexico and
Guatemala. Mr. Emerson received a B.A. from Hamilton College and graduated CUM
LAUDE. He also received an M.B.A. from Rice University.
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JOSE LUIS APAN has served as the Company's Director of Marketing since July
1, 1996. Prior to joining the Company, he was co founder and Chief Executive
Officer of Integracion from 1992 to 1997. From 1986 until he founded
Integracion, Mr. Apan served as Regional Telecommunications Manager for Hewlett-
Packard Latin America where he was responsible for the installation and
operation of the Voice, Data and Video Digital Network for the Latin America
Region. Mr. Apan has an MBA from the Instituto Tecnologico Autonomo de Mexico
and holds an undergraduate degree in Chemical Engineering from the Universidad
Iberoamericana in Mexico City. Mr. Apan is also a Registered Communications
Distribution Designer from the Building Institute of Construction Industry in
Tampa, Florida.
CARLOS DE LARA has served as the Company's Technology Officer since
October, 1997. Prior to joining the Company, he was Chief Operating Officer of
NSI which he cofounded in 1994. While at NSI he was instrumental in obtaining
several large systems integration contracts with Pemex, Elektra, Banco Mexicano,
Banco Union and obtained recognition for the Company as Best Integrator from
3Com and the Best New Integrator in Latin America from Newbridge Networks, Inc.,
both in 1996. Prior to founding NSI, he served from June, 1992 as Division
Vice-President with Serpcco where he developd Serpcco's network integration
business unit. Mr. De Lara was also academic coordinator from 1992 to 1993 at
the Universidad Anahuac, where he founded the postgraduate program for computer
networking and telecommunications, believed to be the first such program in
Mexico and which received official recognition from the Ministry of Education of
Mexico. From 1995 to 1996, Mr. De Lara served as a specialist in data and packet
networks at the Mexican Institute for Communications serving under Dr. Enrique
Melrose, then Research Director, who is now Technical Commissioner at the
COFETEL. Mr. De Lara holds an undergraduate degree in Industrial Engineering
from Universidad Anahuac in Mexico City.
E. RUSSELL HARDY has served as Chief Executive Officer of Interlink
Communications, Inc. since it was founded in May 1998. Prior to joining the
Company, Mr. Hardy worked for 28 years in various capacities at California
Microwave, Inc, serving as President of its Services Division for the last 13
years. While serving at California Microwave, Inc., Mr. Hardy served in various
capacities in the Satellite Communications Division, Defense Products Division
and the Telecommunications Division. Mr. Hardy has a Bachelor of Science in
Electrical Engineering from the University of California at Berkeley and a
Master of Science in Electrical Engineering from San Jose State University.
MARCO A. CASTILLA has served as Vice President of International Affairs and
Corporate Counsel since July 1998. Prior to joining the Company, Mr. Castilla
worked as Foreign Legal Advisor at Swidler Berlin Shereff Friedman, LLP
("Swidler"). At Swidler, Mr. Castilla practiced in the telecommunications
group, representing and advising U.S. and international telecommunications
companies in their entry into newly competitive markets, including with respect
to regulatory and transactional matters, and in structuring their foreign
operations. From December 1995 to September 1996, Mr. Castilla worked as a
Foreign Associate at the international law firm Rogers & Wells in Washington
D.C. From June 1995 to early December 1995, Mr. Castilla worked as Research
Assistant at Harvard Law School. From January 1992 to June 1994, Mr. Castilla
served as Regional Legal Advisor for the United Nations High Commissioner for
Refugees (UNHCR) Regional Office in Mexico. Mr. Castilla received an L.L.M. from
Harvard Law School and a J.D. with honors from the Universidad Iberoamericana in
Mexico City.
JESSE E. MORRIS has served as Corporate Controller since joining the
Company in October 1997. Prior to joining the Company Mr. Morris worked from
January 1992 until October 1997 with Arthur Andersen LLP, a multi-national
accounting and consulting professional services firm, where he last served as
Experienced Audit Manager. Mr. Morris received his B.B.A. in Accounting and
Finance and his Masters in Professional Accountancy from the University of
Texas. Mr. Morris is a Certified Public Accountant with the State of Texas.
DARREL O. KIRKLAND has served as a member of the Board of Directors of the
Company since March 1996. Mr. Kirkland has served as a principal consultant with
Kirkland & Associates, a management consulting firm specializing in
telecommunications since 1992. A registered Professional Engineer, Mr. Kirkland
has many years of experience in long distance, microwave, wireless, fiber and
local transmission services. He has held general management and marketing
positions with MCI Air Signal, CPI Microwave,
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and Discovery Communications. Current and recent clients include MCI, Skytel,
IXC Communications, Prime Cable and Winstar Wireless. Mr. Kirkland received a
B.B.A. from the University of Texas and an M.S. in Industrial Engineering from
the University of Houston.
ENRIQUE ORIHUELA has served as a member of the Board of Directors of the
Company since March 1998. Mr. Orihuela is a founder and an owner of the Andean
Satellite System ("ANDESAT"). Since 1997, he has served as a member of the
Board of Directors of ANDESAT. ANDESAT is a multinational corporation
constituted by members of the five Andean countries: Venezuela, Colombia,
Ecuador, Peru and Bolivia. Mr. Orihuela has been responsible for negotiations
with Satmex, the Mexican satellite operator, for the space in C Band to be used
by ANDESAT until its planned year 2000 satellite launch. He has also conducted
negotiations with Nahuelsat, the Argentinian satellite operator, for the Ku Band
to be used by ANDESAT for the same purpose. In 1991, Mr. Orihuela founded Vector
Communication Network Corp., a Florida-based satellite services provider, and
has served as its President since that time. Mr. Orihuela studied at the
University La Molina in the field of computers and communications.
JACK M. FIELDS, JR. will serve as director upon the completion of the Notes
Offering. Mr. Fields served as a U.S. Congressman representing Texas' 8th
Congressional District in the United States House of Representatives from 1981
to 1997, retiring as chairman of the House Telecommunications and Finance
subcommittee. Under his leadership, Congress enacted the 1996 Telecommunications
Act. Mr. Fields served on the Telecommunications and Finance Subcommittee from
1985 until his retirement. During his years of service, the subcommittee
maintained jurisdiction over interstate and international telecommunications,
the Federal Communications Commission, as well as the telephone, cellular, cable
and broadcast industries. In addition, the subcommittee maintained jurisdiction
over the Securities and Exchange Commission, including the activities of
investment bankers, stock brokers, investment advisors, stock exchanges and the
mutual fund industry. After retiring in 1997, Mr. Fields founded two companies:
Texana Global, Inc. an international trading corporation, and Twenty-First
Century Group, Inc., a Washington, D.C.-based governmental affairs and strategic
planning company. Mr. Fields earned his B.A. and his J.D. degrees from Baylor
University in Waco, Texas. Mr. Fields currently serves on the boards of AIM
Management Group, Inc. and Administaff, Inc., as well as the Houston
Metropolitan Study Group.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mr. Crist, effective
August 1, 1996, pursuant to which Mr. Crist serves as President and Chief
Executive Officer of the Company. The agreement expires on August 1, 1999,
unless the Company terminates Mr. Crist for cause prior to that time. The
agreement provides for Mr. Crist to receive annual compensation of $95,000 and
options to purchase 350,000 shares of Common Stock at $4.50 per share. One-third
of the options vest each year commencing August 1, 1997, and all options
automatically vest if the price of the Company's Common Stock exceeds $13.00 per
share for 20 consecutive trading days. In addition, Mr. Crist is entitled to a
bonus, which will be determined by the Board of Directors based on his and the
Company's performance.
In connection with its acquisition of Telereunion, the Company entered into
employment agreements with Messrs. Landa, Garcia and Orea, effective as of May
14, 1996. The employment agreements provide that Mr. Landa will serve as
President and Chief Executive Officer of Telereunion and that Messrs. Garcia and
Orea will each serve as a vice president of Telereunion. Each employment
agreement terminates on May 14, 1999, unless Telereunion terminates the officer
for cause prior to that time. Each of Messrs. Landa, Garcia and Orea are
entitled to receive annual compensation equal to $80,000.
On January 13, 1997, the Company entered into an employment agreement with
Mr. Binet pursuant to which Mr. Binet serves as Executive Vice President and
Chief Financial Officer of the Company. The agreement terminates on January 13,
2000, unless the Company terminates Mr. Binet for cause prior to that time. Mr.
Binet is entitled to a minimum annual compensation of $70,000 and a bonus based
on his and the Company's performance. Mr. Binet's minimum annual compensation is
adjusted to the extent that Mr. Binet receives a raise in annual salary. In
addition, Mr. Binet was granted an option in January 1997 to purchase 250,000
shares of Common Stock, consisting of 166,667 at $4.00 per share and 83,333 at
$3.25
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per share. The options vest over a three year period, on a quarterly basis,
after the first year. The options are immediately exercisable in the event there
is a change in control of the Company that results in Mr. Binet no longer
serving as Executive Vice President and Chief Financial Officer of the surviving
company.
STOCK OPTION PLANS
1993 STOCK OPTION PLAN
Under the terms of its 1993 Stock Option Plan, the Company may grant to
employees, directors and consultants of the Company and its subsidiaries,
incentive and non-qualified stock options to purchase up to 218,145 shares of
Common Stock. Options must be granted at not less than the fair market value of
the Common Stock at the date of grant as determined by the Company's Board of
Directors (110% of fair market value for stockholders owning 10% or more of the
Common Stock) for incentive stock options and at not less than 85% of the fair
market value for non-qualified stock options. Options granted under this plan
may be for a term of up to 10 years (5 years for options granted to stockholders
owning 10% or more of the Company's Common Stock), as determined by the Board of
Directors.
1994 DIRECTORS' STOCK OPTION PLAN
Under the terms of its 1994 Directors Stock Option Plan, the Company may
grant non-qualified options to purchase up to 31,163 shares of Common Stock to
directors of the Company or directors of any majority-owned subsidiary of the
Company who are not salaried employees. Options may be granted under the plan
until June 1, 2004, at prices not less than the fair market value of the
Company's Common Stock at the date of grant, and must be exercisable within 10
years of the date of grant. Upon a change of control of the Company, all granted
but unvested options under the plan will vest immediately.
TELEREUNION 1995 STOCK OPTION PLAN
The Company assumed Telereunion's Stock Option Plan in connection with the
acquisition of Telereunion. Under the terms of this plan, the Company may grant
non-qualified options to employees, directors and consultants of the Company.
Options must be granted at not less than the fair market value of the Company's
Common Stock at the date of grant as determined by the Company's Board of
Directors (110% of fair market value for stockholders owning 10% or more of the
Company's Common Stock) for incentive stock options, and at not less than 85% of
the fair market value for non-qualified stock options. The terms of the options
are determined by the Company's Board of Directors. Any options granted must be
exercised within 10 years of the date of grant.
1996 STOCK OPTION AND APPRECIATION RIGHTS PLAN
Pursuant to the Company's 1996 Stock Option and Appreciation Rights Plan,
the Company may grant the Company's employees, directors and consultants
non-qualified options to purchase up to 1,200,000 shares of Common Stock. The
plan also provides for grants of stock appreciation rights ("SARs") in
connection with the grant of options under the plan. Options must be granted at
not less than the fair market value of the Company's Common Stock at the date of
grant as determined by the Company's Board of Directors (110% of fair market
value for stockholders owning 10% or more of the Company's Common Stock) for
incentive stock options. The terms of the options are determined by the
Company's Board of Directors. Any options granted must be exercised within ten
years of the date of grant or within five years from the date of grant for
options granted to stockholders owning 10% or more of the Company's Common
Stock. Unexercised vested options and unvested options terminate immediately if
the employment or service of an option holder is terminated for cause. Unvested
options terminate if the employment or service of an option holder is terminated
without cause, or for disability.
The Company may also grant SARs in connection with any option which permits
cashless exercises of the options. SARs allow an option holder to surrender an
option and in return, receive the difference between the exercise price of the
option and the then fair market value of the Common Stock. The Company may also
make loans to any option holder in order to permit the option holder to pay the
purchase price upon exercise of the option.
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1998 STOCK OPTION AND APPRECIATION RIGHTS PLAN
Pursuant to the Company's 1998 Stock Option and Appreciation Rights Plan,
the Company may grant the Company's employees, directors and consultants
non-qualified options to purchase up to 800,000 shares of Common Stock. The
maximum number of shares of Common Stock that may be granted to any individual
under this plan may not exceed 250,000 shares. The Plan also provides for grants
of SARs in connection with the grant of options under the plan. Incentive stock
options must be granted at not less than the fair market value of the Company's
Common Stock at the date of grant as determined by the Company's Board of
Directors (110% of fair market value for stockholders owning 10% or more of the
Company's Common Stock). The terms of the options are determined by the
Company's Board of Directors. Any options granted must be exercised within ten
years of the date of grant or within five years from the date of grant for
options granted to stockholders owning 10% or more of the Company's Common
Stock. Unexercised vested and unvested options terminate immediately if the
employment or service of an option holder is terminated for cause. Unvested
options terminate if the employment or service of an option holder is terminated
without cause or for disability. The Company may also grant SARs in connection
with any option, which permits cashless exercises of the options. SARs allow an
option holder to surrender an option and to receive the difference between the
exercise price of the option and the then fair market value of the Common Stock.
The Company may also make loans to any option holder in order to permit the
option holder to pay the purchase price upon exercise of the option.
SUMMARY COMPENSATION TABLE
The following table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
the Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company, whose aggregate cash and cash
equivalent compensation exceeded $100,000 (collectively, the "Named
Officers"), with respect to the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
PAYOUTS
AWARDS -------------
ANNUAL COMPENSATION(1) ------------ SECURITIES
NAME AND ----------------------------- RESTRICTED UNDERLYING
PRINCIPAL BONUS STOCK OPTIONS/
POSITION(2) YEAR SALARY($) ($)(3) AWARDS($)(4) SARS(#)
- ------------------------------------- ---- ---------- ------- ------------ -------------
<S> <C> <C> <C>
E. Scott Crist 1997 $ 87,308 $75,000 -- --
President and Chief Executive Officer 1996 $ 14,423 -- -- 350,000
Manuel Landa 1997 $ 80,000 $75,000 -- --
Chairman, Executive Vice President of 1996 $ 33,000 -- -- 75,000
Operations and Chief Executive
Officer of Telereunion and President
of Vextro
Oscar Garcia 1997 $ 80,000 $50,000 -- --
Vice President of Telereunion, Vice 1996 $ 33,000 -- -- 75,000
President of Operations of Vextro
Ricardo Orea 1997 $ 80,000 $50,000 -- --
Vice President of Telereunion, Vice 1996 $ 33,000 -- -- 75,000
President of Sales and Marketing of
Vextro
Todd M. Binet 1997 $74,346 $50,000 -- 250,000
Executive Vice President, Secretary, 1996 -- -- -- --
Treasurer and Chief Financial Officer
</TABLE>
- ------------
(1) Each of the Company's officers received perquisites and other personal
benefits in addition to salary and bonuses. The aggregate amount of such
perquisites and other personal benefits, however, does not exceed the lesser
of $50,000 or 10 percent of the total of the annual salary and bonus
reported for any of the Named Officers for each of the reported years.
(2) The following summarizes each executive's employment commencement dates: Mr.
Crist, August, 1996; Mr. Landa, May, 1996; Mr. Garcia, May, 1996; Mr. Orea,
May, 1996; Mr. Binet, January, 1997. Compensation information is provided
for each Named Officer from the employment commencement date.
(3) Represents annual bonus award earned for the fiscal year noted, even though
such bonus was paid in the following fiscal year.
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EXECUTIVE COMPENSATION
The following is the report of the Compensation Committee of the Board of
Directors for compensation paid to executive officers of the Company during
fiscal year 1997.
REPORT ON EXECUTIVE COMPENSATION
During 1997, the compensation of the executive officers was administered
and determined directly by the Board of Directors. In March 1997, the Company
established a Compensation Committee of the Board which is comprised of Mr.
Kirkland, a non-employee director, and Mr. Crist and Mr. Landa, two employee
directors, and it is responsible for administering the Company's executive
compensation programs and policies. As of April 24, 1998, the Compensation
Committee consists of Mr. Kirkland and Mr. Orihuela, two non-employee directors.
The Company's executive compensation programs are designed to attract, motivate
and retain the executive talent needed to optimize stockholder value in a
competitive environment. The programs are intended to support the goal of
increasing stockholder value while facilitating the business strategies and
long-range plans of the Company.
The following is the Board of Directors' report addressing the compensation
of the Company's executive officers for fiscal 1997.
COMPENSATION POLICY AND PHILOSOPHY
The Company's executive compensation policy is designed to establish an
appropriate relationship between executive pay and the Company's annual
performance, its long term growth objectives and its ability to attract and
retain qualified executive officers. The Company's policy is based on the belief
that the interests of the executives should be closely aligned with the
Company's stockholders. The Board attempts to achieve these goals by integrating
annual base salaries with (i) annual incentive bonuses based on corporate
performance, based on the achievement of specified performance objectives set
forth in the Company's financial plan for such fiscal year, and based on
individual performance, and (ii) stock options through the Company's stock
option plans. The Board's philosophy is to review salaries paid to executive
officers with comparable responsibilities in comparable businesses and offer
salaries to its executives which are in the lower range of those offered by such
comparable businesses. In addition, the components of each executive officer's
compensation is weighted to the bonus and option components. This results in a
meaningful portion of each executive's compensation being placed at-risk and
linked to the accomplishment of specific results that are expected to lead to
the creation of value for the Company's stockholders from both the short-term
performance and long term success of the Company. The Board considers all
elements of compensation and the compensation policy when determining individual
components of pay.
The Board believes that leadership and motivation of the Company's
employees are critical to achieving the objectives of the Company. The Board is
responsible for ensuring that its executive officers are compensated in a way
that furthers the Company's business strategies and which aligns their interests
with those of the stockholders. To support this philosophy, the following
principles provide a framework for executive compensation: (i) offer
compensation opportunities that attract the best talent to the Company; (ii)
motivate individuals to perform at their highest levels; (iii) reward
outstanding achievement; (iv) retain those with leadership abilities and skills
necessary for building long-term stockholder value; (v) maintain a significant
portion of executives' total compensation at risk, tied to both the annual and
long-term financial performance of the Company and the creation of incremental
stockholder value; and (iv) encourage executives to manage from the perspective
of owners with an equity stake in the Company.
EXECUTIVE COMPENSATION COMPONENTS
As discussed below, the Company's executive compensation package is
primarily comprised of three components: base salary, annual incentive bonuses
and stock options.
BASE SALARY. For fiscal 1997, the Board approved the base salaries of the
Named Officers based on (i) salaries paid to executive officers with comparable
responsibilities employed by companies with comparable businesses, (ii)
performance and accomplishment of the Company in fiscal 1997 which is the
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most important factor, and (iii) individual performance reviews for fiscal 1997
for most executive officers. The Board's philosophy is to review salaries paid
to executive officers with comparable responsibilities in comparable businesses
and offer salaries to its executives which are in the lower range of those
offered by such comparable businesses. In addition, the components of each
executive officer's compensation is weighted to the bonus and option components.
This results in a meaningful portion of each executive's compensation being
placed at-risk and linked to the accomplishment of specific results that are
expected to lead to the creation of value for the Company's stockholders from
both the short-term performance and long term success of the Company. The Board
reviews executive officer salaries annually and exercises its judgement based on
all the factors described above in making its decision, subject to the terms of
such officer's employment agreement. No specific formula is applied to determine
the weight of each criteria.
ANNUAL INCENTIVE BONUSES. Annual incentive bonuses for the Named Officers
are based upon the following criteria: (i) the Company's financial performance
for the current fiscal year, (ii) the furthering of the Company's strategic
position in the marketplace, and (iii) individual merit. The Company paid
incentive bonuses to the Named Officers as depicted in the Summary Compensation
Table.
LONG TERM INCENTIVE COMPENSATION. Stock options encourage and reward
effective management which results in long-term corporate financial success, as
measured by stock price appreciation. The Board believes that option grants
afford a desirable long-term compensation method because they closely ally the
interests of management with stockholder value and that grants of stock options
are the best way to motivate executive officers to improve long-term stock
market performance. The vesting provisions of options granted under the
Company's stock option plans are designed to encourage longevity of employment
with the Company and generally extend over a three year period.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The Board believes that E. Scott Crist, the Company's Chief Executive
Officer, provides valuable services to the Company and that his compensation
should therefore be competitive with that paid to executives at comparable
companies. In addition, the Board believes that an important component of his
compensation should be based on Company performance. Mr. Crist's annual base
salary for fiscal 1997 was $95,000. The factors which the Board considered in
setting his annual base salary were his individual performance and pay practices
of peer companies relating to executives of similar responsibility.
Additionally, Mr. Crist received an annual incentive bonus of $75,000 which was
determined by the Board after considering the Company's performance in fiscal
year 1997 in relation to the Company's financial plans for 1997 as well as Mr.
Crist's individual performance.
INTERNAL REVENUE CODE SECTION 162(M)
Under Section 162(m) of the Internal Revenue Code (the "Code"), the
amount of compensation paid to certain executives that is deductible with
respect to the Company's corporate taxes is limited to $1,000,000 annually, if
certain requirements of section 162(m) are not met. It is the current policy of
the Board to maximize, to the extent reasonably possible, the Company's ability
to obtain a corporate tax deduction for compensation paid to executive officers
of the Company to the extent consistent with the best interests of the Company
and its stockholders.
The Compensation Committee
Darrel O. Kirkland
E. Scott Crist
Manuel Landa
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OPTION GRANTS
The following table sets forth certain information with respect to options
granted during the last fiscal year to the Named Officers.
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1997)
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO FAIR MARKET
OPTIONS/SARS EMPLOYEES IN EXERCISE VALUE AT DATE
NAME GRANTED(#) FISCAL YEAR PRICE($/SH) EXPIRATION DATE OF GRANT(1)
- ------------------------------------- ------------ ------------ ----------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
E. Scott Crist....................... -- -- -- -- --
Manuel Landa......................... -- -- -- -- --
Oscar Garcia......................... -- -- -- -- --
Ricardo Orea......................... -- -- -- -- --
Todd M. Binet........................ 83,333 15% $3.25 January 13, 2007 $ 89,264
166,667 30% $4.00 January 13, 2007 $ 219,730
</TABLE>
- ------------
(1) The calculation of fair market value was performed utilizing the
Black-Scholes model utilizing the following assumptions: expected volatility
of 75%, risk-free rate of return of 5.6%, dividend yield of 0%, and expected
life of 10 years.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
The following table sets forth certain information with respect to options
exercised during fiscal 1997 by the Named Officers and with respect to
unexercised options held by such persons at the end of fiscal 1997.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-
MONEY
OPTIONS/SARS
NUMBER OF SECURITIES AT FISCAL
UNDERLYING UNEXERCISED AT YEAR
SHARES FISCAL YEAR END(#) END($)(1)
ACQUIRED ON VALUE ----------------------------- ------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------------------- ----------- -------- ----------- ------------- ------------
<S> <C> <C> <C>
E. Scott Crist....................... -- -- 116,667 233,333 $393,750
Manuel Landa......................... -- -- 100,000 -- $388,125
Oscar Garcia......................... -- -- 100,000 -- $388,125
Ricardo Orea......................... -- -- 100,000 -- $388,125
Todd M. Binet........................ -- -- -- 250,000 --
</TABLE>
NAME UNEXERCISABLE
- ------------------------------------- --------------
E. Scott Crist....................... $ 787,500
Manuel Landa......................... --
Oscar Garcia......................... --
Ricardo Orea......................... --
Todd M. Binet........................ $1,031,250
- ------------
(1) The calculations of the value of unexercised options are based on the
difference between the closing price of $7.875 per share of Common Stock on
NASDAQ Small Cap Market on December 31, 1997, and the exercise price of each
option, multiplied by the number of shares covered by the option.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1997, E. Scott Crist and Manuel
Landa, each an executive officer of the Company, served as members of the
Company's Board of Directors Compensation Committee. The Compensation Committee
establishes compensation and incentives for the Company's executive officers and
administers the Company's incentive compensation and benefit plans, including
Mr. Crist's and Mr. Landa's compensation. Darrell Kirkland, a non-employee
director, also served on the Compensation Committee.
DIRECTOR COMPENSATION
The Company reimburses all directors for the ordinary and necessary
expenses that they incur in attending meetings of the Board of Directors or a
committee of the Board of Directors on which they serve. Directors who are not
also employees of the Company receive $500 for each meeting of the Board of
Directors that they attend. Directors of the Company are eligible to participate
in the Company's 1998 Stock Option and Appreciation Rights Plan, 1996 Stock
Option and Appreciation Rights Plan and 1994 Directors Stock Option Plan.
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<PAGE>
Non-employee directors may receive an annual grant of options to purchase
up to 10,000 shares of the Company's Common Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Vector Communications Network Corp ("Vector"), of which Enrique Orihuela,
a director of the Company, is President, provides the Company with satellite
communication services under various one year contracts through April 1999. The
Company paid Vector a total of $215,000 for these services in fiscal year 1997
and $568,000 through June of 1998.
Manuel Landa, Oscar Garcid and Ricardo Orea, each a director of the
Company, together own 3% of the voting shares of Vextro and 18% of the voting
interests and 2% of the economic interests of Telereunion S.A.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of September 8, 1998, by (i) each
person known by the Company to beneficially own five percent or more of any
class of the Company's capital stock, (ii) each director of the Company, (iii)
each Named Officer and (iv) all directors and executive officers of the Company
as a group. All information with respect to beneficial ownership has been
furnished to the Company by the respective shareholders of the Company. Unless
otherwise noted, the persons listed below have sole voting and investment power
with respect to such shares.
PERCENTAGE
NUMBER OF SHARES BENEFICIALLY
NAME AND ADDRESS BENEFICIALLY OWNED OWNED
- ------------------------------------- ------------------- ------------
E. Scott Crist....................... 1,310,250(1) 14.7%
2700 Post Oak Boulevard, Suite 1000
Houston, Texas 77056
Ricardo Orea......................... 1,155,167(2)(3) 12.9%
Moras No. 430
Col. Del Valle, Del Benito Juarez
03100 Mexico, D.F.
Manuel Landa......................... 1,155,166(3)(4) 12.9%
Moras No. 430
Col. Del Valle, Del Benito Juarez
03100 Mexico, D.F.
Oscar Garcia......................... 1,149,167(3)(5) 12.8%
Moras No. 430
Col. Del Valle, Del Benito Juarez
03100 Mexico, D.F.
Todd M. Binet........................ 358,374(6) 4.2%
2700 Post Oak Boulevard, Suite 1000
Houston, Texas 77056
Darrel Kirkland...................... * (7) *
803 Forest View
Austin, TX 78746
Enrique Orihuela..................... -- (8) --
13000 S.W. 133rd Court
Miami, FL 33186
All directors and executive
officers as a group (7 persons).... 5,138,124(9) 57.8%
(FOOTNOTES ON NEXT PAGE)
73
<PAGE>
- ------------
* Less than 1%
(1) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and are exercisable with respect to
rights to purchase 300,000 shares of Common Stock held by Delaware
Guaranteed Trust Co. F/B/O Mr. Crist. Also includes shares of Common Stock
issuable upon exercise of the Series A Common Stock Warrant representing
the right to purchase 9,050 shares of Common Stock at $2.19 per share owned
directly by Mr. Crist. The Series A Common Stock Warrant lapses on May 16,
2003. Also, included are the shares of Common Stock issuable upon exercise
of a Series B Common Stock Warrant representing the right to purchase
49,000 shares of Common Stock at $2.19 per share held by Delaware Guarantee
& Trust Co. F/B/O Mr. Crist. The Series B Common Stock Warrant is currently
exercisable and expires on May 16, 2003. Includes options to purchase
327,778 shares of Common Stock at $4.50 per share which are presently
exercisable. Excludes options to purchase 40,000 shares of Common Stock at
$19.66 per share as such options are not exercisable within 60 days of this
table. Reference is also made to the Schedule 13D filed with the Commission
by Mr. Crist on July 17, 1998, as amended.
(2) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and become exercisable with respect
to rights to purchase 247,208 shares of Common Stock at $2.19 per share
owned by Mr. Orea, as well as rights to purchase 332,959 shares of Common
Stock held by Cloud International, L.L.C. ("Cloud"). Mr. Orea is the
beneficial owner of Cloud. The Series A Common Stock Warrant lapses on May
16, 2003. Reference is also made to the Schedule 13D filed with the
Commission by Mr. Orea on July 30, 1998, as amended.
(3) Includes options to purchase 25,000 and 75,000 shares of Common Stock at
$1.35 and $4.875 per share, respectively, all of which options are
presently exercisable. Excludes options to purchase 40,000 shares of Common
Stock at $17.88 as such options are not exercisable within 60 days of this
table.
(4) Includes shares of Common Stock issuable upon exercise of a Series A Common
Stock Warrant which have vested and become exercisable with respect to
rights to purchase 247,208 shares of Common Stock at $2.19 per share owned
by Mr. Landa, as well as rights to purchase 332,958 shares of Common Stock
held by Forest International, L.L.C. ("Forest"). Mr. Landa is the
beneficial owner of Forest. The Series A Common Stock Warrant lapses on May
16, 2003. Reference is also made to the Schedule 13D filed with the
Commission by Mr. Landa on July 30, 1998, as amended.
(5) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and become exercisable with respect
to rights to purchase 241,208 shares of Common Stock at $2.19 per share
owned by Mr. Garcia, as well as rights to purchase 332,959 shares of Common
Stock held by Sky International, L.L.C. ("Sky"). Mr. Garcia is the
beneficial owner of Sky. The Series A Common Stock Warrant lapses on May
16, 2003. Reference is also made to the Schedule 13D filed with the
Commission by Mr. Garcia on July 27, 1998, as amended.
(6) Includes shares of Common Stock issuable upon exercise of the Series A
Common Stock Warrant which have vested and become exercisable with respect
for rights to purchase 49,000 shares of Common Stock at $2.19 per share.
Also, included are shares of Common Stock issuable upon exercise of a
Series B Common Stock Warrant representing the right to purchase 25,000
shares of Common Stock at $2.19 per share. The Series A Common Stock
Warrant and the Series B Common Stock Warrant both expire on May 16, 2003.
Includes options to purchase 41,666 shares of Common Stock at $3.25 per
share and options to purchase 83,333 shares of Common Stock at $4.00 per
share, all of which are presently exercisable. Excludes options to purchase
41,667 shares of Common Stock at $3.25 per share and 83,334 shares of
Common Stock at $4.00 per share as such options are not exercisable within
sixty (60) days of this table. Excludes 10,000 Series A Warrants and 10,000
Series B Warrants which are held in trust for the benefit of Mr. Binet's
two minor children. Mr. Binet disclaims beneficial ownership of these
shares. Excludes options to purchase 50,000 shares of Common Stock at
$17.88 per share as such options are not exercisable within 60 days of this
table. The options to purchase 50,000 shares of Common Stock vest
immediately upon the successful consummation of one of the Offerings.
(7) Includes options to purchase 10,000 shares of Common Stock at $3.75 per
share, all of which options are presently exercisable. Excludes options to
purchase 10,000 shares of Common Stock at $9.00 per share as such options
are not exercisable within 60 days of this table.
(8) Excludes options to purchase 10,000 shares of Common Stock at $13.50 per
share as such options are not exercisable within 60 days of this table.
(9) Includes options and warrants to purchase 2,929,327 shares of Common Stock,
all of which are exercisable within sixty (60) days of the date of this
table.
74
<PAGE>
SUMMARY OF OTHER INDEBTEDNESS
CONVERTIBLE DEBENTURES
On May 1, 1998, the Company issued $3,000,000 in Deere Park Convertible
Debentures maturing three years from closing (the "First Draw"). On May 28,
1998, the Company issued an additional $1,000,000 of the Deere Park Convertible
Debentures (the "Second Draw"). On June 30, 1998, the Company issued an
additional $1,000,000 of the Deere Park Convertible Debentures (the "Third
Draw"). The Deere Park Convertible Debentures are convertible by the holder
into shares of Common Stock at a price equal to $26 per share for the First
Draw, $29 per share for the Second Draw and $26 per share for the Third Draw,
until November 1, 1998, and thereafter, at the lesser of (i) $26 per share for
the First Draw, $29 per share for the Second Draw and $26 for the Third Draw or
(ii) a price equal to the average of the three highest of the five lowest
closing prices of the Common Stock for the 20 trading days preceding the
conversion date. If the Common Stock trades below $15.00 per share for the First
Draw, $16.66 per share for the Second Draw and $15 per share for the Third Draw
for three consecutive trading days, the Company may redeem all or part of such
Deere Park Convertible Debentures at 107% of face value plus any accrued
interest in the event the holder elects to convert. The Company's obligations to
make interest payments on the Deere Park Convertible Debentures terminates if
the price of Common Stock closes for twenty consecutive trading days at or above
$30 per share for the First Draw, at or above $33.50 per share for the Second
Draw and at or above $30 per share for the Third Draw, adjusted, without
limitation, for any stock splits or combinations. In connection with the Deere
Park Convertible Debentures, Deere Park also received warrants to purchase (i)
an aggregate of 8,952 shares of Common Stock at an exercise price of $16.76 per
share (subject to adjustment for stock splits and other share adjustments) for
the First Draw, (ii) an aggregate of 2,427 shares of Common Stock at $20.60 per
share (subject to adjustment for stock splits and other share adjustments) for
the Second Draw and (iii) an aggregate of 6,382 shares of Common Stock at $15.67
per share (subject to adjustment for stock splits and other share adjustments)
for the Third Draw. The warrants have a term of three years from the
effectiveness of a registration statement covering such warrants. The Deere Park
Convertible Debentures will be PARI PASSU in right of payment to the Notes.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Deere Park Convertible Debentures.
The Deere Park Exit Fee varies depending upon the date of payment, and is equal
to (i) 6.6% if the payment is made within 90 days after the closing of each
respective draw, (ii) 7.2% if payment is made after 90 days and up to 180 days
after the closing of each respective draw, (iii) 8.8% if payment is made after
180 days and up to 270 days after the closing of each respective draw and (iv)
10.0% if payment is made after 270 days after the closing of each respective
draw. The Deere Park Exit Fee is adjusted on a pro rata basis to the extent that
the prepayment is made between periods, except that a minimum Deere Park Exit
Fee of 6.6% is required if the prepayment is made prior to 90 days after
closing.
On May 29, 1998, the Company issued $5,000,000 in Gordon Brothers
Convertible Debentures maturing one year from closing. The Gordon Brothers
Convertible Debentures are convertible by the holders into shares of the
Company's common stock at a price equal to $29 per share for the first six
months following closing, and thereafter, at the lesser of (i) $29 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 $16.66 for
three consecutive trading days, the Company may elect to redeem all or part of
such Gordon Brothers Convertible Debentures at 107% of face value plus accrued
interest in the event the holder elects to convert. In the event that the
Company's common stock closes above $33.50 per share, adjusted, without
limitation, for any stock splits or combinations, the Company's obligation to
make interest payments on the Gordon Brothers Convertible Debentures are
terminated. In connection with the Gordon Brothers Convertible Debentures, the
holders also received warrants to purchase an aggregate of 12,136 shares of the
Company's common stock at an exercise price of $20.60 per share. The warrants
have a term of three years. In addition, the Company is required to file a
registration statement with the Securities and Exchange Commission to
75
<PAGE>
register the shares of common stock issuable upon the conversion of the Gordon
Brothers Convertible Debentures or the exercise of the warrants.
The Company is required to pay an exit fee in connection with any principal
payment to be made under the Gordon Brothers Convertible Debenture. The Gordon
Brothers Exit Fee varies depending upon the date of payment, and is equal to (i)
6.5% if the payment is made within 90 days after May 29, 1998, (ii) 13.0% if
payment is made after 90 days and up to 180 days after May 29, 1998, (iii) 19.0%
if payment is made after 180 days and up to 270 days after May 29, 1998 and (iv)
25.0% if payment is made after 270 days and up to 365 days after May 29, 1998.
The Gordon Brothers Exit Fee with respect to any payment made after May 28, 1999
shall be equal to (a) 25.0% plus (b) 25.0% multiplied by the number of days
elapsed from May 28, 1999 divided by 365. The majority of the proceeds from the
Deere Park Convertible Debentures and the Gordon Brothers Convertible Debentures
were utilized to fund the CMSD Acquisition.
REVOLVING LINE OF CREDIT
On March 12, 1998, the Company guaranteed a revolving credit facility with
Southwest Bank of Texas N.A. which permits Telscape USA to borrow up to
$1,250,000 subject to adequate levels of eligible accounts receivable (the
"Revolving Credit Facility"). Borrowings under the credit facility are secured
by the accounts receivable of Telscape USA and MSN (collectively the
"Borrowers"). This facility provides that borrowings will bear interest at
floating rates of prime plus 1% and expires in 1998. On May 19,
1998, the Company renegotiated the terms of the revolving credit facility to
provide for borrowings of up to $2,500,000 and extended the term of the facility
to thirteen months. As of June 30, 1998, the Company had $1.9 million in
borrowings outstanding under this facility. The credit facility requires
Telscape USA to comply with certain financial covenants and to maintain certain
financial ratios. The credit facility also restricts Telscape USA's ability,
without the prior written consent of the lender, to incur additional
indebtedness or any obligation as surety or guarantor. The credit facility
contains typical event of default provisions, including provisions which provide
for default upon (i) the Borrowers defaulting on any other agreements with the
lender (cross-default), (ii) the Borrowers failing to provide a perfected
security interest (defective collateralization) and (iii) the Borrowers becoming
insolvent.
Telscape USA and MSN have obtained a waiver under the Revolving Credit
Facility to (i) permit Telscape USA and MSN to Guarantee of the Notes by and
(ii) waive the defaults under the minimum current ratio, minimum tangible net
worth and prohibition on quarterly loss covenants. Because the Revolving Credit
Facility prohibits Telscape USA and MSN from guaranteeing any indebtedness, the
Company obtained the waiver for the Guarantee of the Notes in anticipation of
filing the Registration Statement relating to the Notes. As a result of one of
the Company's wholesale long distance customers filing a petition for bankruptcy
in May 1998, which resulted in the Company losing wholesale long distance
revenues and incurring increased Prepaid Card service costs, the Company
obtained the waiver relating to its default under the various financial
convenants.
EQUIPMENT LEASES
On February 28, 1997, Telscape USA entered into an equipment financing
agreement at a rate of 10.75% per annum in connection with its acquisition of
switching equipment, which agreement provided for monthly lease payments of
principal and interest totaling $11,200, through February 28, 2000. On June 1,
1998, the Company entered into a second equipment financing agreement with the
same financing company for the purchase of a Nortel DMS-250 switching platform
and related equipment at a total cost of $1.4 million, which provides for
monthly lease payments of principal and interest totalling $27,500, through June
1, 2003. In connection with the signing of the second agreement, the first
agreement was refinanced to provide for monthly lease payments of $5,400,
through June 1, 2003. The lease obligations are secured by equipment.
On July 6, 1998, the Company financed the purchase of $972,000 in equipment
by entering into two equipment lease arrangements with a financing company which
provide for monthly lease payments of $22,100, including principal and interest
through July 6, 2003. The lease obligations are secured by the financed
equipment.
76
<PAGE>
On July 14, 1998, the Company financed the purchase of $243,000 in
equipment by entering into an equipment lease arrangement with a financing
company which provide for monthly lease payments of $6,600, including principal
and interest through July 14, 2002. The lease obligations are secured by the
financed equipment.
INTEGRACION NOTES
In connection with the Company's acquisition of Integracion, the Company
issued to the selling shareholders: (i) an aggregate of $2,201,000 in
non-interest bearing promissory notes maturing at various dates through January
1, 2001, and (ii) an aggregate of $999,000 in non-interest bearing convertible
notes maturing on September 1, 1999, which are convertible into 333,000 shares
of common stock of the Company at a price of $3.00 per share, representing the
quoted market price of the Company's common stock on the date of the
transaction. As of July 27, 1998, $1,901,000 of the non-interest bearing
promissory notes were outstanding. On July 23, 1998, the non-interest bearing
convertible notes were converted into 333,000 shares of Common Stock.
MSN NOTES
In connection with the MSN acquisition, the Company issued to selling
shareholders an aggregate of $750,000 in non-interest bearing promissory notes
payable in eight equal quarterly installments, beginning March 23, 1998.
COMMON STOCK REPURCHASE NOTE
In connection with a suit filed by the estate of a former shareholder, in
May 1997 the Company entered into a compromise and settlement agreement.
Pursuant to the agreement, the Company agreed to repurchase all of the 83,359
shares of Company common stock owned by the plaintiffs for total consideration
of $425,000, which was comprised of $125,000 and a three year $300,000
promissory note bearing interest at 6%, payable in six semi-annual installments
through May 20, 2000.
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<PAGE>
DESCRIPTION OF THE NOTES
The Notes will be issued under an indenture (the "Indenture"), to be
dated as of , 1998 by and among the Company, the Guarantors and
[NAME OF TRUSTEE], as Trustee (the "Trustee"). The following is a summary of
certain provisions of the Indenture and is subject to, and is qualified in its
entirety by reference to, the Trust Indenture Act of 1939, as amended (the
"TIA"), and to all of the provisions of the Indenture (a copy of which has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part), including the definitions of certain terms therein and those terms
made a part of the Indenture by reference to the TIA as in effect on the date of
the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "-- Certain Definitions." For
purposes of this section, references to "the Company" include only the Company
and not its Subsidiaries.
The Notes will be issued in fully registered form only, without coupons, in
denominations of $1,000 and integral multiples thereof. Initially, the Trustee
will act as Paying Agent and Registrar for the Notes. The Notes may be presented
for registration or transfer and exchange at the offices of the Registrar, which
initially will be the Trustee's corporate trust office. The Company may change
any Paying Agent and Registrar without notice to holders of the Notes (the
"Holders"). The Company will pay principal (and premium, if any) on the Notes
at the Trustee's corporate office in New York, New York. At the Company's
option, interest may be paid at the Trustee's corporate trust office or by check
mailed to the registered address of Holders.
RANKING
The Notes and the Guarantees will be general unsecured obligations of the
Company and the Guarantors, respectively, and will rank senior in right of
payment to all future unsecured Indebtedness of the Company and the Guarantors,
respectively, that is, by its terms or by the terms of the agreement or
instrument governing such Indebtedness, expressly subordinated in right of
payment to the Notes and the Guarantees and PARI PASSU in right of payment with
all existing and future unsecured liabilities of the Company and the Guarantors
that are not so subordinated. As of June 30, 1998, all of the Company's and the
Guarantors' Indebtedness will rank PARI PASSU with or effectively senior to the
Notes and the Guarantees, respectively. The Notes will be effectively
subordinated to all secured Indebtedness of the Company, including Indebtedness
under the Credit Facilities, to the extent of the assets securing such
Indebtedness.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $125.0 million and
will mature on , 2008. Interest on the Notes will accrue at the
rate of % per annum and will be payable semi-annually in arrears on each
and commencing , 1999, to the persons who are
registered Holders at the close of business on the and ,
respectively, immediately preceding the applicable interest payment date.
Interest on the Notes will accrue from the most recent interest payment date to
which interest has been paid or, if no interest has been paid, from and
including the date of issuance. Interest will be computed on the basis of a
360-day year of twelve 30-day months.
The Notes will not be entitled to the benefit of any mandatory sinking
fund.
REDEMPTION
OPTIONAL REDEMPTION. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after
, 2003, upon not less than 30 nor more than 60 days' notice, at the
following redemption prices (expressed as percentages of the principal amount at
maturity thereof) if redeemed during the twelve-month period commencing on
of the year set forth below, plus, in each case, accrued and unpaid
interest thereon, if any, to the date of redemption:
YEAR PERCENTAGE
- ---------------------------------------- ----------
2003.................................... %
2004.................................... %
2005.................................... %
2006 and thereafter..................... 100.000%
78
<PAGE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time, or from
time to time, on or prior to , 2001, the Company may, at its
option, use the net cash proceeds of one or more Public Equity Offerings (as
defined below) to redeem up to 35% of the aggregate principal amount of the
Notes originally issued at a redemption price equal to % of the principal
amount of the Notes to be redeemed plus accrued and unpaid interest, if any, to
the date of redemption; PROVIDED that at least 65% of the principal amount of
Notes originally issued remains outstanding immediately after any such
redemption (excluding any Notes owned by the Company or any of its Affiliates).
In order to effect the foregoing redemption with the proceeds of any Public
Equity Offering, the Company shall make such redemption not more than 120 days
after the consummation of any such Public Equity Offering.
As used in the preceding paragraph, "Public Equity Offering" means an
underwritten public offering of Qualified Capital Stock of the Company pursuant
to a registration statement filed with the Commission in accordance with the
Securities Act.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Notes are listed or, if such Notes are not then listed on
a national securities exchange, on a PRO RATA basis, by lot or by such method as
the Trustee shall deem fair and appropriate; PROVIDED, HOWEVER, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; PROVIDED,
FURTHER, that if a partial redemption is made with the proceeds of a Public
Equity Offering, selection of the Notes or portions thereof for redemption shall
be made by the Trustee only on a PRO RATA basis or on as nearly a PRO RATA basis
as is practicable (subject to procedures of The Depository Trust Company),
unless such method is otherwise prohibited. Notice of redemption shall be mailed
by first-class mail at least 30 but not more than 60 days before the redemption
date to each Holder of Notes to be redeemed at its registered address. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in a principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note. On and after the redemption date, interest will cease to
accrue on Notes or portions thereof called for redemption as long as the Company
has deposited with the Paying Agent funds in satisfaction of the applicable
redemption price pursuant to the Indenture.
GUARANTEES
Each Guarantor fully and unconditionally guarantees, on a senior basis,
jointly and severally, to each Holder and the Trustee, the full and prompt
performance of the Company's obligations under the Indenture and the Notes,
including the payment of principal of and interest on the Notes. The obligations
of each Guarantor are limited to the maximum amount which, after giving effect
to all other contingent and fixed liabilities of such Guarantor and after giving
effect to any collections from or payments made by or on behalf of any other
Guarantor in respect of the obligations of such other Guarantor under its
Guarantee or pursuant to its contribution obligations under the Indenture, will
result in the obligations of such Guarantor under the Guarantee not constituting
a fraudulent conveyance or fraudulent transfer under federal or state law, in
the case of domestic Guarantors, or any applicable foreign law, in the case of
foreign Guarantors. Each Guarantor that makes a payment or distribution under a
Guarantee shall be entitled to a contribution from each other Guarantor in an
amount PRO RATA, based on the net assets of each Guarantor determined in
accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell its assets to the
Company or to another Guarantor that is a Wholly Owned Restricted Subsidiary
without limitation, or with other Persons upon the terms and conditions set
forth in the Indenture. See "-- Certain Covenants -- Merger, Consolidation and
Sale of Assets." In the event that either all of the Capital Stock of a
Guarantor is sold by the Company or one of the Restricted Subsidiaries (whether
by merger, stock purchase or otherwise) or all or substantially all of the
assets of a Guarantor are sold by such Guarantor and such sale complies with the
provisions set forth in "-- Certain Covenants -- Limitation on Asset Sales"
and "-- Change of Control" and any other applicable provisions in the
Indenture, the Guarantor's Guarantee will be released.
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CHANGE OF CONTROL
The Indenture will provide that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the aggregate
principal amount thereof plus accrued interest to the date of purchase.
Within 30 days following the date upon which any Change of Control occurs,
the Company must send, by first-class mail, a notice to each Holder, with a copy
to the Trustee, which notice shall govern the terms of the Change of Control
Offer. Such notice shall state, among other things, the purchase date, which
must be no earlier than 30 days nor later than 60 days from the date such notice
is mailed, other than as may be required by law (the "Change of Control Payment
Date"). Holders electing to have a Note purchased pursuant to a Change of
Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the Trustee may waive the
covenant relating to a Holder's right to redemption upon a Change of Control.
Restrictions in the Indenture described herein on the ability of the Company and
its Restricted Group Members to incur additional Indebtedness, to grant Liens on
its property, to make Restricted Payments and to make Asset Sales may also make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such transaction
in certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such redemption or repurchase. Such
restrictions and the restrictions on transactions with Affiliates may, in
certain circumstances, make more difficult or discourage any leveraged buyout of
the Company or any of its Restricted Group Members by the management of the
Company. While such restrictions cover a wide variety of arrangements which have
traditionally been used to effect highly leveraged transactions, the Indenture
may not afford the Holders of Notes protection in all circumstances from the
adverse aspects of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
The Company shall not be required to make a Change of Control Offer upon a
Change of Control if a third party makes a Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Company and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS. The Company will not,
and will not permit any of its Restricted Group Members to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); PROVIDED, HOWEVER, that if no
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Default or Event of Default shall have occurred and be continuing at the time of
or as a consequence of the incurrence of any such Indebtedness, the Company and
its Restricted Group Members may incur Indebtedness if on the date of the
incurrence of such Indebtedness, after giving effect to the incurrence thereof,
the Leverage Ratio of the Company would be less than or equal to 5.5 to 1.0. For
purposes of determining any particular amount of Indebtedness under this
"Limitation on Incurrence of Additional Indebtedness" covenant, guarantees,
Liens or obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount shall not be
included; PROVIDED, HOWEVER, that the foregoing shall not in any way be deemed
to limit the provision of " -- Limitation on Issuances of Guarantees of
Indebtedness by Restricted Subsidiaries."
LIMITATION ON RESTRICTED PAYMENTS. The Company will not, and will not
cause or permit any of its Restricted Group Members to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Qualified Capital Stock of the Company or any
Restricted Group Member or in options, warrants or other rights to acquire
Qualified Capital Stock) on or in respect of shares of the Company's or any
Restricted Group Member's Capital Stock to holders of such Capital Stock, (b)
purchase, redeem or otherwise acquire or retire for value any Capital Stock of
the Company or any warrants, rights or options to purchase or acquire shares of
any class of such Capital Stock, (c) make any principal payment on, purchase,
defease, redeem, prepay, decrease or otherwise acquire or retire for value,
prior to any scheduled final maturity, scheduled repayment or scheduled sinking
fund payment, any Indebtedness of the Company or any of the Restricted Group
Members that is subordinate or junior in right of payment to the Notes or the
Guarantees, as the case may be, or (d) make any Investment (other than Permitted
Investments) (each of the foregoing actions set forth in clauses (a), (b), (c)
and (d) being referred to as a "Restricted Payment"), unless, at the time of
such Restricted Payment or immediately after giving effect thereto, (i) no
Default or Event of Default shall have occurred and be continuing and (ii) if
the Company is able to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) in compliance with the Leverage Ratio under the
"Limitation on Incurrence of Additional Indebtedness" covenant, the aggregate
amount of Restricted Payments (including such proposed Restricted Payment) made
subsequent to the Issue Date (the amount expended for such purposes, if other
than in cash, being the fair market value of such property as determined
reasonably and in good faith by the Board of Directors of the Company) shall not
exceed the sum of: (1) 100% of the Cumulative Operating Cash Flow less 150% of
cumulative Adjusted Fixed Charges determined for the period (treated as one
accounting period) commencing on the first day of the fiscal quarter in which
the Issue Date occurs and ending on the last day of the most recent fiscal
quarter immediately preceding the date of such Restricted Payment; plus (2) 100%
of the aggregate net cash proceeds received by the Company from any Person
(other than a Restricted Group Member) from the issuance and sale subsequent to
the Issue Date of Qualified Capital Stock of the Company minus the aggregate
amount of Restricted Payments made pursuant to clause (iii) below; plus (3)
without duplication of any amounts included in clause (ii)(2) above, 100% of the
aggregate net cash proceeds from the issuance and sale (other than to a
Restricted Group Member) of debt securities of the Company that have been
converted into or exchanged for Qualified Capital Stock (excluding, in the case
of clauses (ii)(2) and (3), any net cash proceeds from a Public Equity Offering
to the extent used to redeem the Notes in compliance with the provisions set
forth under "Redemption -- Optional Redemption Upon Public Equity Offerings");
plus (4) in the case of the disposition or repayment of any Investment that was
treated as a Restricted Payment made after the Issue Date, an amount (to the
extent not included in the computation of Cumulative Operating Cash Flow) equal
to the lesser of: (x) the return in cash of capital with respect to such
Investment and (y) the amount of such Investment that was treated as a
Restricted Payment, in either case, less the cost of the disposition of such
Investment and net of taxes; plus (5) so long as the Designation thereof was
treated as a Restricted Payment made after the Issue Date, with respect to any
Unrestricted Group Member that has been redesignated as a Restricted Group
Member after the Issue Date in accordance with " -- Designation of Unrestricted
Group Members," the Company's proportionate interest in an amount equal to the
excess of (x) the total assets of such Restricted Group Member, valued on an
aggregate basis at fair market value, over (y) the total liabilities of such
Restricted Group Member, determined in each case in accordance with GAAP (and
provided that such amount shall not in any case exceed the Designation Amount
with respect to such Restricted Group Member upon its Designation); minus (6)
with respect to each Restricted Group Member which has been
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designated as an Unrestricted Group Member after the Issue Date in accordance
with "-- Designation of Unrestricted Group Members," the greater of (x) $0 and
(y) the Designation Amount thereof (measured as of the date of Designation).
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the repurchase, redemption or other
acquisition of any shares of Capital Stock of the Company, either (i) solely in
exchange for shares of Qualified Capital Stock of the Company or (ii) through
the application of net proceeds of a substantially concurrent (x) sale for cash
(other than to a Subsidiary of the Company) of shares of Qualified Capital Stock
of the Company or (y) capital contribution to the Company; (3) if no Default or
Event of Default shall have occurred and be continuing, the acquisition of any
Indebtedness of the Company that is subordinate or junior in right of payment to
the Notes either (i) solely in exchange for shares of Qualified Capital Stock of
the Company, or (ii) in exchange for or through the application of net proceeds
of a substantially concurrent capital contribution or sale for cash (other than
to a Restricted Group Member) of (A) shares of Qualified Capital Stock of the
Company or (B) Refinancing Indebtedness; (4) so long as no Default or Event of
Default shall have occurred and be continuing, repurchases by the Company of
Common Stock of the Company from directors, officers or employees of the Company
or any of its Restricted Group Members or their authorized representatives upon
the death, disability or termination of employment of such directors, officers
or employees, in an aggregate amount not to exceed $1.0 million in any fiscal
year; PROVIDED, HOWEVER, that any unused amount may be used only in the next
succeeding fiscal year; and (5) payments or distributions to dissenting
stockholders in accordance with applicable law, pursuant to or in connection
with a consolidation, merger or transfer of assets that complies with the
provisions of the Indenture applicable to mergers, consolidations and transfers
of all or substantially all of the property and assets of the Company. In
determining the aggregate amount of Restricted Payments made subsequent to the
Issue Date in accordance with clause (ii) of the immediately preceding
paragraph, amounts expended pursuant to clauses (1), (2)(ii) and (4) shall be
included in such calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
LIMITATION ON ASSET SALES. The Company will not, and will not permit any
of its Restricted Group Members to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Group Member, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 80% of the consideration
received by the Company or the Restricted Group Member, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; PROVIDED, that any notes or other obligations
received by the Company or any Restricted Group Member from the transferee
thereof that are converted by the Company or such Restricted Group Member into
cash or Cash Equivalents (to the extent of the cash or Cash Equivalents
received) within 90 days following the closing of such Asset Sale, will be
deemed to be cash for purposes of this provision; and (iii) upon the
consummation of an Asset Sale, the Company shall apply, or cause such Restricted
Group Member to apply, the Net Cash Proceeds relating to such Asset Sale within
365 days of receipt thereof either (A) to prepay any indebtedness under the
Credit Facilities (with a permanent reduction of commitments thereunder), (B) to
make an investment in properties and assets that replace the properties and
assets that were the subject of such Asset Sale or in properties and assets that
will be used in the business of the Company and its Restricted Group Members as
existing on the Issue Date or in businesses reasonably related thereto or, in
either such case, in a company having property and assets of a nature or type,
or engaged in a Telecommunications Business ("Replacement Assets"), or (C) a
combination of prepayment and investment permitted by the foregoing clauses
(iii)(A) and (iii)(B). On the 366th day after an Asset Sale or such earlier
date, if any, as the Board of Directors of the Company or of such Restricted
Group Member determines not to apply the Net Cash Proceeds relating to such
Asset Sale as set
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forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence
(each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash
Proceeds which have not been applied on or before such Net Proceeds Offer
Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next
preceding sentence (each a "Net Proceeds Offer Amount") shall be applied by
the Company or such Restricted Group Member to make an offer to purchase (the
"Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not
less than 30 nor more than 60 days following the applicable Net Proceeds Offer
Trigger Date, from all Holders on a PRO RATA basis, that amount of Notes equal
to the Net Proceeds Offer Amount at a price equal to 100% of the principal
amount of the Notes to be purchased, plus accrued and unpaid interest thereon,
if any, to the date of purchase; PROVIDED, HOWEVER, that if at any time any
non-cash consideration received by the Company or any Restricted Group Member,
as the case may be, in connection with any Asset Sale is converted into or sold
or otherwise disposed of for cash (other than interest received with respect to
any such non-cash consideration), then such conversion or disposition shall be
deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof
shall be applied in accordance with this covenant. The Company may defer the Net
Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount
equal to or in excess of $10.0 million resulting from one or more Asset Sales
(at which time, the entire unutilized Net Proceeds Offer Amount, and not just
the amount in excess of $10.0 million shall be applied as required pursuant to
this paragraph). To the extent that any Net Proceeds Offer Amount remains after
consummation of a Net Proceeds Offer, the Company may use such Net Proceeds
Offer Amount for any purpose not otherwise prohibited by the Indenture. Upon
completion of such offer to purchase, the amount of the Net Proceeds Offer
Amount shall be reset at zero.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Group Members as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Group Members not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Group Members deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 30 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a PRO RATA basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset
Sale" provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
GROUP MEMBERS. The Company will not, and will not cause or permit any of its
Restricted Group Members to, directly or indirectly, create or otherwise cause
or permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Group Member to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances
or to pay any Indebtedness or other obligation owed to the Company or any other
Restricted Group Member; or (c) transfer any of its property or assets to the
Company or any other Restricted Group Member, except for such encumbrances or
restrictions existing under or by reason of: (1) applicable law; (2) the
Indenture; (3) customary non-assignment provisions of any contract or any lease
governing a leasehold interest of any Restricted Group Member; (4) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
not applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the
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Person so acquired; (5) agreements existing on the Issue Date to the extent and
in the manner such agreements are in effect on the Issue Date; (6) in the case
of clause (c) of this covenant, (A) customary restrictions regarding the
subletting, assignment or transfer of any property or asset that is, or is
subject to, a lease, purchase mortgage obligation, license, conveyance or
contract or similar property or asset, (B) any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets of
the Company or any Restricted Group Member not otherwise prohibited by the
Indenture or (C) encumbrances or restrictions arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Group Member in any manner material to the
Company or any Restricted Group Member; (7) with respect to a Restricted Group
Member and imposed pursuant to an agreement that has been entered into for the
sale or disposition of all or substantially all of the Capital Stock of, or
property and assets of, such Restricted Group Member; or (8) an agreement
governing Indebtedness incurred to Refinance the Indebtedness issued, assumed or
incurred pursuant to an agreement referred to in clause (2), (4) or (5) above;
PROVIDED, HOWEVER, that the provisions relating to such encumbrance or
restriction contained in any such Indebtedness are no less favorable to the
Company in any material respect as determined by the Board of Directors of the
Company in their reasonable and good faith judgment than the provisions relating
to such encumbrance or restriction contained in agreements referred to in such
clause (2), (4) or (5). Nothing contained in this "Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Group Members" covenant shall
prevent the Company or any Restricted Group Member from creating, incurring,
assuming or suffering to exist any Liens otherwise permitted in the "Limitation
on Liens" covenant.
DESIGNATION OF UNRESTRICTED GROUP MEMBERS. (a) The Company may designate
any Restricted Group Member as an "Unrestricted Group Member" under the
Indenture (a "Designation") only if:
(i) no Default shall have occurred and be continuing at the time of
or after giving effect to such Designation;
(ii) at the time of and after giving effect to such Designation, the
Company could incur $1.00 of additional Indebtedness under the first
paragraph of "-- Limitation on Incurrence of Indebtedness"; and
(iii) the Company would be permitted to make an Investment (other
than a Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of
"-- Limitation on Restricted Payments" in an amount (the "Designation
Amount") equal to the fair market value of the Company's proportionate
interest in the net worth of such Restricted Group Member on such date.
All Subsidiaries of Unrestricted Group Members shall be Unrestricted Group
Members.
The Company shall not, and shall not cause or permit any Restricted Group
Member to, directly or indirectly, at any time (x) provide credit support for,
subject any of its properties or assets (other than the Capital Stock of any
Unrestricted Group Member) to the satisfaction of, or guarantee, any
Indebtedness of any Unrestricted Group Member (including any undertaking,
agreement or instrument evidencing such Indebtedness), (y) be liable for any
Indebtedness of any Unrestricted Group Member or (z) be liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Group Member.
(b) The Company may revoke any Designation of a Restricted Group
Member as an Unrestricted Group Member (a "Revocation") only if:
(i) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Group Member
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
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All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Company, delivered to the Trustee certifying
compliance with the foregoing provisions.
ADDITIONAL GUARANTEES. (a) If the Company or any of the domestic Wholly
Owned Restricted Subsidiaries transfers or causes to be transferred, in one
transaction or a series of related transactions, any property to any Wholly
Owned Restricted Subsidiary that is not a Guarantor, or if the Company or any of
the domestic Wholly Owned Restricted Subsidiaries shall organize, acquire or
otherwise invest in another Wholly Owned Restricted Subsidiary that is not a
Guarantor, or
(b) if the Company permits any Restricted Group Member, other than any
Guarantor on the Issue Date or any Person who becomes a Guarantor pursuant to
clause (a) above, directly or indirectly, by way of the pledge of any
intercompany note or otherwise, to assume, guarantee or in any other manner
become liable with respect to any Indebtedness of the Company or any other
Restricted Group Member;
then such transferee or acquired or other Restricted Group Member shall (i)
execute and deliver to the Trustee a supplemental indenture in form reasonably
satisfactory to the Trustee pursuant to which such Restricted Group Member shall
fully and unconditionally guarantee all of the Company's obligations under the
Notes and the Indenture on the terms set forth in the Indenture and (ii) deliver
to the Trustee an opinion of counsel stating that such supplemental indenture
has been duly authorized, executed and delivered by such Restricted Group Member
and constitutes a legal, valid, binding and enforceable obligation of such
Restricted Group Member. Thereafter, such Restricted Group Member shall be a
Guarantor for all purposes of the Indenture.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED GROUP
MEMBERS. The Company shall not sell, and shall not cause or permit any
Restricted Group Member, directly or indirectly, to issue or sell, any Capital
Stock of a Restricted Group Member, except (i) to the Company or a Restricted
Group Member; (ii) for directors' qualifying shares or shares of Capital Stock
to foreign nationals mandated by applicable law; (iii) if, immediately after
giving effect to such issuance or sale, such Restricted Group Member would no
longer constitute a Restricted Group Member; (iv) in the case of issuance of
Capital Stock by a non-Wholly Owned Restricted Subsidiary if, after giving
effect to such issuance, the Company maintains its direct or indirect percentage
of beneficial and economic ownership of such non-Wholly Owned Restricted
Subsidiary or (v) up to a 10.5% beneficial ownership interest in INTERLINK
Communications, Inc. to Russell Hardy, Stephen Strohman, Salvador Giblas and/or
Monty J. Moore.
LIMITATION ON LIENS. The Company will not, and will not cause or permit
any of its Restricted Group Members to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Group Members whether
owned on the Issue Date or acquired after the Issue Date, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the Notes, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens and (ii) in all other cases, the Notes are equally and
ratably secured, except for (A) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date; (B) Liens
securing Indebtedness under the Credit Facilities; (C) Liens securing the Notes;
(D) Liens of the Company or a Wholly Owned Restricted Subsidiary of the Company
on assets of any Restricted Group Member; (E) Liens securing Refinancing
Indebtedness which is incurred to Refinance any Indebtedness which has been
secured by a Lien permitted under the Indenture and which has been incurred in
accordance with the provisions of the Indenture; PROVIDED, HOWEVER, that such
Liens (a) are no less favorable to the Holders and are not more favorable to the
lienholders with respect to such Liens than the Liens in respect of the
Indebtedness being Refinanced and (b) do not extend to or cover any property or
assets of the Company or any of its Restricted Group Members not securing the
Indebtedness so Refinanced; and (F) Permitted Liens.
MERGER, CONSOLIDATION AND SALE OF ASSETS. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Group Member to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
assets of the Company and the Company's Restricted Group Members whether as an
entirety or substantially as an entirety to any Person unless: (i) either (1)
the Company shall be the surviving or continuing corporation or (2) the Person
(if other than the
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Company) formed by such consolidation or into which the Company is merged or the
Person which acquires by sale, assignment, transfer, lease, conveyance or other
disposition the properties and assets of the Company and of the Company's
Restricted Group Members substantially as an entirety (the "Surviving Entity")
(x) shall be a corporation organized and validly existing under the laws of the
United States or any State thereof or the District of Columbia and (y) shall
expressly assume, by supplemental indenture (in form and substance satisfactory
to the Trustee) executed and delivered to the Trustee, the due and punctual
payment of the principal of, and premium, if any, and interest on all of the
Notes and the performance of every covenant of the Notes and the Indenture on
the part of the Company to be performed or observed; (ii) immediately after
giving effect to such transaction and the assumption contemplated by clause
(i)(2)(y) above (including giving effect to any Indebtedness and Acquired
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction), the Leverage Ratio of the Company or such
Surviving Entity, as the case may be, would be less than the Leverage Ratio of
the Company immediately prior to such transaction; (iii) immediately before and
immediately after giving effect to such transaction and the assumption
contemplated by clause (i)(2)(y) above (including, without limitation, giving
effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to
be incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and (iv) the Company or the Surviving Entity shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that such consolidation, merger, sale, assignment, transfer, lease, conveyance
or other disposition and, if a supplemental indenture is required in connection
with such transaction, such supplemental indenture comply with the applicable
provisions of the Indenture and that all conditions precedent in the Indenture
relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted Group
Members of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
Each Guarantor (other than any Guarantor whose Guarantee is to be released
in accordance with the terms of the Guarantee and the Indenture in connection
with any transaction complying with the provisions of "-- Limitation on Asset
Sales") will not, and the Company will not cause or permit any Guarantor to,
consolidate with or merge with or into or sell, assign, transfer, lease, convey
or otherwise dispose of all or substantially all of its assets to any Person
(other than a merger of the Company with any Guarantor or a merger of
Guarantors) unless: (i) the entity formed by or surviving any such consolidation
or merger (if other than the Guarantor) or to which such sale, lease, conveyance
or other disposition shall have been made is a corporation organized and validly
existing under the laws of the United States or any state thereof or the
District of Columbia or an entity organized and validly existing under the laws
of the foreign jurisdiction in which such Guarantor is organized; (ii) such
entity assumes by supplemental indenture all of the obligations of such
Guarantor under such Guarantee; and (iii) immediately after giving effect to
such transaction, no Default or Event of Default shall have occurred and be
continuing.
The Indenture will provide that upon any consolidation, combination or
merger or any transfer of all or substantially all of the assets of the Company
or any Guarantor in accordance with the foregoing, in which the Company or such
Guarantor is not the continuing corporation, the successor Person formed by such
consolidation or into which the Company or such Guarantor is merged or to which
such conveyance, lease or transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company or such Guarantor
under the Indenture, the Notes or the Guarantee, as the case may be, with the
same effect as if such surviving entity had been named as such.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. (a) The Company will not, and
will not permit any of its Restricted Group Members to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any of
its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate
Transactions permitted under paragraph (b) below and (y) Affiliate Transactions
on terms that are no less favorable than those that might reasonably have been
obtained in a comparable transaction at such time on an arm's-length basis from
a Person that is not an Affiliate of the
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Company or such Restricted Group Member. All Affiliate Transactions (and each
series of related Affiliate Transactions which are similar or part of a common
plan) involving aggregate payments or other property with a fair market value in
excess of $2.0 million shall be approved by the Board of Directors of the
Company or such Restricted Group Member, as the case may be, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Group Member enters into an Affiliate Transaction (or
a series of related Affiliate Transactions related to a common plan) that
involves an aggregate fair market value of more than $10.0 million, the Company
or such Restricted Group Member, as the case may be, shall, prior to the
consummation thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the relevant
Restricted Group Member, as the case may be, from a financial point of view,
from an Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Group Member as determined in good faith by the Company's Board of Directors or
senior management; (ii) loans and advances to officers and employees of the
Company and its Restricted Group Members not exceeding $1.0 million outstanding
at any time; (iii) transactions exclusively between or among the Company and any
of its Restricted Group Members or exclusively between or among such Restricted
Group Members, provided such transactions are not otherwise prohibited by the
Indenture; (iv) any agreement as in effect as of the Issue Date or any amendment
thereto or any transaction contemplated thereby (including pursuant to any
amendment thereto) in any replacement agreement thereto so long as any such
amendment or replacement agreement is not more disadvantageous to the Holders in
any material respect than the original agreement as in effect on the Issue Date;
and (v) Restricted Payments permitted by the Indenture.
CONDUCT OF BUSINESS. The Company and its Restricted Group Members will not
engage in any businesses which are not the same, similar or reasonably related
to the businesses in which the Company and its Restricted Group Members are
engaged on the Issue Date.
REPORTS TO HOLDERS. The Indenture will provide that the Company will
deliver to the Trustee within 15 days after the filing of the same with the
Commission, copies of the quarterly and annual reports and of the information,
documents and other reports, if any, which the Company is required to file with
the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The
Indenture further provides that, notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of TIA 314(a).
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes
due and payable and the default continues for a period of 30 days;
(ii) the failure to pay the principal of any Notes, when the same
becomes due and payable, at maturity, upon redemption or otherwise
(including the failure to make a payment to purchase Notes tendered
pursuant to a Change of Control Offer or a Net Proceeds Offer);
(iii) a default in the observance or performance of any other
covenant or agreement contained in the Indenture which default continues
for a period of 30 days after the Company receives written notice
specifying the default (and demanding that such default be remedied) from
the Trustee or the Holders of at least 25% of the outstanding principal
amount of the Notes (except in the case of a default with respect to the
"Merger, Consolidation and Sale of Assets" covenant, which will
constitute an Event of Default with such notice requirement but without
such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Group
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Member, or the acceleration of the final stated maturity of any such
Indebtedness if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which has been
accelerated, aggregates $5.0 million or more at any time; PROVIDED that
such Indebtedness has not been discharged in full or such acceleration has
not been rescinded or annulled;
(v) one or more judgments representing obligations in an aggregate
amount in excess of $5.0 million shall have been rendered against the
Company or any of its Restricted Group Members and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and non-appealable; or
(vi) certain events of bankruptcy affecting the Company or any of its
Significant Restricted Group Members.
If an Event of Default (other than an Event of Default specified in clause
(vi) above) shall occur and be continuing, the Trustee or the Holders of at
least 25% in principal amount of outstanding Notes may declare the principal of
and accrued interest on all the Notes to be due and payable by notice in writing
to the Company and the Trustee specifying the respective Event of Default and
that it is a "notice of acceleration" (the "Acceleration Notice"), and the
same shall become immediately due and payable. If an Event of Default specified
in clause (vi) above occurs and is continuing, then all unpaid principal of, and
premium, if any, and accrued and unpaid interest on all of the outstanding Notes
shall IPSO FACTO become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
The Indenture will provide that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (iv) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (v) in the event of the cure or waiver of an
Event of Default of the type described in clause (vi) of the description above
of Events of Default, the Trustee shall have received an officers' certificate
and an opinion of counsel that such Event of Default has been cured or waived.
No such rescission shall affect any subsequent Default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the corresponding obligations of the Guarantors discharged with
respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance
means that the Company shall be deemed to have paid and discharged the entire
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indebtedness represented by the outstanding Notes, except for (i) the rights of
Holders to receive payments in respect of the principal of, premium, if any, and
interest on the Notes when such payments are due, (ii) the Company's obligations
with respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payments, (iii) the rights, powers, trust, duties and
immunities of the Trustee and the Company's obligations in connection therewith
and (iv) the Legal Defeasance provisions of the Indenture. In addition, the
Company may, at its option and at any time, elect to have the obligations of the
Company and the Guarantors released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Restricted Group Members is a party or by which the Company or any of
its Restricted Group Members is bound; (vi) the Company shall have delivered to
the Trustee an officers' certificate stating that the deposit was not made by
the Company with the intent of preferring the Holders over any other creditors
of the Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others; (vii) the Company shall
have delivered to the Trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent provided for or relating to
the Legal Defeasance or the Covenant Defeasance have been complied with; (viii)
the Company shall have delivered to the Trustee an opinion of counsel to the
effect that after the 91st day following the deposit, the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and (ix)
certain other customary conditions precedent are satisfied. Notwithstanding the
foregoing, the opinion of counsel required by clause (ii) above with respect to
a Legal Defeasance need not be delivered if all Notes not theretofore delivered
to the Trustee for cancellation (x) have become due and payable or (y) will
become due an payable on the maturity date within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all
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outstanding Notes when (i) either (a) all the Notes theretofore authenticated
and delivered (except lost, stolen or destroyed Notes which have been replaced
or paid and Notes for whose payment money has theretofore been deposited in
trust or segregated and held in trust by the Company and thereafter repaid to
the Company or discharged from such trust) have been delivered to the Trustee
for cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company, the Guarantors and the Trustee, without the
consent of the Holders, may amend the Indenture for certain specified purposes,
including curing ambiguities, defects or inconsistencies, so long as such change
does not, in the opinion of the Trustee, adversely affect the rights of any of
the Holders in any material respect. In formulating its opinion on such matters,
the Trustee will be entitled to rely on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel. Other
modifications and amendments of the Indenture may be made with the consent of
the Holders of a majority in principal amount of the then outstanding Notes
issued under the Indenture, except that, without the consent of each Holder
affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders
must consent to an amendment; (ii) reduce the rate of or change or have the
effect of changing the time for payment of interest, including defaulted
interest, on any Notes; (iii) reduce the principal of or change or have the
effect of changing the fixed maturity of any Notes, or change the date on which
any Notes may be subject to redemption or repurchase, or reduce the redemption
or repurchase price therefor; (iv) make any Notes payable in money other than
that stated in the Notes; (v) make any change in provisions of the Indenture
protecting the right of each Holder to receive payment of principal of and
interest on such Note on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal amount of
Notes to waive Defaults or Events of Default; (vi) amend, change or modify in
any material respect the obligation of the Company to make and consummate a
Change of Control Offer in the event of a Change of Control or make and
consummate a Net Proceeds Offer with respect to any Asset Sale that has been
consummated or modify any of the provisions or definitions with respect thereto;
or (vii) release any Guarantor from any of its obligations under its Guarantee
or the Indenture other than in accordance with the terms of the Indenture.
GOVERNING LAW
The Indenture will provide that it and the Notes and the Guarantees will be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; PROVIDED that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Group Member
or at the time it merges or consolidates with the Company or any of its
Restricted Group Members or assumed in connection with the acquisition of assets
from such Person and in each case not incurred by such Person in connection
with, or in anticipation or contemplation of, such Person becoming a Restricted
Group Member or such acquisition, merger or consolidation; PROVIDED that
Indebtedness of such Person which is redeemed, defeased, retired or otherwise
repaid at the time of or immediately upon the consummation of the transactions
by which such Person becomes a Restricted Group Member or such Acquisition shall
not be considered as Indebtedness.
"ACQUISITION" means (a) an Investment by the Company or any Restricted
Group Member in any other Person pursuant to which such Person shall become a
Restricted Group Member or any Restricted Group Member, or shall be merged with
or into the Company or any Restricted Group Member, or (b) the acquisition by
the Company or any Restricted Group Member of the assets of any Person (other
than a Restricted Group Member) which constitute all or substantially all of the
assets of such Person or comprises any division or line of business of such
Person or any other properties or assets of such Person other than in the
ordinary course of business.
"ADJUSTED FIXED CHARGES" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the amount of all dividend payments on any series of Preferred Stock of
such Person (other than dividends paid in Qualified Capital Stock) paid, accrued
or scheduled to be paid or accrued during such period.
"ADJUSTED INTEREST EXPENSE" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of the interest
expense of such Person and its Restricted Group Members for such period
determined in accordance with GAAP, including without limitation, (a) any
amortization of debt discount and amortization or write-off of deferred
financing costs, (b) the net costs under Interest Swap Obligations, (c) all
capitalized interest and (d) the interest portion of any deferred payment
obligation; and (ii) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such Person and its
Restricted Group Members during such period as determined on a consolidated
basis in accordance with GAAP, excluding, however, with respect to any
Restricted Group Member, that proportion thereof that corresponds to the
percentage ownership interest in the outstanding Capital Stock of such
Restricted Group Member not owned on the last day of such period, directly or
indirectly, by the Company.
"ADJUSTED INCOME TAX EXPENSE" means, with respect to any period, the
provision for federal, state, local and foreign income taxes payable by the
Company and its Restricted Group Members for such period as determined on a
consolidated basis in accordance with GAAP, excluding, however, with respect to
any Restricted Group Member, that proportion thereof that corresponds to the
percentage ownership interest in the outstanding Capital Stock of such
Restricted Group Member not owned on the last day of such period, directly or
indirectly, by the Company.
"ADJUSTED NET INCOME" means, with respect to any period, the net income
of the Company and the Restricted Group Members for such period determined in
accordance with GAAP, adjusted, to the extent included in calculating such net
income, by excluding, without duplication, (a) all extraordinary gains or losses
for such period, (b) all gains or losses from the sales or other dispositions of
assets out of the ordinary course of business (net of taxes, fees and expenses
relating to the transaction giving rise thereto) for such period; (c) that
portion of such net income derived from or in respect of investments in Persons
other than Restricted Group Members, except to the extent actually received in
cash by the Company or any Restricted Group Member (subject, in the case of any
Restricted Group Member, to the provisions of clause (f) of this definition);
(d) the portion of such net income (or loss) allocable to minority interests in
any Person (other than a Restricted Group Member) for such period, except to the
extent the Company's allocation portion of such Person's net income for such
period is actually received in cash by the Company or any Restricted Group
Member (subject, in the case of any Restricted Subsidiary, to the provisions of
clause (f) of this
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definition); (e) the net income (or loss) of any other Person combined with the
Company or any Restricted Group Member on a "pooling of interests" basis
attributable to any period prior to the date of combination; (f) the net income
of any Restricted Group Member to the extent that the declaration of dividends
or similar distributions by that Restricted Group Member of that income is not
at the time (regardless of any waiver) permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Group Member or the holders of its Capital Stock; and (g) to the
extent not otherwise excluded in accordance with GAAP, the net income (or loss)
of any Restricted Group Member in an amount that corresponds to the percentage
ownership interest in the income of such Restricted Group Member not owned on
the last day of such period, directly or indirectly, by the Company.
"ADJUSTED OPERATING CASH FLOW" means, with respect to any period,
Adjusted Net Income for such period increased (without duplication), to the
extent deducted in calculating such Adjusted Net Income, by (a) Adjusted Income
Tax Expense for such period; (b) Adjusted Fixed Charges for such period; and (c)
depreciation, amortization and any other non-cash items for such period (other
than any non-cash item to the extent that it requires the accrual of, or a
reserve for, cash charges for any future period) of the Company and the
Restricted Group Members, including, without limitation, amortization of
capitalized debt issuance costs for such period, all of the foregoing determined
in accordance with GAAP minus non-cash items to the extent they increase
Adjusted Net Income (including the partial or entire reversal of reserves taken
in prior periods) for such period. In calculating Adjusted Operating Cash Flow,
for each Restricted Group Member, the addition to Adjusted Net Income for such
Restricted Group Member of the items set forth in clause (c) of the previous
sentence shall exclude that proportion thereof that corresponds to the
percentage ownership interest in the outstanding Capital Stock of such
Restricted Group Member not owned on the last day of such period, directly or
indirectly, by the Company.
"AFFILIATE" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the
foregoing.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Group Members (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Restricted Group Member of (a) any
Capital Stock of any Restricted Group Member (other than in respect of any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law); or (b) any other property or assets of the Company or any
Restricted Group Member other than in the ordinary course of business; PROVIDED,
HOWEVER, that Asset Sales shall not include (i) a transaction or series of
related transactions for which the Company or its Restricted Group Members
receive aggregate consideration of less than $500,000 and (ii) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company as permitted under "Merger, Consolidation and Sale of
Assets."
"BOARD OF DIRECTORS" means, as to any Person, the board of directors (or
the equivalent thereof) of such Person or any duly authorized committee thereof.
"BOARD RESOLUTION" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"CAPITALIZED LEASE OBLIGATION" means, as to any Person, the obligations
of such Person under a lease that are required to be classified and accounted
for as capital lease obligations under GAAP and, for purposes of this
definition, the amount of such obligations at any date shall be the capitalized
amount of such obligations at such date, determined in accordance with GAAP.
"CAPITAL STOCK" means (i) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate
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stock, including each class of Common Stock and Preferred Stock of such Person
and (ii) with respect to any Person that is not a corporation, any and all
partnership or other equity interests of such Person.
"CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"CHANGE OF CONTROL" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company to any Person or group of related Persons for purposes of Section 13(d)
of the Exchange Act (a "Group"), together with any Affiliates thereof (whether
or not otherwise in compliance with the provisions of the Indenture) other than
to the Permitted Holders; (ii) the approval by the holders of Capital Stock of
the Company of any plan or proposal for the liquidation or dissolution of the
Company, as the case may be (whether or not otherwise in compliance with the
provisions of the Indenture); (iii) any Person or Group (other than the
Permitted Holders), together with any Affiliate thereof, shall become the record
owner or the beneficial owner (other than any Person described in clause (d)(2)
of Rule 13d-3 of the Exchange Act) of more than 50% of the aggregate voting
power or economic interest of the Capital Stock of the Company; or (iv) the
replacement of a majority of the Board of Directors of the Company over a two-
year period from the directors who constituted the Board of Directors of the
Company, at the beginning of such period, and such replacement shall not have
been approved by a vote of at least a majority of the Board of Directors of the
Company, then still in office who either were members of such Board of Directors
at the beginning of such period or whose election as a member of such Board of
Directors was previously so approved.
"COMMON STOCK" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"CONSOLIDATED NET WORTH" of any Person means the consolidated
stockholders' equity of such Person, determined on a consolidated basis in
accordance with GAAP, less (without duplication) amounts attributable to (x)
Disqualified Capital Stock of such Person and its Subsidiaries or (y)
Unrestricted Subsidiaries.
"CREDIT FACILITIES" means one or more credit facilities evidenced by one
or more credit agreements, together with the related documents thereto
(including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (PROVIDEDthat such increase in borrowings is
permitted by the "Limitation on Incurrence of Additional Indebtedness"
covenant above) or adding Restricted Group Member of the Company as additional
borrowers or guarantors thereunder) all or any portion of the Indebtedness under
such agreements or any successor or replacement agreement and whether by the
same or any other agent, lender or group of lenders.
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"CUMULATIVE OPERATING CASH FLOW" means, as at any date of determination,
the positive cumulative Adjusted Operating Cash Flow realized during the period
commencing on the first day of the fiscal quarter in which the Issue Date occurs
and ending on the last day of the most recent fiscal quarter immediately
preceding the date of determination for which consolidated financial information
of the Company is available or, if such cumulative Adjusted Operating Cash Flow
for such period is negative, the negative amount by which cumulative Adjusted
Operating Cash Flow is less than zero.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Group Member against fluctuations in currency (or
currency units) values.
"DEFAULT" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"DESIGNATION" has the meaning set forth in "-- Certain
Covenants -- Designation of Unrestricted Group Members."
"DESIGNATION AMOUNT" has the meaning set forth in "-- Certain
Covenants -- Designation of Unrestricted Group Members."
"DISQUALIFIED CAPITAL STOCK" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof on or prior to the final maturity date of the Notes.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes.
"EXISTING JOINT VENTURE" means each of Telereunion S.A. [any others] and
[its/their] respective successor(s) thereto.
"fair market value" means, with respect to any asset or property, the
price (after taking into account any liabilities relating to such assets) which
could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which are in effect as of the Issue Date.
"GUARANTOR" means each of the Company's U.S. Wholly Owned Restricted
Subsidiaries as of the Issue Date and each of the Company's Restricted Group
Members that in the future executes a supplemental indenture in which such
Restricted Group Member agrees to be bound by the terms of the Indenture as a
Guarantor; PROVIDED, HOWEVER, that any Person constituting a Guarantor shall
cease to constitute a Guarantor when its Guarantee is released in accordance
with the terms of the Indenture.
"INDEBTEDNESS" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person as lessee, (iv) all Obligations
of such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business that are not overdue by 90 days or
more or are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted), (v) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction, (vi) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (i) through (v) above and clause (viii)
below, (vii) all Obligations of any other Person of the type referred to in
clauses (i) through (vi) which are secured by any lien on any property or asset
of such Person, the amount of such Obligation being deemed to be the lesser of
the fair market
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value of such property or asset or the amount of the Obligation so secured,
(viii) all Obligations under currency agreements and interest swap agreements of
such Person and (ix) all Disqualified Capital Stock issued by such Person with
the amount of Indebtedness represented by such Disqualified Capital Stock being
equal to the greater of its voluntary or involuntary liquidation preference and
its maximum fixed repurchase price, but excluding accrued dividends, if any. For
purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the Board of Directors of the issuer of such Disqualified Capital
Stock. For purposes of the covenant described above under the caption
"Limitation on Incurrence of Additional Indebtedness," in determining the
principal amount of any Indebtedness to be incurred by the Company or any
Restricted Group Member or which is outstanding at any date, the principal
amount of any Indebtedness which provides that an amount less than the principal
amount thereof shall be due upon any declaration of acceleration thereof shall
be the accreted value thereof at the date of determination.
"INDEPENDENT FINANCIAL ADVISOR" means a firm (i) which does not, and
whose directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"INTEREST SWAP OBLIGATIONS" means the obligations of any Person pursuant
to any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"INVESTMENT" means, with respect to any Person, any direct or indirect
loan or other extension of credit (including, without limitation, a guarantee
but excluding advances to customers in the ordinary course of business that are,
in conformity with GAAP, recorded as accounts receivable on the balance sheet of
the Company or any of its Restricted Group Members) or capital contribution to
(by means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition by such Person of any Capital Stock, bonds, notes, debentures or
other securities or evidences of Indebtedness issued by, any Person. For the
purposes of the "Limitation on Restricted Payments" covenant, (i)
"Investment" shall include and be valued at the fair market value of the net
assets of any Restricted Group Member at the time that such Restricted Group
Member is designated an Unrestricted Group Member and shall exclude the fair
market value of the net assets of any Unrestricted Group Member at the time that
such Unrestricted Group Member is designated a Restricted Group Member and (ii)
the amount of any Investment shall be the original cost of such Investment plus
the cost of all additional Investments by the Company or any of its Restricted
Group Members, without any adjustments for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment, reduced by
the payment of dividends or distributions in connection with such Investment or
any other amounts received in respect of such Investment; PROVIDED that no such
payment of dividends or distributions or receipt of any such other amounts shall
reduce the amount of any Investment if such payment of dividends or
distributions or receipt of any such amounts would be included in Adjusted Net
Income. If the Company or any Restricted Group Member sells or otherwise
disposes of any Common Stock of any direct or indirect Restricted Group Member
such that, after giving effect to any such sale or disposition, the Company's
Board of Directors deems that such Person is no longer a Restricted Affiliate,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Common Stock of such
Restricted Group Member not sold or disposed of.
"ISSUE DATE" means the date of original issuance of the Notes.
"LEVERAGE RATIO" means the ratio of (a) the Total Indebtedness as of the
date of calculation (the "Determination Date") to (b) two times the Adjusted
Operating Cash Flow for the latest two fiscal quarters
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for which financial information is available immediately preceding such
Determination Date (the "Measurement Period"). For purposes of calculating
Adjusted Operating Cash Flow for the Measurement Period immediately prior to the
relevant Determination Date, (I) any Person that is a Restricted Group Member on
the Determination Date (or would become a Restricted Group Member on such
Determination Date in connection with the transaction that requires the
determination of such Adjusted Operating Cash Flow) will be deemed to have been
a Restricted Group Member at all times during such Measurement Period, (II) any
Person that is not a Restricted Group Member on such Determination Date (or
would cease to be a Restricted Group Member on such Determination Date in
connection with the transaction that requires the determination of such Adjusted
Operating Cash Flow) will be deemed not to have been a Restricted Group Member
at any time during such Measurement Period, and (III) if the Company or any
Restricted Group Member shall have in any manner (x) acquired (through an
Acquisition or the commencement of activities constituting such operating
business) or (y) disposed of (by way of an Asset Sale or the termination or
discontinuance of activities constituting such operating business) any operating
business during such Measurement Period or after the end of such period and on
or prior to such Determination Date, such calculation will be made on a PRO
FORMA basis in accordance with GAAP as if, in the case of an Acquisition or the
commencement of activities constituting such operating business, all such
transactions had been consummated on the first day of such Measurement Period
and, in the case of an Asset Sale or termination or discontinuance of activities
constituting such operating business, all such transactions had been consummated
prior to the first day of such Measurement Period (it being understood that in
calculating Adjusted Operating Cash Flow the exclusions set forth in clauses (a)
through (f) of the definition of Adjusted Net Income shall apply to an acquired
Person as if it were a Restricted Group Member).
"LIEN" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"MEXICAN NETWORK" means the approximately 4,025 kilometer combined fiber
optic and microwave long distance network connecting the United States, the Gulf
region of Mexico and certain Mexican cities to be constructed by Telereunion
S.A.
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (other than the portion of any such deferred payment constituting
interest) and proceeds from the conversion of other property received when
converted to cash or Cash Equivalents received by the Company or any of its
Restricted Group Members from such Asset Sale net of (a) reasonable
out-of-pocket expenses and fees relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees and sales
commissions), (b) taxes paid or payable as a result of such Asset Sale without
regard to the consolidated results of operations of the Company and its
Restricted Group Members, taken as a whole, after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale, (d) appropriate
amounts to be provided by the Company or any Restricted Group Member, as the
case may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any Restricted
Group Member, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale and (e) with respect to Asset Sales
by any Restricted Group Members, the portion of such cash payments attributable
to persons holding a minority interest in such Restricted Group Member.
"NON-SUBSIDIARY AFFILIATE," of any specified Person, means any other
Person in which an Investment in the Capital Stock of such Person has been made
by such specified Person other than a direct or indirect Subsidiary of such
specified Person.
"OBLIGATIONS" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
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"PERMITTED HOLDERS" means E. Scott Crist, Manuel Landa, Todd M. Binet,
Oscar Garcia, Ricardo Orea, Bryan T. Emerson and Jose Luis Apan.
"PERMITTED INDEBTEDNESS" means, without duplication, each of the
following:
(i) Indebtedness under the Notes, the Guarantees and the Indenture;
(ii) Indebtedness incurred pursuant to the Credit Facilities in an
aggregate principal amount at any time outstanding not to exceed the
greater of (A) $ 20.0 million (as permanently reduced from time to time in
accordance with the terms thereof) or (B) 80% of accounts receivable (net
of reserves for uncollectible accounts receivable) reflected on the
Company's balance sheet at such time;
(iii) other Indebtedness of the Company and its Restricted Group
Members outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid
or permanent reductions thereon;
(iv) Indebtedness (other than Acquired Indebtedness) of the Company
and its Restricted Group Members incurred to finance the cost (including
the cost of design, construction, development acquisition, installation or
integration) of equipment used in the Telecommunications Business or
ownership rights with respect to indefeasible rights of use, minimum
assignable ownership units or minimum investment units (or similar
ownership interests) in transnational fiber optic cable or other
transmission facilities, in each case purchased or leased by the Company or
any Restricted Group Member after the Issue Date, and Refinancings thereof;
(v) (x) Indebtedness of the Company in an aggregate amount
outstanding at any time not to exceed 2.00 times the net cash proceeds
received after the Issue Date by the Company from the issuance and sale of
its Qualified Capital Stock (other than to a Restricted Group Member) less
the amount of any net cash proceeds used to make Restricted Payments in
accordance with the "Limitation on Restricted Payments" covenant and (y)
Indebtedness of the Company or Acquired Indebtedness of a Restricted Group
Member in an aggregate amount outstanding at any one time not to exceed
1.50 times the fair market value of Common Stock of the Company issued as
consideration in a Telecommunications Acquisition; PROVIDED, HOWEVER, that
any Indebtedness Incurred under this clause (v) shall have a Weighted
Average Life to Maturity greater than the Weighted Average Life to Maturity
of the Notes and shall not require repayment or redemption (including
pursuant to any required offer to purchase) prior to the maturity date of
the Notes (other than a redemption upon a Change of Control of the Company
pursuant to provisions similar to those under " -- Change of Control");
(vi) Indebtedness of the Company and its Restricted Group Members
under Currency Agreements to the extent relating to (x) Indebtedness of the
Company or any Restricted Group Member and/or (y) obligations to purchase
assets, properties or services incurred in the ordinary course of business
of the Company or any Restricted Group Member and/or (z) accounts
receivable denominated in currencies other than U.S. dollars; PROVIDED,
HOWEVER, that such Currency Agreements do not increase the Indebtedness or
other obligations of the Company and the Restricted Group Members
outstanding other than as a result of fluctuations in foreign currency
exchange rates or by reason of fees, indemnities or compensation payable
thereunder;
(vii) Interest Swap Obligations of the Company covering Indebtedness
of the Company or any of its Restricted Group Members and Interest Swap
Obligations of any Restricted Group Member covering Indebtedness of such
Restricted Group Member; PROVIDED, HOWEVER, that such Interest Swap
Obligations are entered into to protect the Company and its Restricted
Group Members from fluctuations in interest rates on Indebtedness incurred
in accordance with the Indenture to the extent the notional principal
amount of such Interest Swap Obligation does not exceed the principal
amount of the Indebtedness to which such Interest Swap Obligation relates;
(viii) Indebtedness of the Company and/or any Restricted Group Member
(a) in respect of performance bonds of the Company or any Restricted Group
Member or surety or appeal bonds or letters of credit supporting trade
payables provided by the Company or any Restricted Group Member incurred in
the ordinary course of business and on ordinary business terms in
connection with the construction, ownership, maintenance or operation of a
Telecommunications Business; and (b) arising
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from agreements providing for indemnification, adjustment of purchase price
or similar obligations, or from guarantees or letters of credit, surety
bonds or performance bonds securing any of the aforementioned obligations
of the Company or any of its Restricted Group Members pursuant to such
agreements, in each case incurred in connection with the disposition of any
business, assets or Restricted Group Member (other than guarantees of
Indebtedness incurred by any Person acquiring all or any portion of such
business, assets or Restricted Group Member for the purpose of financing
such acquisition), in a principal amount not to exceed the gross proceeds
actually received by the Company or any Restricted Group Member in
connection with such disposition;
(ix) Indebtedness of a Restricted Group Member to the Company or to a
Restricted Group Member for so long as such Indebtedness is held by the
Company or a Restricted Group Member, in each case subject to no Lien held
by a Person other than the Company or a Restricted Group Member; PROVIDED
that if as of any date any Person other than the Company or a Restricted
Group Member owns or holds any such Indebtedness or holds a Lien in respect
of such Indebtedness, such date shall be deemed the incurrence of
Indebtedness not constituting Permitted Indebtedness under this clause (ix)
by the issuer of such Indebtedness;
(x) Indebtedness of the Company to a Restricted Group Member for so
long as such Indebtedness is held by a Restricted Group Member, in each
case subject to no Lien; PROVIDED that (a) any such Indebtedness of the
Company to any Restricted Group Member is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the
Indenture and the Notes and (b) if as of any date any Person other than a
Restricted Group Member owns or holds any such Indebtedness or any Person
holds a Lien in respect of such Indebtedness, such date shall be deemed the
incurrence of Indebtedness not constituting Permitted Indebtedness under
this clause (x) by the Company;
(xi) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; PROVIDED, HOWEVER, that such
Indebtedness is extinguished within two business days of incurrence;
(xii) Indebtedness of the Company or any of its Restricted Group
Members represented by letters of credit for the account of the Company or
such Restricted Group Member, as the case may be, in order to provide
security for workers' compensation claims, payment obligations in
connection with self-insurance or similar requirements in the ordinary
course of business;
(xiii) Indebtedness represented by Capitalized Lease Obligations of
the Company and its Restricted Group Members incurred in the ordinary
course of business not to exceed $ 2.5 million at any one time outstanding;
(xiv) Indebtedness of the Company, to the extent that the net
proceeds thereof are promptly used to repurchase the Notes tendered in a
Change of Control Offer;
(xv) Refinancing Indebtedness; and
(xvi) additional Indebtedness of the Company and its Restricted Group
Members in an aggregate principal amount not to exceed $10.0 million at any
one time outstanding.
For purposes of determining compliance with the "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion may, at the time of such
incurrence, (i) classify such item of Indebtedness under and comply with the
foregoing clauses of this covenant (or any of such definitions), as applicable,
(ii) classify and divide such item of Indebtedness into more than one of such
clauses (or definitions), as applicable, and (iii) elect to comply with such
clauses (or definitions), as applicable, in any order.
"PERMITTED INVESTMENTS" means (i) Investments by the Company or any
Restricted Group Member in any Person that is or will become immediately after
such Investment a Restricted Group Member or that will merge or consolidate into
the Company or a Restricted Group Member, (ii) Investments in the Company by any
Restricted Group Member; PROVIDED that any Indebtedness evidencing such
Investment is unsecured and subordinated, pursuant to a written agreement, to
the Company's obligations under the Notes
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and the Indenture; (iii) investments in cash and Cash Equivalents; (iv) loans
and advances to employees and officers of the Company and its Restricted Group
Members in the ordinary course of business for bona fide business purposes not
in excess of $1.0 million at any one time outstanding; (v) Currency Agreements
and Interest Swap Obligations entered into in the ordinary course of the
Company's or its Restricted Group Members' businesses and otherwise in
compliance with the Indenture; (vi) Investments in any Person up to $20.0
million at any one time outstanding; (vii) Investments in securities of trade
creditors or customers received pursuant to any plan of reorganization or
similar arrangement upon the bankruptcy or insolvency of such trade creditors or
customers; (viii) Investments made by the Company or its Restricted Group
Members as a result of consideration received in connection with an Asset Sale
made in compliance with the "Limitation on Asset Sales" covenant; (ix)
payroll, travel and similar advances in the ordinary course of business to cover
matters that will be at the time of such advances, ultimately treated as
expenses in accordance with GAAP; (x) Investments in evidences of Indebtedness,
securities or other property of trade creditors or customers received pursuant
to any plan of reorganization or similar arrangement upon the bankruptcy or
insolvency of such trade creditors or customers; (xi) repurchases or redemptions
by the Company of Capital Stock from officers and other employees of the Company
or any of its Restricted Group Members or their authorized representatives upon
the death, disability or termination of employment of such individuals, in an
aggregate amount not exceeding $1.0 million in any calendar year and $3.0
million from the Issue Date and (xii) Investments by the Company or any
Restricted Group Member in any Restricted Group Member in connection with the
construction, operation and maintenance of the Mexican Network up to $155.0
million.
"PERMITTED LIENS" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Group Members
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens
imposed by law incurred in the ordinary course of business for sums not yet
delinquent or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been
made in respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) judgment Liens not giving rise to an Event of Default so long as
such Lien is adequately bonded and any appropriate legal proceedings which
may have been duly initiated for the review of such judgment shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired;
(v) easements, rights-of-way, municipal and zoning restrictions and
other similar charges or encumbrances in respect of real property not
interfering in any material respect with the ordinary conduct of the
business of the Company or any of its Restricted Group Members;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; PROVIDED that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation;
(vii) purchase money Liens to finance property or assets of the
Company or any Restricted Group Member acquired in the ordinary course of
business; PROVIDED, HOWEVER, that (A) the related purchase money
indebtedness shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any Restricted
Group Member other than the property and assets so acquired and (B) the
Lien securing such Indebtedness shall (x) exist at the time of such
acquisition or (y) be created within 180 days of such acquisition;
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(viii) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(ix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(x) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements of the
Company or any of its Restricted Group Members, including rights of offset
and set-off;
(xi) Liens securing Interest Swap Obligations, which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xii) Liens securing Capitalized Lease Obligations permitted pursuant
to clause (xiii) of the definition of "Permitted Indebtedness";
(xiii) Liens securing Indebtedness under Currency Agreements;
(xiv) Liens securing Acquired Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness" covenant;
PROVIDED that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Group Member and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness by the
Company or a Restricted Group Member and (B) such Liens do not extend to or
cover any property or assets of the Company or of any of its Restricted
Group Members other than the property or assets that secured the Acquired
Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the Company or a Restricted Group Member and are no more
favorable to the lienholders than those securing the Acquired Indebtedness
prior to the incurrence of such Acquired Indebtedness by the Company or a
Restricted Group Member;
(xv) Liens in favor of the Company or any Restricted Group Member;
(xvi) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(xvii) Liens existing on the Issue Date or securing the Notes or any
Guarantee of the Notes; and
(xviii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
the Company or any of its Restricted Group Members in the ordinary course
of business in accordance with the past practices of the Company and its
Restricted Group Members prior to the Issue Date.
"PERSON" means an individual, partnership, corporation, unincorporated
organization, trust or joint venture, or a governmental agency or political
subdivision thereof.
"PREFERRED STOCK" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"QUALIFIED CAPITAL STOCK" means any Capital Stock that is not
Disqualified Capital Stock.
"REFINANCE" means, in respect of any security or Indebtedness, to
refinance, modify, extend, renew, refund, repay, prepay, redeem, defease or
retire, or to issue a security or Indebtedness in exchange or replacement for,
such security or Indebtedness in whole or in part. "Refinanced" and
"Refinancing" shall have correlative meanings.
"REFINANCING INDEBTEDNESS" means any Refinancing by the Company or any
Restricted Group Member of Indebtedness incurred in accordance with the
"Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi), (xii),
(xiii) or (xvi) of the definition of Permitted Indebtedness), in each case that
does not (1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness, accrued interest and the amount of reasonable fees
and expenses incurred by the Company in connection with such Refinancing) or (2)
create Indebtedness with (A) a Weighted Average
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Life to Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (B) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; PROVIDED that (x) if such
Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if
such Indebtedness being Refinanced is subordinate or junior to the Notes, then
such Refinancing Indebtedness shall be subordinate to the Notes at least to the
same extent and in the same manner as the Indebtedness being Refinanced.
"RESTRICTED AFFILIATE" means any direct or indirect Non-Subsidiary
Affiliate of the Company or a Restricted Subsidiary of the Company that has been
designated by the Board of Directors of the Company as a Restricted Affiliate
based on a determination by the Board of Directors that the Company has,
directly or indirectly, the requisite control over such Non-Subsidiary Affiliate
to prevent it from incurring Indebtedness, or taking any other action at any
time, in contravention of any of the provisions of the Indenture that are
applicable to Restricted Affiliates; PROVIDED, HOWEVER, that immediately after
giving effect to such designation (i) the Liens and Indebtedness of such
Non-Subsidiary Affiliate outstanding immediately after such designation would,
if incurred at such time, have been permitted to be incurred for all purposes of
the Indenture; and (ii) a Default or Event of Default shall not have occurred
and be continuing. The Company shall deliver an officers' certificate to the
Trustee upon designating any Non-Subsidiary Affiliate as a Restricted Affiliate.
As of the Issue Date, every Exisiting Joint Venture is a Restricted Affiliate.
"RESTRICTED GROUP MEMBERS" means collectively, each Restricted Subsidiary
of the Company, each Restricted Affiliate and each Restricted Subsidiary of a
Restricted Affiliate.
"RESTRICTED SUBSIDIARY" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"SALE AND LEASEBACK TRANSACTION" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Group Member any property, whether owned
by the Company or any Restricted Group Member at the Issue Date or later
acquired, which has been or is to be sold or transferred by the Company or such
Restricted Group Member to such Person or to any other Person from whom funds
have been or are to be advanced by such Person on the security of such Property.
"SIGNIFICANT RESTRICTED GROUP MEMBER", with respect to any Person, means
any Restricted Group Member of such Person that satisfies the criteria for a
"significant subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the
Securities Act.
"SUBSIDIARY", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"TELECOMMUNICATIONS ACQUISITION" means an Acquisition of properties or
assets to be used in a Telecommunications Business or of the Capital Stock of
any Person that becomes a Restricted Group Member; PROVIDED, HOWEVER, that such
Person's properties and assets shall consist principally of properties or assets
that will be used in a Telecommunications Business.
"TELECOMMUNICATIONS BUSINESS" means any business of owning, constructing,
financing or operating a voice, data or other communications services system,
including any business conducted by the Company or any Restricted Group Member
on the Issue Date.
"TELEREUNION S.A." means Telereunion S.A. de C.V., a company organized
under the laws of Mexico.
"TOTAL INDEBTEDNESS" means, as at any date of determination, an amount
equal to the aggregate amount of all Indebtedness of the Company and the
Restricted Group Members outstanding as of such date of determination, after
giving effect to any incurrence of Indebtedness and the application of the
proceeds therefrom giving rise to such determination.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company designated
as such pursuant to "Certain Covenants -- Designation of Unrestricted
Subsidiaries."
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"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means any Restricted
Group Member of such Person of which all the outstanding voting securities
(other than in the case of a foreign Restricted Group Member, directors'
qualifying shares or an immaterial amount of shares required to be owned by
other Persons pursuant to applicable law) are owned by such Person or any Wholly
Owned Restricted Subsidiary of such Person.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the principal U.S. federal income tax
consequences of the purchase, ownership and disposition of the Notes. This
summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), final, temporary, and proposed Treasury regulations promulgated
thereunder, administrative pronouncements and rulings, and judicial decisions,
changes to any of which subsequent to the date hereof may affect the tax
consequences described herein, possibly with retroactive effect.
This summary discusses only Notes held as capital assets within the meaning
of Code section 1221. It does not discuss all of the tax consequences that may
be relevant to a Holder in light of the Holder's particular circumstances or to
Holders subject to special rules, such as certain financial institutions, banks,
insurance companies, regulated investment companies, dealers in securities or
foreign currencies, persons holding Notes as part of a straddle or hedging
transaction, or U.S. Holders whose functional currency (as defined in Code
section 985) is not the U.S. dollar. Persons considering purchasing Notes should
consult their own tax advisors concerning the application of U.S. federal tax
laws to their particular situations as well as any tax consequences arising
under the laws of any state, local or foreign taxing jurisdiction.
As used in this summary, the term "U.S. Holder" means the beneficial
owner of a Note that is, for United States federal income tax purposes, (i) a
citizen or resident of the United States (including certain former citizens and
former long-term residents); (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof; or a partnership treated as a U.S. person under
applicable Treasury regulations; (iii) an estate the income of which is subject
to U.S. federal income taxation regardless of its source; or (iv) a trust with
respect to the administration of which a court within the United States is able
to exercise primary supervision and one or more U.S. fiduciaries have the
authority to control all substantial decisions of the trust. As used in this
summary, the term "Non-U.S. Holder" means a beneficial owner of a Note that is
not a U.S. Holder.
TAX CONSEQUENCES TO U.S. HOLDERS
PAYMENTS OF INTEREST. Interest paid or accrued on the Notes will be
taxable to U.S. Holders as ordinary interest income. Interest will be included
in U.S. Holders' income at the time such payments are accrued or are received in
accordance with the U.S. Holder's method of accounting for U.S. federal income
taxes.
MARKET DISCOUNT. If a Holder purchases a Note at a market discount (as
described below), the Holder will be required to treat any principal payments
on, or any gain realized on the sale, exchange, retirement or maturity of, such
Note as ordinary income to the extent of the accrued market discount (not
previously included in income) at the time of such payment or disposition. In
addition, a U.S. Holder who purchases a Note with market discount may be
required to defer the deduction of all or a portion of the interest paid or
accrued on any indebtedness incurred or continued to purchase or carry such Note
until the maturity of the Note or its earlier disposition in a taxable
transaction.
In general, market discount is the amount by which the Note's "adjusted
issue price" exceeds the U.S. Holder's tax basis in the Note immediately after
the Note is acquired, unless such difference is less than a specified de minimis
amount. The "adjusted issue price" of a Note at the beginning of any accrual
period is equal to its issue price increased by the accrued OID, if any, for
each prior accrual period (determined without regard to the amortization of any
acquisition premium) and reduced by any payments made on such Note on or before
the first day of the accrual period other than qualified stated interest (as
defined in Code section 1273). Market discount is considered to accrue ratably,
unless the U.S. Holder elects to accrue market discount under the "constant
interest method" described under the original issue discount rules contained in
the Code and Treasury Regulations. This election, once made, is irrevocable and
applies only to the Notes for which it is made. A U.S. Holder also may elect to
include market discount in income currently as it accrues, in which case the
rules described above regarding the deferral of interest deductions will not
apply. This election, once made, applies to all market discount obligations
acquired on or after the first day of the first taxable year to which the
election applies and may not be revoked without the consent
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of the IRS. Generally, if a Note with market discount is transferred in certain
non-taxable transactions, the market discount will be transferred to the
property received in exchange for the Note; however, under certain limited
circumstances, the market discount will be includible as ordinary income as if
such Note had been sold at its fair market value.
AMORTIZABLE BOND PREMIUM. In general, if a U.S. Holder of a Note purchases
the Note at a premium (I.E., an amount in excess of the amount payable upon the
maturity thereof), such excess will be treated as "amortizable bond premium."
In such case, a U.S. Holder may elect, under Code section 171, to offset
interest income with the amortizable bond premium as it is amortized under a
constant-yield method (as defined in the Code). The U.S. Holder's tax basis in
the Note then decreases by the amount of the amortizable bond premium used to
offset interest income. An election under Code section 171 is available only if
a Note is held as a capital asset. U.S. Holders should consult their own tax
advisors regarding special rules that apply for determining the amount and
method of amortizing bond premium with respect to the Notes that may be redeemed
prior to maturity.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES. Upon the sale, exchange or
retirement of a Note, a U.S. Holder generally will recognize taxable gain or
loss equal to the difference between the amount realized on the sale, exchange
or retirement and such U.S. Holder's adjusted tax basis in the Note. For these
purposes, the amount realized does not include any amount attributable to
accrued interest on the Note which has not previously been included in income.
Such amounts are treated as payments of interest. See "-- Payments of
Interest" above. A U.S. Holder's adjusted tax basis in a Note generally will
equal the U.S. Holder's cost of acquiring the Note increased by the amount of
any market discount previously included in the U.S. Holder's income with respect
to the Note, and reduced by any amortized bond premium, principal payments, and
the amount of any other payments except payments of qualified stated interest.
Gain or loss realized on the sale, retirement or other disposition
(including redemption) of a Note will be capital gain or loss if the Note is a
capital asset in the hands of the U.S. Holder (except that any portion of such
gain attributable to market discount will be ordinary income). For certain
non-corporate U.S. Holders (including individuals), the maximum rate of tax on
net capital gains is 20 percent for capital assets held for more than 12 months.
Gain on the sale of capital assets held for one year or less is subject to U.S.
federal income tax at ordinary income tax rates. Certain limitations exist on
the deductibility of capital losses by both corporations and individual
taxpayers. U.S. Holders should consult their own tax advisors with respect to
applicable rates and holding periods and netting rules for capital losses.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
INCOME AND WITHHOLDING TAX. Under present U.S. federal tax law, and
subject to the discussion below concerning backup withholding:
(a) under the so-called portfolio interest exemption, payments of
interest on the Notes by the Company or any paying agent to any Non-U.S.
Holder will not be subject to the 30 percent U.S. federal withholding tax
otherwise applicable, provided that (i) such Non-U.S. Holder does not own,
actually or constructively, 10 percent or more of the total combined voting
power of all classes of stock of the Company entitled to vote, is not a
controlled foreign corporation related, directly or indirectly, to the
Company through stock ownership, and is not a bank receiving interest
described in Code section 881(c)(3)(A); and (ii) the requirements set forth
in Code section 871(h) or Code section 881(c) have been fulfilled with
respect to the beneficial owner, as discussed below; and
(b) a Non-U.S. Holder of a Note will not be subject to U.S. federal
income tax on gain realized on the sale, exchange or other disposition of
such Note, unless (i) such Non-U.S. Holder is an individual who is present
in the U.S. for 183 days or more in the taxable year of disposition, and
either (A) such individual has a "tax home" (as defined in Code section
911(d)(3)) in the U.S. (unless such gain is attributable to a fixed place
of business in a foreign country maintained by such individual and has been
subject to foreign tax of at least 10 percent) or (B) the gain is
attributable to an office or other fixed place of business maintained by
such individual in the U.S. or (ii) such gain is effectively connected with
the conduct by such Non-U.S. Holder of a trade or business in the U.S.,
and, if a tax
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treaty applies, the gain is attributable to a U.S. permanent establishment
maintained by the Non-U.S. Holder.
Code section 871(h) and Code section 881(c) require that, in order to
obtain the portfolio interest exemption from withholding tax described in
paragraph (a) above, either (i) the beneficial owner of a Note must certify to
the Company or its agent, under penalties of perjury, that it is a Non-U.S.
Holder and provide a completed IRS Form W-8 ("Certificate of Foreign Status")
or (ii) a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
(a "Financial Institution") and that is holding the Note on behalf of such
beneficial owner certifies to the Company or its agent, under penalties of
perjury, that it has received a Certificate of Foreign Status from the
beneficial owner (or from another Financial Institution) and furnishes the
Company/agent with a copy thereof. For payments made after December 31, 1999,
the payment must be "reliably associated" (within the meaning of Treasury
regulations) with a Certificate of Foreign Status.
If a Non-U.S. Holder of a Note is engaged in a trade or business in the
U.S., and if interest on the Note or gain realized on its sale, exchange or
other disposition is effectively connected with the conduct of such trade or
business, such Non-U.S. Holder will be able to claim an exemption from U.S.
withholding taxes by providing the Company with a properly executed IRS Form
4224 (after December 31, 1999, subject to certain transition rules, IRS Form
W-8). Such Non-U.S. Holder, although exempt from the withholding tax discussed
in the preceding paragraph, will generally be subject to regular U.S. income tax
on such effectively connected income in the same manner as if it were a U.S.
Holder. See TAX CONSEQUENCES TO U.S. HOLDERS above. In addition, if such
Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits
tax equal to 30 percent (or such lower rate provided by an applicable treaty) of
its effectively connected earnings and profits for the taxable year, subject to
certain adjustments.
Even if the portfolio interest exemption described above is inapplicable to
a particular Non-U.S. Holder, such holder may be eligible for an exemption from
or reduced rate of withholding tax under an applicable income tax treaty. In
order to obtain such an exemption or rate reduction, such Non-U.S. Holder must
provide the Company or its agent with a properly completed IRS Form 1001 (after
December 31, 1999, subject to certain transition rules, IRS Form W-8) in the
year in which payment occurs or in either of the two proceeding years,
describing such exemption or reduced rate.
A Non-U.S. Holder that is required to submit a certification on Form 1001,
4224 or W-8 to avoid the imposition of U.S. withholding taxes or to obtain a
reduced rate with respect to a payment on a Note is required to submit such
certification to the Company or its agent as soon as practicable after the
Non-U.S. Holder acquires such Note (or a beneficial interest therein) and to
update such forms as required by the IRS. If the Company or its agent does not
physically receive such certification by the date that is 10 days prior to a
payment date on the Note, then the Company and/or its agent may treat such
certification as ineffective with respect to any payment to such Non-U.S. Holder
on such payment date and may withhold tax from such payment.
Under Code section 2105(b), a Note held by an individual who is not a
citizen or resident of the U.S. at the time of his death will not be subject to
U.S. federal estate tax as a result of such individual's death, provided that
the individual does not own, actually or constructively, 10 percent or more of
the total combined voting power of all classes of stock of the Company entitled
to vote and, at the time of such individual's death, payments with respect to
such Note would not have been effectively connected to the conduct by such
individual of a trade or business in the U.S.
BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. HOLDERS. In general, under current U.S. federal tax law, payments to
a U.S. Holder of (a) principal, premium (if any) and interest on a Note and (b)
the proceeds of sales or other dispositions of Notes before maturity will be
subject to U.S. information reporting requirements. Such payments to
noncorporate U.S. Holders may be subject to backup withholding at a rate of 31
percent if such U.S. Holder fails to furnish its Taxpayer Identification Number
("TIN"), which, for an individual, would be his Social Security Number, and/or
certain other information in the required manner. The amount of any backup
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withholding from a payment to a U.S. Holder will be allowed as a credit against
such U.S. Holder's U.S. federal income tax liability and may entitle such U.S.
Holder to a refund, provided that the required information is furnished to the
IRS. U.S. Holders should consult their own tax advisors regarding the
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption, if applicable.
NON-U.S. HOLDERS. In general, there is no U.S. information reporting
requirement or backup withholding tax on payments to Non-U.S. Holders who
provide the appropriate certification described above regarding qualification
for the portfolio interest exemption from U.S. federal income tax for payments
of interest on the Notes.
Payment by the Company of principal on the Notes or payment by a U.S.
office of a broker of the proceeds of a sale of Notes is subject to both backup
withholding and information reporting unless the beneficial owner provides a
completed IRS Form W-8 which certifies under penalties of perjury that such
owner is a Non-U.S. Holder who meets all the requirements for exemption from
U.S. federal income tax on any gain from the sale, exchange or retirement of the
Notes.
In general, backup withholding and information reporting will not apply to
a payment of the gross proceeds of a sale of the Notes effected at a foreign
office of a broker. If, however, such a broker is, for U.S. federal income tax
purposes, a U.S. person, a controlled foreign corporation, or a foreign person
50 percent or more of whose gross income for certain periods is derived from
activities that are effectively connected with the conduct of a trade or
business in the U.S., such payments will not be subject to backup withholding,
but will be subject to information reporting unless (i) such broker has
documentary evidence in its records that the beneficial owner is a Non-U.S.
Holder and certain other considerations are met; or (ii) the beneficial owner
otherwise establishes an exemption, provided such broker does not have actual
knowledge that the payee is a U.S. person. Non-U.S. Holders should consult their
own tax advisors regarding the application of these rules to their particular
situations, the availability of an exemption therefrom, and the procedure for
obtaining such an exemption, if applicable.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be allowed as a credit against Non-U.S. Holder's
U.S. federal income tax liability and may entitle such Holder to a refund,
provided the required information is furnished to the IRS.
On October 6, 1997, the Treasury Department issued final rules with respect
to withholding tax on income paid to Non-U.S. Holders and related matters (the
"New Withholding Regulations"). The New Withholding Regulations will generally
be effective for payments made after December 31, 1999, subject to certain
transition rules. The New Withholding Regulations modify the requirements
imposed on a Non-U.S. Holder and certain intermediaries for establishing the
recipient's status as a Non-U.S. Holder eligible for exemption from withholding
and backup withholding. In particular, the New Withholding Regulations impose
more stringent conditions on the ability of financial intermediaries acting for
a Non-U.S. Holder to provide certifications on behalf of the Non-U.S. Holder,
which may include entering into an agreement with the IRS to audit certain
documentation with respect to such certifications. Non-U.S. Holders that are
subject to withholding are urged to consult their own tax advisors with respect
to the New Withholding Regulations.
THE FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A HOLDER'S PARTICULAR
SITUATION. PROSPECTIVE PURCHASERS OF THE NOTES ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS AS TO THE PRECISE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX
CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE NOTES.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") between the Company, the Guarantors and the
Underwriters, the Company has agreed to sell to the Underwriters, and the
Underwriters have agreed, severally, to purchase from the Company, all of the
Notes.
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Notes is subject to the approval of
certain legal matters by counsel and to various other conditions, including the
conditions that no stop order suspending the effectiveness of the Registration
Statement is in effect and no proceedings for such purpose are pending before or
threatened by the Commission, that there has been no material adverse change in
the business, condition (financial or otherwise), prospects or results of
operations of the Company and its subsidiaries, taken as a whole, from that set
forth in the Registration Statement and that the Underwriters have received
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of each Underwriter's obligation is such that
each is committed to purchase the aggregate principal amount of Notes set forth
opposite its name if any are purchased.
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
- ------------------------------------- -----------------
BT Alex. Brown Incorporated.......... $
Lehman Brothers Inc..................
-----------------
Total........................... $ 125,000,000
=================
The Underwriters propose to offer the Notes directly to the public at the
public offering price set forth on the cover page hereof, and to certain dealers
at such price less a concession not in excess of % of the principal amount of
the Notes offered hereby. After the public offering of the Notes offered hereby,
the public offering price and other selling terms may be changed.
The Underwriting Agreement provides that the Company and the Guarantors
will indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act regarding any untrue statement of material
fact or omission of a material fact or omissions that render any statements
misleading, and will contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company does not intend to apply for listing of the Notes on a national
securities exchange. The Company has been advised by the Underwriters that they
presently intend to make a market in the Notes, and any such market making may
be discontinued at any time in the sole discretion of the Underwriters. After
the public offering of the Notes offered hereby, there can be no assurances that
an active public market for the Notes will develop.
Upon consummation of the Notes Offering, the Company will pay $1.0 million
and will issue 155,000 warrants to a financial advisor.
In connection with the Notes Offering, certain persons participating in the
Notes Offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the Notes. Specifically, the Underwriters may bid for and
purchase Notes in the open markets to stabilize the price of the Notes. The
Underwriters may also over-allot the Notes Offering, creating a syndicate short
position, and may bid for and purchase Notes in the open market to cover the
syndicate short position. In addition, the Underwriters may bid for and purchase
the Notes in market making transactions and impose penalty bids. These
activities may stabilize or maintain the market price of the Notes above market
levels that may otherwise prevail. The Underwriters are not required to engage
in these activities, and may end these activities at any time.
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LEGAL MATTERS
The validity of the Notes offered hereby are being passed upon for the
Company by Swidler Berlin Shereff Friedman, LLP, Washington, D.C. Certain legal
matters relating to the Notes are being passed upon for the Underwriters by
Cahill Gordon & Reindel (a partnership including a professional corporation),
New York, New York.
EXPERTS
The consolidated financial statements as of December 31, 1996 and 1997 and
for each of the two years ended December 31, 1997, included in this Prospectus
have been audited by BDO Seidman, LLP, independent certified public accountants,
to the extent and for the periods set forth in their reports appearing elsewhere
herein, and are included in reliance upon such reports given upon the authority
of said firm as experts in auditing and accounting. The consolidated financial
statements of the Company for the year ended December 31, 1995, appearing in
this Prospectus have been audited by Hoffman, McBryde & Co., P.C., independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of MSN as of and for the year ended December 31,
1997, appearing in the Prospectus have been audited by BDO Seidman, LLP,
independent certified public accountants, to the extent and for the periods set
forth in their report appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of said firm as experts in auditing
and accounting.
The financial statements of Integracion for the year ended December 31,
1996, appearing in this Prospectus have been audited by De Las Fuentes, De La
Mora Y Valdivia, S.C, independent certified public accountants in Mexico as set
forth in their report thereon appearing elswhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (the "Registration
Statement") under the Securities Act, with respect to the Notes offered hereby.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement and
to the exhibits and schedules thereto. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or document
filed as an exhibit to the Registration Statement, reference is made to such
exhibit for a more complete description of the matter involved, and each such
statement is qualified in its entirety by such reference. Reports, proxy and
information statements and other information filed by the Company with the
Commission may be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549 and at the following regional offices of
the Commission: CitiCorp Center, 500 West Madision Street, Suite 1400, Chicago,
Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New York 10048.
In addition, reports, proxy and information statements and other information
filed by the Company with the Commission may be reviewed through the
Commission's Electronic Data Gathering Analysis and Retrieval System, which is
publicly available through the Commission's web site (http://www.sec.gov).
The Company is subject to the periodic reporting and informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, the Company files reports and other
information as required thereby with the Commission. The Company intends to
furnish its stockholders with annual reports containing audited annual financial
statements and related notes thereto and with quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
statements.
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INDEX TO FINANCIAL STATEMENTS
PAGE
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CONSOLIDATED FINANCIAL STATEMENTS OF TELSCAPE INTERNATIONAL, INC.:
Reports of Independent Certified Public Accountants............. F-2
Consolidated Balance Sheets -- As of December 31, 1996 and 1997 and
June 30, 1998 (unaudited)..................................... F-4
Consolidated Statements of Operations -- For the years
ended December 31, 1995, 1996 and 1997 and the Six Months
Ended June 30, 1997 and 1998 (unaudited)....................... F-5
Consolidated Statements of Stockholders' Equity -- For the
years ended December 31, 1995, 1996 and 1997 and the Six
Months Ended June 30, 1998 (unaudited)......................... F-6
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1995, 1996 and 1997 and the Six Months Ended
June 30, 1997 and 1998 (unaudited)............................. F-7
Notes to Consolidated Financial Statements...................... F-9
FINANCIAL STATEMENTS OF INTEGRACION DE REDES, S.A. de C.V.
Report of Independent Auditors.................................. F-46
Statements of Operations -- For the year ended December 31,
1996 and Six Months Ended June 30, 1997 (unaudited)............ F-47
Statements of Changes in Financial Position -- For the
year ended December 31, 1996 and the Six Months Ended June
30, 1997 (unaudited)........................................... F-48
Notes to the Financial Statements............................... F-49
FINANCIAL STATEMENTS OF MSN COMMUNICATIONS, INC.
Report of Independent Certified Public Accountants.............. F-52
Balance Sheet -- As of December 31, 1997........................ F-53
Statement of Operations and Accumulated Deficit -- For the
year ended December 31, 1997................................... F-54
Statement of Cash Flows -- For the year ended December 31,
1997........................................................... F-55
Notes to the Financial Statements............................... F-56
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Telscape International, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Telscape
International, Inc. and subsidiaries (formerly Polish Telephones and Microwave
Corporation) as of December 31, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Telscape
International, Inc. and subsidiaries at December 31, 1996 and 1997, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Houston, Texas
March 9, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Polish Telephones and Microwave Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Polish Telephones and Microwave
Corporation and subsidiaries for the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows of Polish Telephones and Microwave Corporation and subsidiaries
for the year ended December 31, 1995, in conformity with generally accepted
accounting principles.
Hoffman, McBryde & Co., P.C.
Dallas, Texas
March 27, 1996
F-3
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ JUNE 30,
1996 1997 1998
-------------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 495,000 $ 4,734,000 $ 4,939,000
Accounts receivable, less
allowance for doubtful
accounts of $57,000, $200,000,
and $215,000 (unaudited),
respectively.................. 2,035,000 6,276,000 12,841,000
Inventories..................... 2,045,000 4,305,000 3,803,000
Prepaid expenses and other...... 90,000 2,674,000 6,458,000
Deferred income taxes........... -- 517,000 334,000
-------------- -------------- -----------
Total current assets....... 4,665,000 18,506,000 28,375,000
Property and equipment, net of
accumulated depreciation........... 983,000 2,679,000 13,084,000
Goodwill and other intangibles, net
of accumulated amortization........ 3,246,000 17,674,000 26,332,000
Deferred income taxes................ 192,000 77,000 --
Investment in affiliates............. -- 295,000 --
Other assets......................... 285,000 404,000 1,254,000
-------------- -------------- -----------
Total assets............... $ 9,371,000 $ 39,635,000 $69,045,000
============== ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 1,756,000 $ 10,756,000 $17,694,000
Accrued expenses................ 724,000 3,303,000 6,799,000
Current portion of notes payable
and capital lease
obligations................... -- 508,000 993,000
Convertible debentures.......... -- -- 5,000,000
Deferred income taxes........... 372,000 270,000 441,000
-------------- -------------- -----------
Total current
liabilities............. 2,852,000 14,837,000 30,927,000
Notes payable and capital lease
obligations........................ -- 2,676,000 4,463,000
Convertible subordinated
debentures......................... -- -- 5,000,000
Minority interests................... 754,000 34,000 63,000
Commitments and contingencies (Note
7)
Series B Non-voting preferred stock,
$.001 par value, 380,000 shares
authorized and no shares issued and
outstanding, mandatorily redeemable
upon achievement of certain
performance measures............... -- -- --
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;
3,935,969, 4,104,027 and
4,667,548, respectively issued
and outstanding,
respectively.................. 4,000 4,000 5,000
Additional paid-in capital...... 11,884,000 25,232,000 31,575,000
Capital subscriptions
receivable.................... (600,000) -- --
Accumulated deficit............. (5,523,000) (2,851,000) (2,359,000)
Treasury stock.................. -- (297,000) (629,000)
-------------- -------------- -----------
Total stockholders'
equity.................. 5,765,000 22,088,000 28,592,000
-------------- -------------- -----------
Total liabilities and
stockholders' equity.... $ 9,371,000 $ 39,635,000 $69,045,000
============== ============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ------------------------------
1995 1996 1997 1997 1998
------------ -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 1,108,000 $ 5,705,000 $ 36,154,000 $ 9,941,000 $ 65,777,000
Cost of revenues..................... 619,000 3,041,000 24,396,000 5,994,000 57,056,000
------------ -------------- -------------- -------------- --------------
Gross profit......................... 489,000 2,664,000 11,758,000 3,947,000 8,721,000
Selling, general and administrative
expenses........................... 1,349,000 4,159,000 8,154,000 3,399,000 5,705,000
Depreciation and amortization........ 48,000 264,000 622,000 239,000 1,258,000
------------ -------------- -------------- -------------- --------------
Operating income (loss).............. (908,000) (1,759,000) 2,982,000 309,000 1,758,000
Other income (expense):
Interest income................. 232,000 143,000 171,000 26,000 91,000
Interest expense................ (2,000) (128,000) (266,000) (26,000) (342,000)
Foreign exchange gain (loss).... (2,000) 161,000 (126,000) 27,000 (187,000)
Other, net...................... -- (62,000) (11,000) (293,000) 96,000
------------ -------------- -------------- -------------- --------------
Total other income
(expense), net.......... 228,000 114,000 (232,000) (266,000) (342,000)
------------ -------------- -------------- -------------- --------------
Income (loss) before income taxes and
minority interests................. (680,000) (1,645,000) 2,750,000 43,000 1,416,000
Income tax benefit (expense)......... -- 53,000 (84,000) 167,000 (895,000)
------------ -------------- -------------- -------------- --------------
Income (loss) before minority
interests.......................... (680,000) (1,592,000) 2,666,000 210,000 521,000
Minority interests in subsidiaries... 7,000 (6,000) 6,000 4,000 (29,000)
------------ -------------- -------------- -------------- --------------
Net income (loss).................... $ (673,000) $ (1,598,000) $ 2,672,000 $ 214,000 $ 492,000
============ ============== ============== ============== ==============
Earnings (loss) per share:
Basic........................... $ (0.36) $ (0.52) $ 0.68 $ 0.05 $ 0.11
Diluted(1)...................... n/a n/a $ 0.53 0.05 $ 0.06
Weighted average shares outstanding:
Basic........................... 1,890,442 3,046,594 3,903,470 3,921,878 4,534,568
Diluted(1)...................... n/a n/a 5,152,211 3,998,660 7,778,072
</TABLE>
- ------------
(1) Inclusion of additional shares under a diluted analysis is inappropriate due
to the anti-dilutive effect
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL
------------------ ADDITIONAL SUBSCRIPTIONS ACCUMULATED TREASURY
SHARES AMOUNT PAID-IN CAPITAL RECEIVABLE DEFICIT STOCK
-------- ------- ---------------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994........... 1,890,442 $2,000 $8,113,000 $ (600,000) $(3,069,000) $ --
Reclassification of accumulated
losses acquired from minority
interest in subsidiary............. -- -- -- -- (183,000) --
Net loss............................. -- -- -- -- (673,000) --
-------- ------- ---------------- -------------- ------------ ---------
Balance, December 31, 1995........... 1,890,442 2,000 8,113,000 (600,000) (3,925,000) --
Issuance of stock in acquisition of
subsidiary......................... 1,605,000 1,000 2,856,000 -- -- --
Issuance of stock in connection with
merger............................. 400,000 1,000 525,000 -- -- --
Issuance of stock in connection with
stock options exercised............ 40,527 -- 38,000 -- -- --
Compensation related to warrants
granted............................ -- -- 352,000 -- -- --
Net loss............................. -- -- -- -- (1,598,000) --
-------- ------- ---------------- -------------- ------------ ---------
Balance, December 31, 1996........... 3,935,969 4,000 11,884,000 (600,000) (5,523,000) --
Issuance of stock in connection with
warrants and options exercised..... 148,058 -- 1,004,000 -- -- --
Compensation related to common stock
and warrants granted............... 20,000 -- 188,000 -- -- --
Repurchase of treasury shares........ -- -- -- -- -- (297,000)
Release of stock in escrow........... -- -- -- 600,000 -- --
Additional consideration recognized
upon vesting of warrants........... -- -- 12,156,000 -- -- --
Net income........................... -- -- -- -- 2,672,000 --
-------- ------- ---------------- -------------- ------------ ---------
Balance, December, 1997.............. 4,104,027 4,000 25,232,000 -- (2,851,000) (297,000)
Issuance of stock in connection with
warrants and options exercised
(unaudited)........................ 1,044,609 1,000 5,463,000 -- -- --
Issuance of stock in connection with
acquisition (unaudited)............ 100,000 -- 880,000 -- -- --
Repurchase of treasury shares
(unaudited)........................ -- -- -- -- -- (332,000)
Net income (unaudited)............... -- -- -- -- 492,000 --
-------- ------- ---------------- -------------- ------------ ---------
Balance, June 30, 1998 (unaudited)... 5,248,636 $5,000 $31,575,000 $ -- $(2,359,000) $(629,000)
======== ======= ================ ============== ============ =========
</TABLE>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
Balance, December 31, 1994........... $ 4,446,000
Reclassification of accumulated
losses acquired from minority
interest in subsidiary............. (183,000)
Net loss............................. (673,000)
-------------
Balance, December 31, 1995........... 3,590,000
Issuance of stock in acquisition of
subsidiary......................... 2,857,000
Issuance of stock in connection with
merger............................. 526,000
Issuance of stock in connection with
stock options exercised............ 38,000
Compensation related to warrants
granted............................ 352,000
Net loss............................. (1,598,000)
-------------
Balance, December 31, 1996........... 5,765,000
Issuance of stock in connection with
warrants and options exercised..... 1,004,000
Compensation related to common stock
and warrants granted............... 188,000
Repurchase of treasury shares........ (297,000)
Release of stock in escrow........... 600,000
Additional consideration recognized
upon vesting of warrants........... 12,156,000
Net income........................... 2,672,000
-------------
Balance, December, 1997.............. 22,088,000
Issuance of stock in connection with
warrants and options exercised
(unaudited)........................ 5,464,000
Issuance of stock in connection with
acquisition (unaudited)............ 880,000
Repurchase of treasury shares
(unaudited)........................ (332,000)
Net income (unaudited)............... 492,000
-------------
Balance, June 30, 1998 (unaudited)... $28,592,000
=============
The accompanying notes are integral part of these financial statements.
F-6
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------- --------------------------
1995 1996 1997 1997 1998
------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................ $ (673,000) $ (1,598,000) $ 2,672,000 $ 214,000 $ 492,000
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities:
Provision for doubtful
accounts....................... 9,000 277,000 254,000 556,000
Depreciation and amortization.... 48,000 264,000 622,000 239,000 1,258,000
Provision for inventory
obsolescence................... -- 55,000 53,000 -- --
Write-off investment in operating
venture........................ -- -- 196,000 196,000 --
Deferred income tax benefit...... -- (112,000) (1,566,000) -- 422,000
Interest amortized on discounted
investments.................... (64,000) (8,000) -- -- --
Imputed interest on non-interest
bearing notes payable.......... -- -- 136,000 -- 142,000
Minority interest in
subsidiaries' income (loss).... (7,000) 6,000 (6,000) (4,000) 29,000
Equity in income from
unconsolidated subsidiary...... -- -- -- -- 49,000
Decrease in minority interests
for credits utilized........... 55,000 53,000 -- -- --
Changes in assets and
liabilities:
Accounts receivable......... 75,000 (952,000) (1,623,000) (183,000) (4,957,000)
Inventories................. 15,000 (720,000) (2,359,000) 337,000 1,292,000
Prepaid and other assets.... (117,000) 35,000 (2,634,000) (461,000) (3,210,000)
Accounts payable............ (114,000) (124,000) 6,954,000 3,145,000 4,007,000
Accrued liabilities......... (35,000) 361,000 1,866,000 (342,000) 361,000
------------- ------------ ------------ ------------ ------------
Net cash provided by (used
in) operating
activities................ (817,000) (2,731,000) 4,588,000 3,395,000 441,000
------------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term
investments.................... (10,944,000) (4,899,000) -- -- --
Redemption of short-term
investments.................... 11,500,000 8,378,000 -- -- --
Purchases of property and
equipment...................... (46,000) (441,000) (1,682,000) (667,000) (5,696,000)
Acquisition of Telereunion, net
of cash acquired............... -- (353,000) -- -- --
Acquisition of Integracion, net
of cash acquired............... -- -- 117,000 -- --
Acquisition of N.S.I., net of
cash acquired.................. -- -- (49,000) -- --
Acquisition of MSN, net of cash
acquired....................... -- -- -- -- (2,325,000)
Acquisition of INTERLINK, net of
cash acquired.................. -- -- -- -- (8,250,000)
Investment in BCH Holdings....... -- -- (185,000) -- --
Purchase of minority interest.... (63,000) -- -- -- --
Investment in joint venture...... (3,000) (196,000) -- -- --
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing
activities..................... 444,000 2,489,000 (1,799,000) (667,000) (16,271,000)
------------- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease
obligations.................... -- -- (104,000) (45,000) (46,000)
Payments on notes payable........ -- -- (50,000) -- (444,000)
Proceeds from capital
subscriptions.................. -- -- 600,000 -- --
Purchase of treasury shares...... -- -- -- -- (332,000)
Issuance of common stock......... -- 564,000 -- -- --
Borrowings on line of credit,
net............................ -- -- -- -- 1,948,000
Proceeds from warrants and
options exercised.............. -- -- 1,004,000 2,000 4,909,000
Proceeds from issuance of
convertible debts.............. -- -- -- -- 10,000,000
------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities........... -- 564,000 1,450,000 (43,000) 16,035,000
------------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents........... (373,000) 322,000 4,239,000 2,685,000 205,000
------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at
beginning of year.............. 546,000 173,000 495,000 495,000 4,734,000
------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end
of year........................ $ 173,000 $ 495,000 $ 4,734,000 $ 3,180,000 $ 4,939,000
============= ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- -------------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Interest paid................... $ 2,000 $ 176,000 $ 121,000 $ 8,000 $ 105,000
Taxes paid...................... -- 80,000 505,000 214,000 600,000
Non-cash transactions:
Property and equipment acquired by
execution of capital lease
obligation......................... 329,000 329,000
Issuance of notes and acquisition of
treasury shares in litigation
settlement:
Litigation settlement........... (3,000) (3,000)
Treasury stock.................. (297,000) (297,000)
Notes payable................... 300,000 300,000
Issuance of preferred and common
stock in exchange for shares of
common stock in connection with
reverse triangular merger:
Excess of cost over net assets
acquired...................... 2,857,000
Common stock.................... (2,000)
Preferred stock................. --
Additional paid-in capital...... (2,855,000)
Issuance of promissory notes in
connection with the acquisition of
Integracion........................ 2,555,000
Issuance of common stock and warrants
in exchange for services provided
or in connection with severance
agreement.......................... 352,000 188,000 188,000
Reduction of subsidiary stock
subscription receivable in exchange
for credits on equipment........... 55,000 53,000
Additional contingent consideration
recorded:
2,175,000 warrants issued in
connection with Telereunion and
Integracion acquisitions vesting
upon achievement of certain
operating performance measures..... 12,156,000
Accrual of redemption of 380,000
shares of Series B preferred stock
to be redeemed based upon
achievement of certain operating
performance measures............... 380,000
Issuance of common stock and
promissory notes in connection with
the acquisition of MSN
Communications
Common Stock.................... 880,000
Promissory Notes................ 672,000
Issuance of warrants in
connection with issuance of
convertible debentures........ 537,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES APPLICABLE TO UNAUDITED PERIODS)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Telscape International, Inc. (collectively with its subsidiaries, the
"Company") is an emerging, fully-integrated telecommunications company. The
Company supplies U.S.-originated international long distance services on a
wholesale and retail basis, via switched and dedicated networks, with an
emphasis on Latin America. In addition, the Company provides a full range of
systems integration and value-added telecom services in Mexico to major public
and private sector customers.
Through its Telscape USA, Inc. ("Telscape USA") subsidiary, the Company
is a facilities-based long distance telecommunications services company
providing international long distance services for calls originating in the
United States and terminating in other countries, primarily in Latin America.
Through its Mexican subsidiaries, Vextro de Mexico, S.A. de C.V.
("Vextro"), Integracion de Redes, S.A. de C.V. ("Integracion"), and N.S.I.
de S.A. de C.V. ("N.S.I."), the Company is engaged in the distribution and
sale of voice, data and networking equipment and provides value-added services
in network integration. Each of these Mexican entities is owned principally by
Telereunion, Inc. ("Telereunion"), a wholly-owned subsidiary of the Company.
Through its newly-acquired subsidiary, MSN Communications, Inc. ("MSN"),
the Company is engaged in the distribution and sale of prepaid phone cards
across the United States, targeted mainly at the Hispanic community.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly and majority owned subsidiaries. The Company records minority
interests expense, which represents the portion of majority owned subsidiaries
attributable to minority owners. Investments in affiliates in which the Company
owns a 20% to 50% ownership interest, and in which the Company exercises
significant influence over operating and financial policies, are accounted for
by the equity method. Investments of less than 20% ownership are recorded at
cost, which does not exceed the estimated net realizable value of such
investments. All significant intercompany transactions and balances have been
eliminated in consolidation.
INTERIM FINANCIAL STATEMENTS
The consolidated financial statements at June 30, 1998 and for the six
months ended June 30, 1997 and 1998 are unaudited. In the opinion of Management,
the unaudited consolidated financial statements at June 30, 1998 and for the six
months ended June 30, 1997 and 1998, include all normal recurring adjustments
necessary for a fair presentation of the financial position and results of
operations for such periods. Results of operations for the interim periods are
not necessarily indicative of results to be expected for the full year.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that effect 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 reporting 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.
REVENUE RECOGNITION
The Company recognizes revenue from long distance telecommunications
services at the time of customer usage. Revenue from sales of equipment are
recognized at time of shipment. Revenue from data
F-9
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and network integration value-added services are recognized when services are
performed. In certain cases, the Company has entered into arrangements with
third parties whereby these parties provide long distance telecommunication
services for prepaid phone cards sold at a fixed cost. The Company recognizes
revenues (and cost of revenues) from the sale of cards under these agreements at
the time of shipment of its cards. In other cases, the Company has entered into
arrangements with third parties whereby these parties provide the long distance
telecommunications services for prepaid phone cards and bills the Company for
these services as the cards are utilized. The Company recognizes revenues (and
cost of revenues) from the sale of cards under these agreements at the time the
cards are utilized.
CASH AND CASH EQUIVALENTS
The Company considers cash in banks and short-term investments with
original maturities of three months or less as cash and cash equivalents.
FINANCIAL INSTRUMENTS
The Company follows the guidance of Statement of Financial Accounting
Standards No. 107, "DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS," which
requires the disclosures of the fair value of financial instruments; however,
this information does not represent the aggregate net fair value of the Company.
Some of the information used to determine fair value is subjective and
judgmental in nature; therefore, fair value estimates, especially for less
marketable securities may vary. The amounts actually realized or paid upon
settlement or maturity could be significantly different.
Unless quoted market price indicates otherwise, the fair values of cash and
cash equivalents, short-term investments, escrowed deposits and investments
(certificates of deposit) generally approximate market value because of the
short maturity of these instruments. The Company's notes payable and capital
lease obligations also approximate market value as the underlying borrowing
rates are similar to other financial instruments with similar maturities and
terms.
INVENTORIES
Inventories consist principally of telecommunications equipment acquired
from manufacturers for distribution and are stated at the lower of cost
(first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of major renewals and
betterments is capitalized; repairs and maintenance costs are expensed when
incurred. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts, with any
resultant gain or loss being reflected in the Consolidated Statement of
Operations. Depreciation of property and equipment for financial reporting
purposes is computed using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements and capital leases are amortized
over the lesser of the life of the lease or the useful life of the asset. For
income tax purposes, accelerated methods of depreciation are used. The following
is a summary of the Company's property and equipment and their estimated useful
lives:
AS OF DECEMBER 31, ESTIMATED
-------------------------- USEFUL LIVES
1996 1997 (YEARS)
------------ ------------ ------------
Computer equipment and software...... $ 314,000 $ 569,000 3
Telecommunications equipment......... 467,000 1,184,000 5-7
Office equipment..................... 271,000 380,000 5-7
Leasehold improvements............... 196,000 230,000 7
Transportation equipment............. 157,000 295,000 5
Call center equipment................ -- 705,000 5
------------ ------------
1,405,000 3,363,000
Less, accumulated depreciation....... (422,000) (684,000)
------------ ------------
$ 983,000 $ 2,679,000
============ ============
F-10
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL AND INTANGIBLES
The major classes of intangible assets are summarized below:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF AMORTIZATION
---------------------------- JUNE 30, PERIOD
1996 1997 1998 (YEARS)
------------ -------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Goodwill............................. $ 3,312,000 $ 18,037,000 $ 27,570,000 15
Organization costs................... 73,000 73,000 73,000 5
Less, accumulated amortization....... (139,000) (436,000) (1,311,000)
------------ -------------- --------------
$ 3,246,000 $ 17,674,000 $ 26,332,000
============ ============== ==============
</TABLE>
Intangible assets are amortized using the straight-line method for periods
noted above.
Goodwill is recognized for the excess of the purchase price of the various
business combinations over the estimated fair value of the identifiable net
tangible and intangible assets acquired. In connection with certain of the
Company's acquisitions, the Company issued performance-based warrants. The
Company records such contingent consideration at the time the contingency is
resolved and the consideration becomes issuable or when the outcome of the
contingency is determinable beyond a reasonable doubt. During the year ended
December 31, 1997, 2,095,000 warrants, issued in connection with the Telereunion
acquisition, vested as a result of certain operating performance measures being
achieved. In addition, 380,000 shares of preferred stock were mandatorily
redeemable at December 31, 1997 at $1.00 per share based upon the Company
meeting certain operating performance measures. The preferred shares were
redeemed in the first quarter of 1998. As a result, the Company recorded
$12,114,000 in additional consideration in connection with the Telereunion
acquisition. During the year ended December 31, 1997, 80,000 warrants, issued in
connection with the Integracion acquisition, vested as a result of certain
operating performance measures being achieved. The Company recorded $422,000 in
additional consideration in connection with the Integracion acquisition.
Effective January 1, 1998, the Company acquired MSN resulting in $6,063,000 in
goodwill being recorded (Unaudited). See Note 2 for further discussion regarding
the Company's acquisitions. Realization of long-lived assets, including
goodwill, is periodically assessed by the management of the Company utilizing
the guidance of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of. Accordingly, in the event that
facts and circumstances indicate that property and equipment, and intangible or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if a write-down to market value is necessary. In management's opinion,
there is no impairment of such assets at December 31, 1997 or at June 30, 1998.
WARRANTY RESERVES
The Company generally provides its systems integration customers a warranty
on each sale of equipment and related products and accrues warranty expense at
the time of sale based upon actual claims history. Actual warranty costs
incurred are charged against such accrual when paid.
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets include the following:
AS OF DECEMBER 31,
-----------------------
1996 1997
--------- ------------
Value-added taxes receivable......... $ -- $ 1,749,000
Deposits............................. 14,000 448,000
Prepaid insurance and other
expenses........................... 13,000 197,000
Other................................ 63,000 280,000
--------- ------------
$ 90,000 $ 2,674,000
========= ============
F-11
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCRUED EXPENSES:
Accrued expenses include the following:
AS OF DECEMBER 31,
------------------------
1996 1997
---------- ------------
Customer prepayments................. $ 406,000 $ 799,000
Accrued carrier costs................ -- 560,000
Accrued wages........................ 15,000 579,000
Taxes payable........................ 146,000 509,000
Preferred stock redemption payable... -- 380,000
Other................................ 157,000 476,000
---------- ------------
$ 724,000 $ 3,303,000
========== ============
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company has determined that the U.S. dollar is the functional currency
for its operations outside the U.S. As such, gains and losses resulting from the
translation of financial statements of such operations are included in the
Consolidated Statements of Operations.
INCOME TAXES
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards ("SFAS") No. 109, "ACCOUNTING FOR
INCOME TAXES." Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and income tax
bases of assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when differences are expected to reverse. A
valuation allowance is used to reduce deferred tax assets to the amount that is
more likely than not to be realized.
EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, Earnings Per Share. SFAS No. 128 is effective for the year
ended December 31, 1997. SFAS No. 128 simplifies the standards required under
current accounting rules for computing earning 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 SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------ --------------------------
1995 1996 1997 1997 1998
------------ -------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BASIC
Net income (loss) as reported........ $ (673,000) $ (1,598,000) $ 2,672,000 $ 214,000 $ 492,000
Weighted average common shares
outstanding........................ 1,890,442 3,046,594 3,903,470 3,921,878 4,534,568
Basic earnings (loss) per share...... $ (0.36) $ (0.52) $ 0.68 0.05 $ 0.11
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
F-12
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------ --------------------------
1995 1996 1997 1997 1998
------------ -------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
DILUTED
Net income (loss) as reported........ $ (673,000) $ (1,598,000) $ 2,672,000 $ 214,000 $ 492,000
Interest expense on convertible
debt............................... -- -- 42,000 -- --
------------ -------------- ------------ ------------ ------------
Net income (loss) applicable to
common stockholders................ $ (673,000) $ (1,598,000) $ 2,714,000 $ 214,000 $ 492,000
Weighted average common shares
outstanding........................ 1,890,442 3,046,594 3,903,470 3,921,878 4,534,568
Weighted average dilutive potential
common shares outstanding:
Options......................... 91,773 74,775 430,969 69,471 956,241
Warrants........................ -- 39,867 651,272 7,311 2,287,263
Convertible debt................ -- -- 166,500 -- --
------------ -------------- ------------ ------------ ------------
Total weighted average dilutive
potential common shares
outstanding........................ 91,773 114,642 1,248,741 76,782 3,243,504
Weighted average common and dilutive
potential common shares
outstanding........................ 1,982,215 3,161,236 5,152,211 3,998,660 7,778,072
Diluted net income (loss) per
share.............................. $ (0.34) $ (0.51) $ 0.53 $ 0.05 $ 0.06
</TABLE>
Diluted EPS for the years ended December 31, 1995 and 1996, was not
disclosed on the Consolidated Statement of Operations as the effect is
anti-dilutive. Certain performance based warrants vested at December 31, 1997
upon the achievement of certain operating performance measures (See Note 2). In
accordance with SFAS 128, these contingently issuable shares were 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.
Accordingly, 1,000,000 warrants were included in the calculation of diluted EPS
for the year ended December 31, 1997 as if those shares were issued on July 1,
1997 and 1,175,000 warrants were included as if those shares were issued on
October 1, 1997. At December 31, 1996, December 31, 1997, June 30, 1997 and June
30, 1998, there were 2,695,000, 500,000, 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, 525,000, 525,000, 666,270, 556,164 and
17,000 options and warrants outstanding at December 31, 1995, 1996, 1997, June
30, 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.
NEW 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
F-13
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. For the six months ended June 30,
1998, comprehensive income is the same as net income.
SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF A BUSINESS ENTERPRISE,"
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of an enterprise about which separate
financial information is available that are evaluated regularly by the chief
operating decision makers in deciding how to allocate resources and in assessing
performance.
SFAS No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits" standardizes the disclosure requirements for pensions
and other post-retirement benefits and requires additional information on
changes in the benefit obligations and fair values of plan assets. The statement
is effective for financial statements for periods beginning after December 15,
1997 and requires comparative information for earlier years to be restated.
SFAS Nos. 130, 131 and 132 are effective for financial statements for the
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. Adoption of these statements is not expected
to have a material effect on the Company's financial statement disclosures.
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the Company
does not expect adoption of the new standard to have a material effect on its
financial statements.
2. MERGERS AND ACQUISITIONS
TELEREUNION ACQUISITION
On May 17, 1996, the Company acquired all of the outstanding common stock
of Telereunion, which had previously acquired a 97% ownership of Vextro in a
triangular reverse acquisition, accounted for as a purchase. Vextro is engaged
in the distribution and sale of voice, data and networking equipment and
provides value-added telecommunications services and network integration
services in Mexico. In late 1994, Vextro was issued a license to provide
value-added telecommunications services by the Mexican Secretaria de
Comunicaciones y Transportes ("SCT"). The license grants Vextro the right for
an unspecified term to provide these services throughout Mexico involving the
use of data, facsimile and voice transmissions, and the resulting embedded
international and long distance traffic generated.
Under the terms of the acquisition, the Company issued to the shareholders
of Telereunion 1,605,000 shares of common stock of the Company, 380,000 shares
of non-voting, non-participatory Series B preferred stock and warrants to
purchase up to 2,595,000 additional common shares at $2.19 per share. The
warrants vest and become exercisable upon Vextro meeting certain operating
performance measures and
F-14
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expire seven years after closing. The preferred stock was mandatorily redeemable
at $380,000 in the aggregate upon the Company meeting certain operating
performance measures. In addition, the Company converted and amended certain
non-qualified options outstanding under the Telereunion 1995 Stock Option and
Appreciation Rights Plan to provide for the right to acquire an aggregate of
216,618 shares of common stock of the Company at an exercise price of $1.35 per
share. The acquisition was accounted for under the purchase method of
accounting. The operations of Telereunion and Vextro have been included in the
Company's financial statements since the date of acquisition.
The consideration paid for Telereunion measured at the acquisition date was
$3,210,000, net of cash received of approximately $132,000, and consisted of
common stock valued at $2,722,000, 216,618 stock options valued at $135,000 and
transaction costs of $485,000. 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 $3,312,000 of goodwill, which is being
amortized over 15 years. During the year ended December 31, 1997, certain of the
operating performance measures were met resulting in 2,095,000 warrants vesting
and the 380,000 preferred shares being mandatorily redeemable at $1.00 per
share. The preferred shares were redeemed in the first quarter of 1998. As a
result, $12,114,000 in additional contingent consideration and the related
goodwill was recognized relating to the acquisition of Telereunion at December
31, 1997.
ORION MERGER
On July 26, 1996, the Company entered into an Agreement and Plan of Merger,
pursuant to which the Company acquired on September 5, 1996, all of the
outstanding common stock of Orion Communications, Inc. ("Orion"), a Texas
corporation in exchange for 400,000 shares of its common stock. Orion was a
reseller of U.S. domestic long distance services. This transaction has been
accounted for under the pooling-of-interests method and, accordingly, the
accompanying consolidated statements of operations include the results of the
operations of Orion since its inception on April 10, 1996. At the time of the
merger, the name of Orion was changed to Telscape USA, Inc. Expenses of $102,500
related to the merger with Orion were charged to expense during 1996.
INTEGRACION ACQUISITION
Effective July 1, 1997, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding shares of Integracion. Integracion is a systems
integrator engaged in the distribution and sale of data and network equipment
and also provides value-added services in network integration in Mexico.
Under the terms of the transaction, the Company paid the following to the
selling shareholders of Integracion: i) the sum of $130,000 in cash, ii) an
aggregate of $2,201,000 in non-interest bearing promissory notes maturing at
various dates through January 1, 2001, iii) an aggregate of $999,000 in non-
interest bearing convertible notes maturing on September 1, 1999, which are
convertible into 333,000 shares of common stock of the Company at a price of
$3.00 per share, representing the quoted market price of the Company's common
stock on the date of the transaction, iv) warrants for the purchase of up to
100,000 shares of common stock of the Company based on Integracion meeting
certain performance requirements and v) a covenant by the Purchasers to pay
$280,000 in the event that Integracion meets certain performance requirements
over the cumulative periods beginning January 1, 1997 and ending December 31,
2000. The acquisition was accounted for under the purchase method of accounting.
The financial position and results of operations of Integracion have been
included in the Company's consolidated financial statements since the effective
date of the acquisition.
The consideration paid for Integracion measured at the acquisition date was
$2,745,000 and consisted of cash of $130,000, promissory notes with a discounted
value of $2,555,000 and transaction costs of $60,000. 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 $1,756,000 of
goodwill, which is being
F-15
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortized over 15 years. During the year ended December 31, 1997, certain of the
operating performance measures were met resulting in 80,000 warrants vesting.
The remaining 20,000 warrants were forfeited. As a result, $422,000 in
additional contingent consideration and the related goodwill was recognized on
the acquisition of Integracion at December 31, 1997.
N.S.I. ACQUISITION
On October 1, 1997, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding shares of N.S.I. N.S.I. is a systems integrator
engaged in the distribution and sale of data and network equipment and also
provides value-added services in network integration in Mexico.
Under the terms of the acquisition, the Company paid cash of $1,000 to the
shareholders of N.S.I. and agreed to guarantee the repayment of approximately
$260,000 of N.S.I. debt to one of the sellers. 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 $430,000 of goodwill, which is
being amortized over 15 years. The acquisition was accounted for under the
purchase method of accounting. The financial position and results of operations
of N.S.I. have been included in the Company's consolidated financial statements
since the effective date of the acquisition.
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 $78,000. The purchase price was allocated to the acquired
company's assets and liabilities based upon an estimate of fair values at the
date of acquisition and resulted in $6,091,000 of goodwill, which is being
amortized over 15 years (unaudited).
The following presents the unaudited pro forma results of operations of the
Company for the year ended December 31, 1996 and 1997, as if the acquisitions of
Telereunion, Integracion, N.S.I. and MSN had occurred on January 1, 1996:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------
1996 1997
-------------- --------------
(UNAUDITED)
Pro forma revenues................... $ 15,662,000 $ 68,776,000
Pro forma operating income........... (2,158,000) 2,189,000
Pro forma net income (loss).......... (2,171,000) 2,041,000
Pro forma basic net income (loss) per
share.............................. $ (0.71) $ 0.51
Pro forma diluted net income (loss)
per share(1)....................... n/a $ 0.39
- ------------
(1) Inclusion of additional shares under a diluted analysis for 1996 is
inappropriate due to the anti-dilutive effect.
The unaudited pro forma consolidated financial statements of Telereunion,
Integracion, N.S.I. and MSN have been prepared as if the business combinations
had been consummated as of January 1, 1996. The
F-16
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
information is not necessarily indicative of the results of operations and
financial position of the Company as they may be in the future or as they might
have been had the business combinations been consummated as of January 1, 1996.
The balances included in the Consolidated Balance Sheets related to the
current year acquisitions 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. In addition, changes in the balances recorded where contingent
consideration was issued are subject to change as those contingencies are
resolved. In certain cases, the contingent consideration is payable in equity
securities where valuation of those securities is not determined until the
respective contingency is resolved. As such, it is not possible to compute the
amount that could be recorded in the future. In such cases, the amount of
contingent consideration recorded in the future may be significant. As of
December 31, 1997, there were 500,000 warrants issued in connection with the
Telereunion acquisition, which are subject to vesting upon the meeting of
certain operating performance measures. If such operating performance measures
were met and the warrants were valued as of December 31, 1997, $2,906,000 in
additional consideration and related goodwill would have been recognized.
DTS/ZWUT
Digital Communications Systems/Zaklady Wytworcze Urzadzen Telefonicznych
("DTS/ZWUT"), a Polish limited liability company, was a 90%-owned subsidiary
of the Company. DTS/ZWUT manufactures and markets telephone switching equipment
in Poland. On December 12, 1997, the Company exchanged its 90% interest in
DTS/ZWUT for a 31% interest in BCH Holding Company, Inc. ("BCH"), a Nevada
corporation with a full service telecommunications operation based in Warsaw,
Poland. As a result of this transaction, the Company's investment in BCH will be
accounted for under the equity method.
3. CONCENTRATION OF RISK
CONCENTRATION OF RISK - MEXICO
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 material devaluation in the Mexican peso could result in an adverse
effect on the Company's operations.
SIGNIFICANT CUSTOMERS
The Company's credit risks primarily consist of accounts receivable from
its customers, many of which are located in Mexico. Management performs ongoing
credit valuations of its customers and provides allowances for credit losses
when necessary.
Major customers are those that individually account for more than 10
percent of the Company's total revenues. For the year ended December 31, 1997,
one customer accounted for 28% of the Company's total revenues and 56% of the
Company's long distance services revenues. For the years ended December 31, 1996
and 1995, and for the six months ended June 30, 1998, no customer represented
greater than 10% of revenues.
F-17
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The Company's notes payable and capital lease obligations consist of the
following:
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------- ---------------
1996 1997 1998
--------- ------------ ---------------
(UNAUDITED)
Convertible Subordinated Debentures,
bearing interest at 8%, convertible
into common stock, maturing three
years from closing (see discussion
below)............................. $ -- $ -- $ 5,000,000
Convertible Debentures bearing
interest at 8%, convertible into
common stock, maturing on May 39,
2000 (see discussion below)........ -- -- 5,000,000
Non-interest bearing promissory
notes, imputed interest at 10%,
unamortized discount of $348,000
and $308,000, respectively, issued
in connection with Integracion
acquisition, maturing at various
dates through January 1, 2001 (See
Note 2)............................ -- 1,853,000 1,633,000
Non-interest bearing promissory note,
imputed interest at 10%,
unamortized discount of $141,000
and $120,000, respectively, issued
in connection with Integracion
acquisition, convertible into
333,000 shares of common stock, and
maturing on September 1, 1999 (See
Note 2)............................ -- 839,000 881,000
Promissory note issued to repurchase
common stock, payable in six
semi-annual installments through
May 20, 2000, and bearing interest
at 6% (See Note 7)................. -- 250,000 200,000
Capital lease obligation payable in
monthly installments of $11,000
including principal and interest
maturing February 28, 2000......... -- 242,000 196,000
Non-interest bearing promissory note,
imputed interest at 10%,
unamortized discount of $78,000,
issued in connection with MSN
acquisition, payable in eight equal
quarterly installments beginning
April 23, 1998..................... -- -- 598,000
Revolving credit facility maturing
July 31, 1999 bearing interest at
prime plus 1%, secured by accounts
receivable......................... -- -- 1,948,000
--------- ------------ ---------------
Total notes payable and capital
leases............................. -- 3,184,000 15,456,000
Current portion...................... -- 508,000 5,993,000
--------- ------------ ---------------
Long-term portion.................... $ -- $ 2,676,000 $ 9,463,000
========= ============ ===============
The annual maturities of the debt indicated above for the five years
following June 30, 1998, are $198,000 in 1998, $8,825,000 in 1999, $629,000 in
2000, $5,775,000 in 2001 and $29,000 in 2002.
On February 28, 1997, the Company entered into a lease obligation which
provided for monthly lease payments of $11,200 including principal and interest
through February 28, 2000.
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.
F-18
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A significant difference
relates to the treatment of inventories under the Mexican Tax Law. Under this
law, the cost of sales for financial statement purposes is not deductible for
income tax purposes. Instead, inventory purchases are deductible for income tax
purposes in the year the purchases are made.
Significant components of the Company's deferred tax liabilities and assets
at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------------------------- --------------------------
UNITED STATES FOREIGN UNITED STATES FOREIGN
------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
CURRENT:
Operating loss carryforwards and tax
credits............................ $ -- $ -- $ 189,000 $ 152,000
Accrued carrier costs................ -- -- 191,000 --
Accrued wages........................ -- -- 52,000 --
Other accrued liabilities............ -- -- 34,000 --
Allowance for doubtful accounts...... 13,000 6,000 51,000 10,000
Inventories.......................... -- (516,000) -- (704,000)
Customer prepayments................. -- 138,000 -- 272,000
Valuation allowance.................. (13,000) -- -- --
------------- --------- ------------- ---------
Net current deferred tax asset
(liability)........................ $ -- $(372,000) $ 517,000 $(270,000)
============= ========= ============= =========
LONG-TERM:
Operating loss carryforwards and tax
credits............................ $ 1,079,000 $ 172,000 $ -- $ --
Basis differences in assets.......... 18,000 13,000 6,000 58,000
Accrued employee benefits............ 120,000 7,000 -- 13,000
Valuation allowance.................. (1,217,000) -- -- --
------------- --------- ------------- ---------
Net long term deferred tax asset..... $ -- $ 192,000 $ 6,000 $ 71,000
============= ========= ============= =========
</TABLE>
The Company records valuation allowances based upon judgments as to the
future realization of deferred tax benefits supported by demonstrated trends in
the Company's operating results. At December 31, 1996, the Company had recorded
a valuation allowance equal to its deferred tax assets. At December 31, 1997, no
valuation allowance was recorded.
Significant components of the provision (benefit) for income taxes are as
follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ --------------
Current:
Federal....................... $ -- $ -- $ 1,146,000
Foreign....................... -- 58,000 504,000
------------ ------------ --------------
Total current............ -- 58,000 1,650,000
Deferred:
Federal....................... -- -- (1,545,000)
Foreign....................... -- (111,000) (21,000)
------------ ------------ --------------
Total deferred........... -- (111,000) (1,566,000)
------------ ------------ --------------
Total provision
(benefit)........ $ -- $ (53,000) $ 84,000
============ ============ ==============
F-19
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a reconciliation of income taxes calculated at the United
States federal statutory rate to the income tax provision (benefit):
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Provision for income taxes at U.S.
statutory rate..................... (34)% (34)% 34%
Non-deductible amortization of
intangible assets.................. 3 7
Non-deductible litigation loss....... 2
Other items, net..................... (3) 4
Effect of utilization of net
operating loss carryforwards, tax
credits and reversal of valuation
allowance.......................... 34 31 (44)
--------- --------- ---------
Income tax provision
(benefit)............... -- (3)% 3%
========= ========= =========
At December 31, 1997, the Company had available for US federal income tax
purposes unused net operating loss carryforwards of approximately $368,000 which
may provide future tax benefits and which will expire in years 2005 through
2011. Additionally, as of December 31, 1997, the Company had approximately
$65,000 in alternative minimum tax credits which can be utilized to offset
future tax liabilities.
In accordance with Mexican Tax Law, companies may carryforward an income
tax loss for ten years. Also, in accordance with Mexican Tax Law, a company is
subject to income taxes based upon the greater of 34% of taxable income and 1.8%
of net assets, as defined in the tax law. Any tax on assets paid is recoverable
and can be carried forward for ten years in the event a company begins paying
taxes on income. At December 31, 1996, the Company had available for Mexican
income tax purposes operating loss carryforwards of approximately $328,000 which
expire in 2007 and net asset taxes credits of approximately $40,000 which expire
in 2007.
6. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
1993 STOCK OPTION PLAN
Under the terms of its 1993 Stock Option Plan, the Company may grant
incentive and non-qualified stock options to purchase up to 218,145 shares of
its common stock to the Company's employees, directors or consultants. Options
must be granted at not less than the fair market value of the Company's common
stock at the date of grant as determined by the Company's Board of Directors
(110% of fair market value for stockholders owning 10% or more of the Company's
common stock) for incentive stock options, or not less than 85% of the fair
market value for non-qualified stock options. Options granted under this plan
may be for a term of up to 10 years (5 years for incentive stock options granted
to stockholders owning 10% or more of the Company's common stock) and are
exercisable as determined by the Board of Directors.
1994 DIRECTORS STOCK OPTION PLAN
Effective June 1, 1994, the Company adopted the 1994 Directors Stock Option
Plan, which provides that the Company may grant non-qualified options to
directors of the Company or any majority-owned subsidiary who are not salaried
employees to purchase up to 31,163 shares of its common stock. Options must be
granted by June 1, 2004, at prices not less than the fair market value of the
Company's common stock at the date of grant and must be exercised within ten
years of the date of grant. Upon a change of control of the Company, all granted
but unvested options under the plan will vest immediately.
F-20
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TELEREUNION 1995 STOCK OPTION PLAN
As stated in Note 2, the Company assumed Telereunion's Stock Option Plan in
connection with the acquisition of Telereunion. Under the terms of this Plan,
the Company may grant non-qualified or incentive stock options to employees,
directors and consultants. Options must be granted at not less than the fair
market value of the Company's common stock at the date of grant as determined by
the Company's Board of Directors (110% of fair market value for stockholders
owning 10% or more of the Company's common stock) for incentive stock options,
or not less than 85% of the fair market value for non-qualified stock options.
The terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant (5 years
for incentive stock options granted to stockholders owning 10% or more of the
Company's common stock).
1996 STOCK OPTION AND APPRECIATION RIGHTS PLAN
During 1996, the Company adopted the 1996 Stock Option and Appreciation
Rights Plan, which provides that the Company may grant non-qualified or
incentive stock options to purchase up to 1,200,000 shares of its common stock
to the Company's employees, directors or consultants. The plan also provides for
grants of stock appreciation rights in connection with the grant of options
under the plan. Options must be granted at not less than the fair market value
of the Company's common stock at the date of grant as determined by the
Company's Board of Directors (110% of fair market value for stockholders owning
10% or more of the Company's common stock) for incentive stock options, or not
less than 85% of the fair market value for non-qualified stock options. The
terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant (5 years
for incentive stock options granted to stockholders owning 10% or more of the
Company's common stock).
A summary of the Company's fixed option plans as of December 31, 1995, 1996
and 1997 is presented below:
<TABLE>
<CAPTION>
TOTAL WTD. AVG.
1993 PLAN 1994 PLAN 1995 PLAN 1996 PLAN ALL PLANS EXER. PRICE
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C>
Options outstanding at January 1,
1995............................... 64,440 -- -- -- 64,440 $0.80
Options granted...................... 58,000 30,000 -- -- 88,000 2.23
Options exercised.................... (4,000) -- -- -- (4,000) 2.25
Options cancelled.................... -- -- -- -- -- --
--------- --------- --------- --------- ---------
Options outstanding at December 31,
1995............................... 118,440 30,000 -- -- 148,440 1.61
Max. shares exercisable.............. 118,440 30,000 -- -- 148,440 1.61
Options granted...................... -- 10,000 216,618 1,190,809 1,417,427 3.62
Options exercised.................... -- -- -- -- -- --
Options cancelled.................... (32,408) (30,000) (141,618) -- (204,026) 1.39
--------- --------- --------- --------- ---------
Options outstanding at December 31,
1996............................... 86,032 10,000 75,000 1,190,809 1,361,841 3.95
Max. shares exercisable.............. 86,032 10,000 75,000 225,000 396,032 3.49
Options granted...................... -- -- -- 525,000 525,000 5.73
Options exercised.................... (15,828) -- -- (10,000) (25,828) 1.87
Options cancelled.................... -- -- -- (505,809) (505,809) 3.91
--------- --------- --------- --------- ---------
Options outstanding at December 31,
1997............................... 70,204 10,000 75,000 1,200,000 1,355,204 4.76
========= ========= ========= ========= =========
Max. shares exercisable.............. 70,204 10,000 75,000 393,333 548,537 3.89
</TABLE>
SFAS 123 requires the Company to provide pro forma information regarding
net income (loss) applicable to common stockholders and income (loss) per share
as if compensation cost for the Company's stock options granted had been
determined in accordance with the fair value based method prescribed in that
Statement. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1995, 1996 and 1997: dividend
yield of 0% for all years; expected volatility ranging from 20% to 33%, 80%
F-21
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to 85%, and 80% to 90%; risk-free interest rates ranging from 5.92% to 6.78%,
6.15% to 6.41%, and 5.65% to 5.80%; and expected lives ranging from 7.75 to 9.33
years, 1.33 to 9.87 years, and 7.25 to 9.91 years, respectively.
Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) applicable to common stockholders and income (loss) per share would have
been revised to the pro forma amounts indicated below:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ -------------- ------------
Net income (loss):
As reported.................... $ (673,000) $ (1,598,000) $ 2,672,000
Pro Forma...................... $ (738,000) $ (3,096,000) $ 1,955,000
Net income (loss) per share:
Basic
As reported.................... $ (.36) $ (.52) $ .68
Pro Forma...................... $ (.39) $ (1.02) $ .50
Diluted
As reported.................... n/a n/a $ .53
Pro Forma...................... n/a n/a $ .38
F-22
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WARRANTS
Following is a description of the Company's warrants outstanding at
December 31, 1997:
#
DESCRIPTION OF WARRANTS: OUTSTANDING
- ------------------------------------- -----------
Series A Warrants (unregistered) issued in connection with the Company's
acquisition of Telereunion on May 17, 1996, exercisable at $2.19 at
stated percentages only upon the Company achieving certain operating
performance measures or fully vesting upon the Company maintaining a
$12 share price for 90 consecutive trading days; expiration date of
May 16, 2003, 2,000,000 of which vested at December 31, 1997 (See Note
2).................................................................. 2,500,000
Series B Warrants (unregistered) issued in connection with the Company's
acquisition of Telereunion on May 17, 1996, currently exercisable at
$2.19 as certain operating performance measures were achieved during
the year ended December 31, 1997, expiration date May 16, 2003 (See
Note 2)............................................................. 95,000
Registered warrants (NASDAQ) issued in connection with the IPO
exercisable at any time at $8 per share prior to expiration on August
10, 1998............................................................ 393,770
Warrants (unregistered) issued to IPO underwriters exercisable at any
time at $8.10 prior to expiration on August 10, 1999................ 105,000
Warrants (unregistered) issued on February 29, 1996, in connection with
former officer's severance agreement exercisable at any time at $2.94
prior to expiration on February 28, 2001............................ 150,000
Warrants (unregistered) issued in connection with the Company's
acquisition of Telereunion on May 17, 1996, exercisable at any time at
$2.19 prior to expiration on May 16, 2001........................... 78,191
Warrants (unregistered) issued on April 30, 1997, in connection with
former officer's severance agreement exercisable at any time at $3.88
- $5.00 prior to expiration on April 30, 1999....................... 25,000
Warrants (unregistered) issued in connection with the Company's
acquisition of Integracion effective July 1, 1997, currently
exercisable at $3.00 as certain operating performance measures were
achieved during the year ended December 31, 1997, expiration date of
July 1, 2003 (See Note 2)........................................... 80,000
----------
Total warrants........................................................ 3,426,961
==========
The IPO warrants were redeemable at the Company's option at any time with
30 days written notice at a redemption price of $0.20 per share. During the
fourth quarter 1997, the Company exercised its redemption privileges. As a
result, 475,535 warrants were exercised, including 131,230 warrants as of
December 31, 1997, resulting in net proceeds to the Company of approximately
$3,804,000, of which $989,000 was received prior to December 31, 1997.
F-23
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company is obligated under certain long-term non-cancelable lease
agreements for office and warehouse space as follows:
AMOUNT
------------
1998................................. $ 449,000
1999................................. 564,000
2000................................. 585,000
2001................................. 626,000
2002................................. 655,000
------------
$ 2,879,000
============
Total rent expense under leases was $131,000 and $229,000, respectively,
for the years ended December 31, 1996 and 1997.
At December 31, 1997, the Company has employment agreements with six
officers, which expire in 1999. Future minimum commitments under these
agreements, excluding incentive bonuses or stock options, as of December 31,
1997, are as follows:
AMOUNT
----------
1998................................. $ 410,000
1999................................. 221,000
----------
$ 631,000
==========
Vextro is required to pay a license fee quarterly to the Mexican government
equal to five percent of its revenues from value-added telecommunications
services. Under the license, Vextro is free to set its service rates without
government approval; however, Vextro's rate schedule must be filed with the SCT.
On December 16, 1997, the Company entered into a purchase agreement with an
equipment manufacturer whereby it agreed to purchase a telecommunications switch
for a total cost of $1,060,000. No amounts had been funded pursuant to this
commitment as of December 31, 1997. On March 16, 1998, the Company entered into
a second purchase agreement with the same manufacturer to expand the capacity of
the telecommunication switch for an incremental cost of $854,000. As of March
1998, the Company had placed orders for additional telecommunications equipment
of over $1.8 million.
CONTINGENCIES
The Company has been named in two lawsuits filed by former employees and
consultants of the Company seeking damages in the aggregate in excess of
$1,000,000. The Company denies these allegations and intends to vigorously
defend against these allegations, although there can be no assurance as to the
successful defense of this matter. The Company believes that the results of this
litigation will not have a materially adverse effect on the Company's financial
condition.
The Company was a defendant in a suit filed on November 8, 1997 by the
estate of a former shareholder. Effective May 23, 1997, the Company entered into
a compromise and settlement agreement with respect to this lawsuit. Pursuant to
the agreement, the Company agreed to repurchase all of the 83,359 shares of
Company common stock owned by the plaintiffs for total consideration of
$425,000, which was comprised of $125,000 and a three year $300,000 promissory
note bearing interest at 6%. In return for this consideration, the plaintiffs
have agreed to release the Company and the other defendant from any and all
claims in connection with the lawsuit. The Company recorded a loss on the
settlement of $128,000, which represents the excess of the consideration paid
over the trading value of the stock on the date of settlement.
F-24
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, including Gary Panno, Kris Murthy, and Dal Berry, as
well as three 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 call for the Shareholders to sell a total of 101,417
Shares to the Company for $986,000 or $9.72 per share to be paid 25% upon
closing and 75% within ninety (90) days. Closing is expected to take place
during the first half of April 1998. In addition, the Shareholders agreed to
sign a ninety (90) day lock-up ("Lock-Up"), commencing on the closing date,
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.
YEAR 2000 PLANS
The year 2000 issue exists because many computer systems and applications,
including those embedded in telecommunications equipment and facilities, use two
digit rather than four digit date fields to designate the applicable year. As a
result, the systems and applications may not properly recognize the year 2000 or
process data which includes it, potentially causing data miscalculations or
inaccuracies or operations malfunctions or failures. The year 2000 is also a
leap year, which may also lead to incorrect calculations, functions or system
failure. This issue exists for many kinds of software, including software for
mainframes, PCs and embedded systems. The Company has initiated the process of
gathering, testing, and producing information about the Company's technologies
impacted by the year 2000 transition. As part of this effort, the Company is
reviewing its network and supporting infrastructure for the telecommunications
services it provides, its operational and financial information technology
systems, and the year 2000 compliance of the Company's key vendors.
Though the year 2000 could affect the Company's internal systems,
management believes the impact will be minimal because the Company has purchased
the majority of its hardware and software systems within the last year or will
be replacing existing systems as part of a Company wide information systems
upgrade. The newer hardware and software systems generally have been engineered
to be year 2000 compliant. In addition, the Company is in the process of
building and expanding its telecommunications network, and in doing so is
ensuring that these new systems are year 2000 compliant.
In accordance with Emerging Issues Task Force Consensus No. 96-14,
"Accounting for the Costs Associated with Modifying Computer Software for the
Year 2000," the Company will expense all costs as
F-25
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
incurred. The extent of the costs to ready the Company for the year 2000
transition have not been fully determined; however, the Company does not believe
that such costs will have a material adverse impact on the Company's financial
position or its results of operations. However, if the Company is unable to
ready its network and systems for the year 2000 transition, or if its key
suppliers or other companies upon which the Company depends or with whom the
Company's systems interface are not year 2000 compliant, there could be a
material adverse effect on the Company.
8. CAPITAL SUBSCRIPTIONS RECEIVABLE
On December 15, 1993, the Company executed stock purchase agreements with
two individuals and a company that entitled each holder to purchase 125,000
shares of the Company's common stock at $2 per share. In accordance with the
terms of the stock purchase agreements, each holder paid $50,000 of the purchase
price and received 25,000 shares; the remaining 100,000 shares were held in
escrow until the balance for each holder of $200,000 is paid in full by the
holder, which is due December 15, 1998. During 1997, the remaining balance of
the purchase price was paid to the Company resulting in the shares being
released from escrow.
9. SEGMENT INFORMATION
The Company operates in two business segments, international long distance
and systems integration services. Long distance services operations are
conducted in the United States of America. Systems integration services are
performed in Mexico and Poland.
F-26
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues, operating information and identifiable assets by business segment
and location are as follows:
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------- ------------------------------
1995 1996 1997 1997 1998
------------ -------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues --
Long distance services (United
States)....................... $ -- $ 1,213,000 $ 17,390,000 $ 5,669,000 $ 50,435,000
Systems Integration:
Mexico..................... -- 3,350,000 18,030,000 3,895,000 15,342,000
Poland..................... 1,108,000 1,142,000 734,000 377,000 --
------------ -------------- -------------- -------------- --------------
Total revenues........ $ 1,108,000 $ 5,705,000 $ 36,154,000 $ 9,941,000 $ 65,777,000
Operating income (loss) --
Long distance services (United
States)....................... $ -- $ (1,933,000) $ 2,428,000 $ 404,000 $ 787,000
Systems Integration:
Mexico..................... -- 129,000 768,000 (57,000) 971,000
Poland..................... (908,000) 45,000 (214,000) (38,000) --
------------ -------------- -------------- -------------- --------------
Total operating income
(loss)............. $ (908,000) $ (1,759,000) $ 2,982,000 $ 309,000 $ 1,758,000
------------ -------------- -------------- -------------- --------------
Capital Expenditures --
Long distance services (United
States)....................... $ -- $ 23,000 $ 383,000 $ 572,000 $ 2,909,000
Systems Integration:
Mexico..................... 46,000 418,000 1,260,000 87,000 2,787,000
Poland..................... -- -- 39,000 8,000 --
------------ -------------- -------------- -------------- --------------
Total capital
expenditures....... $ 46,000 $ 441,000 $ 1,682,000 $ 667,000 $ 5,696,000
Depreciation and
amortization --
Long distance services (United
States)....................... $ 1,000 $ 141,000 $ 369,000 $ 46,000 $ 479,000
Systems Integration:
Mexico..................... -- 74,000 204,000 181,000 779,000
Poland..................... 47,000 49,000 49,000 12,000 --
------------ -------------- -------------- -------------- --------------
Total depreciation
and amortization... $ 48,000 $ 264,000 $ 622,000 $ 239,000 $ 1,258,000
============ ============== ============== ============== ==============
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
-------------------------------------------- ------------------------------
1995 1996 1997 1997 1998
------------ -------------- -------------- -------------- --------------
(UNAUDITED)
Identifiable assets --
Long distance services (United
States)....................... $ -- $ 4,136,000 $ 6,612,000 $ 4,776,000 $ 34,237,000
Systems Integration:
Mexico..................... -- 4,165,000 32,013,000 7,102,000 34,808,000
Poland..................... 4,498,000 1,070,000 1,010,000 1,020,000 --
------------ -------------- -------------- -------------- --------------
Total identifiable
assets............. $ 4,498,000 $ 9,371,000 $ 39,635,000 $ 12,898,000 $ 69,045,000
============ ============== ============== ============== ==============
</TABLE>
F-27
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INVESTMENT IN OPERATING VENTURES
During 1996, the Company invested $196,000 for a 7.21% interest in a
venture with Elterix, a Polish company developing a private network for 70,000
telephone lines. During 1997, this venture lost its license to provide such
services. Accordingly, the Company realized a loss equal to its investment in
1997.
11. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
The Company's obligations under the Notes (See Note 13), are fully and
unconditionally guaranteed by all of the Company's wholly-owned United States
subsidiaries (the "Guarantors"). The following condensed consolidating
financial statements are presented for purposes of complying with the reporting
requirements of the parent company and subsidiaries which are guarantors under
the Notes. Separate financial statements of the Guarantors are not presented
because the Company believes such statements would not be material to investors.
F-28
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET -- JUNE 30, 1998
<TABLE>
<CAPTION>
TELSCAPE GUARANTOR NON-GUARANTOR
INTERNATIONAL, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........ $ (201,000) $ 4,272,000 $ 868,000 $ -- $ 4,939,000
Accounts receivable, net......... 335,000 1,898,000 10,608,000 -- 12,841,000
Inventories...................... (50,000) 43,000 3,810,000 -- 3,803,000
Prepaid expenses and other....... 166,000 1,551,000 4,741,000 -- 6,458,000
Deferred income taxes............ -- 263,000 71,000 -- 334,000
Intercompany receivables
(payables), net................ 9,546,000 (732,000) (8,814,000) -- --
-------------------- ------------ -------------- ------------ ------------
Total current assets........ 9,796,000 7,295,000 11,284,000 -- 28,375,000
Property and equipment, net...... 262,000 3,795,000 9,027,000 -- 13,084,000
Goodwill and other intangibles,
net............................ 9,348,000 16,984,000 -- -- 26,332,000
Investments in affiliates........ 19,987,000 -- -- (19,741,000) 246,000
Other assets..................... 824,000 164,000 20,000 -- 1,008,000
-------------------- ------------ -------------- ------------ ------------
Total assets................ $40,217,000 $28,238,000 $20,331,000 $(19,741,000) $69,045,000
==================== ============ ============== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable................. $ 304,000 $ 2,600,000 $14,790,000 $ -- $17,694,000
Accrued Expenses................. 327,000 4,394,000 2,078,000 -- 6,799,000
Current portion of notes payable
and capital lease
obligations.................... 515,000 478,000 -- -- 993,000
Current portion of convertible
debentures..................... 5,000,000 -- -- -- 5,000,000
Deferred income taxes............ -- -- 441,000 -- 441,000
-------------------- ------------ -------------- ------------ ------------
Total current liabilities... 6,146,000 7,472,000 17,309,000 -- 30,927,000
-------------------- ------------ -------------- ------------ ------------
Convertible Debentures........... 5,000,000 -- -- -- 5,000,000
Notes payable and capital lease
obligations.................... 479,000 3,984,000 -- -- 4,463,000
Minority interests............... -- 63,000 -- -- 63,000
Commitments and contingencies
(Note 6)....................... -- -- -- -- --
Series B Non-voting preferred
stock.......................... -- -- -- -- --
STOCKHOLDERS' EQUITY
Preferred Stock.................. -- -- -- -- --
Series A preferred stock......... -- -- -- -- --
Common stock..................... 5,000 31,000 152,000 (183,000) 5,000
Additional paid-in capital....... 31,575,000 12,712,000 3,028,000 (15,740,000) 31,575,000
Accumulated deficit.............. (2,359,000) 3,976,000 (158,000) (3,818,000) (2,359,000)
Treasury stock................... (629,000) -- -- -- (629,000)
-------------------- ------------ -------------- ------------ ------------
Total stockholders'
equity.................... 28,592,000 16,719,000 3,022,000 (19,741,000) 28,592,000
-------------------- ------------ -------------- ------------ ------------
Total liabilities and
stockholders' equity...... $40,217,000 $28,238,000 $20,331,000 $(19,741,000) $69,045,000
==================== ============ ============== ============ ============
</TABLE>
F-29
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET -- DECEMBER 31, 1997
<TABLE>
<CAPTION>
TELSCAPE GUARANTOR NON-GUARANTOR
INTERNATIONAL, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........ $ 3,000 $ 4,272,000 $ 459,000 $ -- $ 4,734,000
Accounts receivable, net......... -- 1,219,000 5,057,000 -- 6,276,000
Inventories...................... -- -- 4,305,000 -- 4,305,000
Prepaid expenses and other....... 275,000 163,000 2,236,000 -- 2,674,000
Deferred income taxes............ -- 517,000 -- -- 517,000
Intercompany receivables
(payables), net................ 2,975,000 206,000 (3,181,000) -- --
------------------- ------------- -------------- ------------- -------------
Total current assets........ 3,253,000 6,377,000 8,876,000 -- 18,506,000
Property and equipment, net...... 296,000 396,000 1,987,000 -- 2,679,000
Goodwill and other intangibles,
net............................ 63,000 17,611,000 -- -- 17,674,000
Deferred income taxes............ -- 7,000 70,000 -- 77,000
Investments in subsidiaries and
affiliates..................... 19,010,000 -- -- (18,715,000) 295,000
Other assets 169,000 115,000 120,000 -- 404,000
------------------- ------------- -------------- ------------- -------------
Total assets................ $22,791,000 $ 24,506,000 $11,053,000 $(18,715,000) $39,635,000
=================== ============= ============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................. $ 156,000 $ 343,000 $10,257,000 $ -- $10,756,000
Accrued expenses................. 54,000 1,906,000 1,343,000 -- 3,303,000
Current portion of notes payable
and capital lease
obligations.................... 208,000 300,000 -- -- 508,000
Deferred income taxes............ -- -- 270,000 -- 270,000
------------------- ------------- -------------- ------------- -------------
Total current liabilities... 418,000 2,549,000 11,870,000 -- 14,837,000
Notes payable and capital lease
obligations.................... 285,000 2,391,000 -- -- 2,676,000
Minority interests............... -- 34,000 -- -- 34,000
Commitments and contingencies
(Note 7)....................... -- -- -- -- --
Series B Non-voting preferred
stock.......................... -- -- -- -- --
STOCKHOLDERS'EQUITY
Preferred Stock.................. -- -- -- -- --
Series A preferred stock......... -- -- -- -- --
Common stock..................... 4,000 11,000 152,000 (163,000) 4,000
Additional paid-in capital....... 25,232,000 15,965,000 28,000 (15,993,000) 25,232,000
Accumulated deficit.............. (2,851,000) 3,556,000 (997,000) (2,559,000) (2,851,000)
Treasury stock................... (297,000) -- -- -- (297,000)
------------------- ------------- -------------- ------------- -------------
Total stockholders'
equity.................... 22,088,000 19,532,000 (817,000) (18,715,000) 22,088,000
------------------- ------------- -------------- ------------- -------------
Total liabilities and
stockholders' equity...... $22,791,000 $ 24,506,000 $11,053,000 $(18,715,000) $39,635,000
=================== ============= ============== ============= =============
</TABLE>
F-30
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET -- DECEMBER 31, 1996
<TABLE>
<CAPTION>
TELSCAPE GUARANTOR NON-GUARANTOR
INTERNATIONAL, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........ $ 300,000 $ 55,000 $ 140,000 $ -- $ 495,000
Accounts receivable, net......... -- 342,000 1,693,000 -- 2,035,000
Inventories...................... 4,000 -- 2,041,000 -- 2,045,000
Prepaid expenses and other....... 31,000 -- 59,000 -- 90,000
Intercompany receivables
(payables), net................ 1,413,000 (161,000) (1,252,000) -- --
------------------- ------------- -------------- ------------- -------------
Total current assets........ 1,748,000 236,000 2,681,000 -- 4,665,000
Property and equipment, net...... 1,000 22,000 960,000 -- 983,000
Goodwill and other intangibles,
net............................ 3,246,000 -- -- 3,246,000
Deferred income taxes............ -- -- 192,000 -- 192,000
Investments in subsidiaries and
affiliates..................... 4,584,000 83,000 -- (4,667,000) --
Other assets..................... 196,000 72,000 17,000 -- 285,000
------------------- ------------- -------------- ------------- -------------
Total assets................ $ 6,529,000 $3,659,000 $3,850,000 $(4,667,000) $ 9,371,000
=================== ============= ============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................. $ 14,000 $ 217,000 $1,525,000 $ -- $ 1,756,000
Accrued expenses................. 4,000 40,000 680,000 -- 724,000
Current portion of notes payable
and capital lease
obligations.................... -- -- -- --
Deferred income taxes............ -- -- 372,000 -- 372,000
------------------- ------------- -------------- ------------- -------------
Total current liabilities... 18,000 257,000 2,577,000 -- 2,852,000
Minority interests............... 746,000 8,000 -- -- 754,000
Commitments and contingencies
(Note 7)....................... -- -- -- -- --
Series B Non-voting preferred
stock.......................... -- -- -- -- --
STOCKHOLDERS' EQUITY.................
Preferred Stock.................. -- -- -- -- --
Series A preferred stock......... -- -- -- -- --
Common stock..................... 4,000 11,000 100,000 (111,000) 4,000
Additional paid-in capital....... 11,884,000 3,827,000 2,735,000 (6,562,000) 11,884,000
Capital subscriptions
receivable..................... (600,000) -- -- -- (600,000)
Accumulated deficit.............. (5,523,000) (444,000) (1,562,000) 2,006,000 (5,523,000)
Treasury stock................... --
------------------- ------------- -------------- ------------- -------------
Total stockholders'
equity.................... 5,765,000 3,394,000 1,273,000 (4,667,000) 5,765,000
------------------- ------------- -------------- ------------- -------------
Total liabilities and
stockholders' equity...... $ 6,529,000 $3,659,000 $3,850,000 $(4,667,000) $ 9,371,000
=================== ============= ============== ============= =============
</TABLE>
F-31
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- SIX MONTHS ENDED JUNE 30,
1998
<TABLE>
<CAPTION>
TELSCAPE NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ -- $49,229,000 $29,211,000 $(12,663,000) $65,777,000
Cost of Revenues..................... -- 46,133,000 23,586,000 (12,663,000) 57,056,000
-------------- ------------ ------------ ------------ ------------
Gross profit......................... -- 3,096,000 5,625,000 -- 8,721,000
Selling, general and administrative
expenses............................ 690,000 1,380,000 3,635,000 -- 5,705,000
Depreciation and amortization........ 279,000 686,000 293,000 -- 1,258,000
-------------- ------------ ------------ ------------ ------------
Operating income (loss).............. (969,000) 1,030,000 1,697,000 -- 1,758,000
Other income (expense):
Interest, net...................... (123,000) (70,000) (58,000) -- (251,000)
Foreign exchange gain (loss)....... -- -- (187,000) -- (187,000)
Other, net......................... -- 72,000 24,000 -- 96,000
Equity in income of subsidiaries... 1,259,000 -- -- (1,259,000) --
-------------- ------------ ------------ ------------ ------------
Total other income (expense),
net............................. 1,136,000 2,000 (221,000) (1,259,000) (342,000)
-------------- ------------ ------------ ------------ ------------
Income (loss) before income taxes and
minority interests.................. 167,000 1,032,000 1,476,000 (1,259,000) 1,416,000
Income tax benefit (expense)......... 325,000 (583,000) (637,000) -- (895,000)
-------------- ------------ ------------ ------------ ------------
Income (loss) before minority
interests........................... 492,000 449,000 839,000 (1,259,000) 521,000
Minority interests in subsidiaries... -- (29,000) -- -- (29,000)
-------------- ------------ ------------ ------------ ------------
Net income (loss).................... $ 492,000 $ 420,000 $ 839,000 $ (1,259,000) $ 492,000
============== ============ ============ ============ ============
</TABLE>
F-32
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- SIX MONTHS ENDED JUNE 30,
1997
<TABLE>
<CAPTION>
TELSCAPE NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ -- $5,725,000 $5,932,000 $(1,716,000) $9,941,000
Cost of Revenues..................... -- 3,767,000 3,943,000 (1,716,000) 5,994,000
-------------- ------------ ------------ ------------ ------------
Gross profit......................... -- 1,958,000 1,989,000 -- 3,947,000
Selling, general and administrative
expenses........................... 639,000 766,000 1,994,000 -- 3,399,000
Depreciation and amortization........ 29,000 112,000 98,000 -- 239,000
-------------- ------------ ------------ ------------ ------------
Operating income (loss).............. (668,000) 1,080,000 (103,000) -- 309,000
Other income (expense):
Interest, net...................... (23,000) 19,000 4,000 -- --
Foreign exchange gain (loss)....... -- -- 27,000 -- 27,000
Other, net......................... (324,000) -- 31,000 -- (293,000)
Equity in income of subsidiaries... 1,433,000 -- -- (1,433,000) --
-------------- ------------ ------------ ------------ ------------
Total other income (expense),
net............................ 1,086,000 19,000 62,000 (1,433,000) (266,000)
-------------- ------------ ------------ ------------ ------------
Income (loss) before income taxes and
Minority interests................. 418,000 1,099,000 (41,000) (1,433,000) 43,000
Income tax benefit (expense)......... (204,000) 411,000 (40,000) -- 167,000
-------------- ------------ ------------ ------------ ------------
Income (loss) before minority
interests.......................... 214,000 1,510,000 (81,000) (1,433,000) 210,000
Minority interests in subsidiaries... -- 1,000 3,000 -- 4,000
-------------- ------------ ------------ ------------ ------------
Net income (loss).................... $ 214,000 $1,511,000 $ (78,000) $(1,433,000) $ 214,000
============== ============ ============ ============ ============
</TABLE>
F-33
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- YEAR ENDED
DECEMBER 31, 1997
<TABLE>
<CAPTION>
TELSCAPE NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ -- $17,390,000 $30,033,000 $(11,269,000) $36,154,000
Cost of Revenues..................... -- 12,281,000 23,384,000 (11,269,000) 24,396,000
-------------- ------------ ------------ ------------ ------------
Gross profit......................... -- 5,109,000 6,649,000 -- 11,758,000
Selling, general and administrative
expenses............................ 1,116,000 1,620,000 5,418,000 -- 8,154,000
Depreciation and amortization........ 68,000 301,000 253,000 -- 622,000
-------------- ------------ ------------ ------------ ------------
Operating income (loss).............. (1,184,000) 3,188,000 978,000 -- 2,982,000
Other income (expense)
Interest, net...................... (52,000) (26,000) (17,000) -- (95,000)
Foreign exchange gain (loss)....... -- -- (126,000) -- (126,000)
Other, net......................... (278,000) 54,000 213,000 -- (11,000)
Equity in income of subsidiaries... 4,565,000 -- -- (4,565,000) --
-------------- ------------ ------------ ------------ ------------
Total other income (expense),
net........................... 4,235,000 28,000 70,000 (4,565,000) (232,000)
-------------- ------------ ------------ ------------ ------------
Income (loss) before income taxes and
minority interests................. 3,051,000 3,216,000 1,048,000 (4,565,000) 2,750,000
Income tax benefit (expense)......... (405,000) 804,000 (483,000) -- (84,000)
-------------- ------------ ------------ ------------ ------------
Income (loss) before minority
interests........................... 2,646,000 4,020,000 565,000 (4,565,000) 2,666,000
Minority interests in subsidiaries... 26,000 (20,000) -- -- 6,000
-------------- ------------ ------------ ------------ ------------
Net income (loss).................... $2,672,000 $ 4,000,000 $ 565,000 $ (4,565,000) $ 2,672,000
============== ============ ============ ============ ============
</TABLE>
F-34
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- YEAR ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
TELSCAPE NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ -- $1,213,000 $6,900,000 $(2,408,000) $ 5,705,000
Cost of Revenues..................... -- 817,000 4,632,000 (2,408,000) 3,041,000
-------------- ------------ ------------ ----------- ------------
Gross profit......................... -- 396,000 2,268,000 -- 2,664,000
Selling, general and administrative
expenses............................ 1,462,000 844,000 1,853,000 -- 4,159,000
Depreciation and amortization........ 1,000 140,000 123,000 -- 264,000
-------------- ------------ ------------ ----------- ------------
Operating income (loss).............. (1,463,000) (588,000) 292,000 -- (1,759,000)
Other income (expense):
Interest, net...................... 103,000 6,000 (94,000) -- 15,000
Foreign exchange gain (loss)....... -- -- 161,000 -- 161,000
Other, net......................... (63,000) 1,000 -- -- (62,000)
Equity in income of subsidiaries... (177,000) -- -- 177,000 --
-------------- ------------ ------------ ----------- ------------
Total other income (expense),
net............................. (137,000) 7,000 67,000 177,000 114,000
Income (loss) before income taxes and
minority interests................. (1,600,000) (581,000) 359,000 177,000 (1,645,000)
-------------- ------------ ------------ ----------- ------------
Income tax benefit (expense)......... -- -- 53,000 -- 53,000
-------------- ------------ ------------ ----------- ------------
Income (loss) before minority
interests........................... (1,600,000) (581,000) 412,000 177,000 (1,592,000)
Minority interests in subsidiaries... 2,000 (8,000) -- -- (6,000)
-------------- ------------ ------------ ----------- ------------
Net income (loss).................... $(1,598,000) $ (589,000) $ 412,000 $ 177,000 $(1,598,000)
============== ============ ============ =========== ============
</TABLE>
F-35
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -- YEAR ENDED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
TELSCAPE NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ -- $ -- $ 1,108,000 $ -- $ 1,108,000
Cost of Revenues..................... -- -- 619,000 -- 619,000
-------------- ------------ ------------ ----------- ------------
Gross profit......................... -- -- 489,000 -- 489,000
Selling, general and administrative
expenses............................ 712,000 -- 637,000 -- 1,349,000
Depreciation and amortization........ 1,000 -- 47,000 -- 48,000
-------------- ------------ ------------ ----------- ------------
Operating income (loss).............. (713,000) -- (195,000) -- (908,000)
Other income (expense):
Interest, net...................... 217,000 -- 13,000 -- 230,000
Foreign exchange gain (loss)....... -- -- (2,000) -- (2,000)
Other, net......................... -- -- -- -- --
Equity in income (loss) of
subsidiaries...................... (184,000) -- -- 184,000 --
-------------- ------------ ------------ ----------- ------------
Total other income (expense),
net........................... 33,000 -- 11,000 184,000 228,000
-------------- ------------ ------------ ----------- ------------
Income (loss) before income taxes and
minority interests.................. (680,000) -- (184,000) 184,000 (680,000)
Income tax benefit (expense)......... -- -- -- -- --
-------------- ------------ ------------ ----------- ------------
Income (loss) before minority
interests........................... (680,000) -- (184,000) 184,000 (680,000)
Minority interests in subsidiaries... 7,000 -- -- -- 7,000
-------------- ------------ ------------ ----------- ------------
Net income (loss).................... $ (673,000) $ -- $ (184,000) $ 184,000 $ (673,000)
============== ============ ============ =========== ============
</TABLE>
F-36
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -- SIX MONTHS ENDED JUNE 30,
1998
<TABLE>
<CAPTION>
TELSCAPE NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 492,000 $ 420,000 $ 839,000 $(1,259,000) $ 492,000
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Provision for doubtful
accounts.................... -- 548,000 8,000 -- 556,000
Depreciation and
amortization................ 279,000 686,000 293,000 -- 1,258,000
Imputed interest on
non-interest bearing notes
payable..................... 20,000 122,000 -- -- 142,000
Minority interests in
subsidiaries' income........ -- 29,000 -- -- 29,000
Equity in income from
subsidiaries................ (1,210,000) -- -- 1,259,000 49,000
Changes in current assets and
current liabilities......... (3,296,000) (760,000) 1,971,000 -- (2,085,000)
-------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities........ (3,715,000) (1,045,000) 3,111,000 -- 441,000
-------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ -- (2,909,000) (2,787,000) -- (5,696,000)
Acquisition of MSN, net of cash
acquired......................... (2,325,000) -- -- -- (2,325,000)
Acquisition of INTERLINK, net of
cash acquired.................... (8,250,000 -- -- -- (8,250,000)
-------------- ------------- ------------- ------------- -------------
Net cash used in investing
activities.................. (10,575,000) (2,909,000) (2,787,000) -- (16,271,000)
-------------- ------------- ------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease
obligations...................... (46,000) -- -- -- (46,000)
Payments on notes payable.......... (444,000) -- -- -- (444,000)
Purchase of treasury stock......... (332,000) -- -- -- (332,000)
Borrowings on line of credit,
net.............................. -- 1,948,000 -- -- 1,948,000
Proceeds from warrants and options
exercised........................ 4,909,000 -- -- -- 4,909,000
Proceeds from issuance of
convertible debt................. 10,000,000 -- -- -- 10,000,000
-------------- ------------- ------------- ------------- -------------
Net cash provided by financing
activities.................. 14,087,000 1,948,000 -- -- 16,035,000
-------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash
and cash
equivalents................. (204,000) 85,000 324,000 -- 205,000
-------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at
beginning of year........... 3,000 4,272,000 459,000 -- 4,734,000
-------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at
end of period............... $ (201,000) $ 4,357,000 $ 783,000 $ -- $ 4,939,000
============== ============= ============= ============= =============
</TABLE>
F-37
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -- SIX MONTHS ENDED JUNE 30,
1997
<TABLE>
<CAPTION>
TELSCAPE NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 214,000 $1,511,000 $(78,000) $(1,433,000) $ 214,000
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Provision for doubtful
accounts.................... -- 243,000 11,000 -- 254,000
Depreciation and
amortization................ 29,000 112,000 98,000 -- 239,000
Write-off investment in
operating venture........... 196,000 -- -- -- 196,000
Minority interests in
subsidiaries' (income)...... -- (1,000) (3,000) -- (4,000)
Equity in income from
subsidiaries................ (1,433,000) -- -- 1,433,000 --
Changes in other assets and
other liabilities........... 1,078,000 1,079,000 339,000 -- 2,496,000
-------------- ------------ ------------ ------------ ------------
Net cash provided by
operating activities...... 84,000 2,944,000 367,000 -- 3,395,000
-------------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (336,000) (236,000) (95,000) -- (667,000)
-------------- ------------ ------------ ------------ ------------
Net cash used in investing
activities..................... (336,000) (236,000) (95,000) -- (667,000)
-------------- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease
obligations...................... (45,000) -- -- -- (45,000)
Proceeds from warrants and
options exercised.............. 2,000 -- -- -- 2,000
-------------- ------------ ------------ ------------ ------------
Net cash provided by financing
activities..................... (43,000) -- -- -- (43,000)
-------------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents........... (295,000) 2,708,000 272,000 -- 2,685,000
-------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at
beginning of period............ 300,000 55,000 140,000 -- 495,000
-------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end
of period...................... $ 5,000 $2,763,000 $412,000 $ -- $3,180,000
============== ============ ============ ============ ============
</TABLE>
F-38
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -- YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
TELSCAPE NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBISIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ 2,672,000 $ 4,000,000 $ 565,000 $(4,565,000) $ 2,672,000
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Provision for doubtful
accounts.................... -- 200,000 77,000 -- 277,000
Depreciation and
amortization................ 68,000 301,000 253,000 -- 622,000
Provision for inventory
obsolescence................ -- -- 53,000 -- 53,000
Write-off investment in
operating venture........... 196,000 -- -- -- 196,000
Deferred income tax benefit.... -- (409,000) (1,157,000) -- (1,566,000)
Imputed interest on
non-interest bearing notes
payable..................... -- 136,000 -- -- 136,000
Minority interests in
subsidiaries' income
(loss)...................... (26,000) 20,000 -- -- (6,000)
Equity in income from
subsidiaries................ (4,565,000) -- -- 4,565,000 --
Changes in current assets and
current liabilities......... 101,000 276,000 1,827,000 -- 2,204,000
-------------- ------------- ------------- ------------ ------------
Net cash provided by (used
in) operating activities.. (1,554,000) 4,524,000 1,618,000 -- 4,588,000
-------------- ------------- ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and
equipment........................ (8,000) (375,000) (1,299,000) -- (1,682,000)
Acquisition of Integracion, net of
cash acquired.................... -- 117,000 -- -- 117,000
Acquisition of N.S.I., net of cash
acquired......................... -- (49,000) -- -- (49,000)
Investment in BCH Holdings......... (185,000) -- -- -- (185,000)
-------------- ------------- ------------- ------------ ------------
Net cash used in investing
activities.................. (193,000) (307,000) (1,299,000) -- (1,799,000)
-------------- ------------- ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease
obligations...................... (104,000) -- -- -- (104,000)
Payments on notes payable.......... (50,000) -- -- -- (50,000)
Proceeds from capital
subscriptions.................... 600,000 -- -- -- 600,000
Proceeds from warrants and options
exercised........................ 1,004,000 -- -- -- 1,004,000
-------------- ------------- ------------- ------------ ------------
Net cash provided by financing
activities.................. 1,450,000 -- -- -- 1,450,000
-------------- ------------- ------------- ------------ ------------
Net increase (decrease) in cash
and cash equivalents........ (297,000) 4,217,000 319,000 -- 4,239,000
-------------- ------------- ------------- ------------ ------------
Cash and cash equivalents at
beginning of year........... 300,000 55,000 140,000 -- 495,000
-------------- ------------- ------------- ------------ ------------
Cash and cash equivalents at
end of year................. $ 3,000 $ 4,272,000 $ 459,000 $ -- $ 4,734,000
============== ============= ============= ============ ============
</TABLE>
F-39
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -- YEAR ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
TELSCAPE NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $(1,598,000) $(589,000) $ 412,000 $ 177,000 $(1,598,000)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Provision for doubtful
accounts.................... -- -- 9,000 -- 9,000
Depreciation and
amortization................ 1,000 140,000 123,000 -- 264,000
Provision for inventory
obsolescence................ -- -- 55,000 -- 55,000
Deferred income tax benefit.... -- -- (112,000) -- (112,000)
Interest amortized on
discounted investments...... (8,000) -- -- -- (8,000)
Minority interests in
subsidiaries' income
(loss)...................... (2,000) 8,000 -- -- 6,000
Equity in income of
subsidiary.................. 177,000 -- -- (177,000) --
Decrease in minority interests
for credits utilized........ -- -- 53,000 -- 53,000
Changes in current assets and
current liabilities......... (1,272,000) (45,000) (83,000) -- (1,400,000)
-------------- ------------- ------------ ------------- -------------
Net cash provided by (used in)
operating activities........ (2,702,000) (486,000) 457,000 -- (2,731,000)
-------------- ------------- ------------ ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term
investments...................... (4,899,000) -- -- -- (4,899,000)
Redemption of short-term
investments...................... 8,378,000 -- -- -- 8,378,000
Purchases of property and
equipment........................ -- (23,000) (418,000) -- (441,000)
Acquisition of Telereunion, net of
cash acquired.................... (353,000) -- -- -- (353,000)
Investment in joint venture........ (196,000) -- -- -- (196,000)
-------------- ------------- ------------ ------------- -------------
Net cash provided by (used in)
investing activities............. 2,930,000 (23,000) (418,000) -- 2,489,000
-------------- ------------- ------------ ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock........... -- 564,000 -- -- 564,000
-------------- ------------- ------------ ------------- -------------
Net cash provided by financing
activities....................... -- 564,000 -- -- 564,000
-------------- ------------- ------------ ------------- -------------
Net increase in cash and cash
equivalents...................... 228,000 55,000 39,000 -- 322,000
-------------- ------------- ------------ ------------- -------------
Cash and cash equivalents at
beginning of year................ 72,000 -- 101,000 -- 173,000
-------------- ------------- ------------ ------------- -------------
Cash and cash equivalents at end of
year............................. $ 300,000 $ 55,000 $ 140,000 $ -- $ 495,000
============== ============= ============ ============= =============
</TABLE>
F-40
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -- YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
TELSCAPE NON-
INTERNATIONAL, GUARANTOR GUARANTOR
INC. SUBSIDIARIES SUBISIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................. $ (673,000) $ -- $ (184,000) $ 184,000 $ (673,000)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and
amortization................ 1,000 -- 47,000 -- 48,000
Interest amortized on
discounted investments...... (64,000) -- -- -- (64,000)
Equity in income of
subsidiaries................ 184,000 -- -- (184,000) --
Minority interests in
subsidiaries' income
(loss)...................... (7,000) -- -- -- (7,000)
Decrease in minority interests
for credits utilized........ 55,000 -- -- -- 55,000
Changes in current assets and
current liabilities......... (31,000) -- (145,000) -- (176,000)
-------------- ------------ ------------ ------------ ------------
Net cash used in operating
activities.................. (535,000) -- (282,000) -- (817,000)
-------------- ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term
investments...................... (10,944,000) -- -- -- (10,944,000)
Redemption of short-term
investments...................... 11,500,000 -- -- -- 11,500,000
Purchases of property and
equipment........................ -- -- (46,000) -- (46,000)
Purchase of minority interests..... (63,000) -- -- -- (63,000)
Investment in joint venture........ (3,000) -- -- -- (3,000)
-------------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities........ 490,000 -- (46,000) -- 444,000
-------------- ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided by financing
activities.................. -- -- -- -- --
-------------- ------------ ------------ ------------ ------------
Net decrease in cash and cash
equivalents................. (45,000) -- (328,000) -- (373,000)
-------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at
beginning of year........... 117,000 -- 429,000 -- 546,000
-------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at
end of year................. $ 72,000 $ -- $ 101,000 $ -- $ 173,000
============== ============ ============ ============ ============
</TABLE>
F-41
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
1996
Revenues............................. $ 509,000 $ 841,000 $ 1,474,000 $ 2,881,000 $ 5,705,000
Operating loss....................... (210,000) (265,000) (362,000) (921,000) (1,759,000)
Income (loss) before taxes and
minority interests................. (174,000) (186,000) (287,000) (998,000) (1,645,000)
Net loss............................. (181,000) (207,000) (299,000) (911,000) (1,598,000)
Basic EPS............................ $ (0.10) $ (.07) $ (0.08) $ (0.23) $ (0.52)
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
------------ ------------ -------------- -------------- --------------
1997
Revenues............................. $ 3,771,000 $ 6,170,000 $ 12,193,000 $ 14,020,000 $ 36,154,000
Operating income (loss).............. (386,000) 696,000 1,169,000 1,503,000 2,982,000
Income (loss) before taxes and
minority interests................. (359,000) 402,000 1,110,000 1,597,000 2,750,000
Net income (loss).................... (324,000) 538,000 1,202,000 1,256,000 2,672,000
Basic EPS............................ $ (0.08) $ 0.14 $ 0.31 $ 0.32 $ 0.68
Diluted EPS(1)....................... n/a $ 0.13 $ 0.22 $ 0.18 $ 0.53
- ------------
</TABLE>
(1) Inclusion of additional shares under a diluted analysis for loss period is
inappropriate due to the anti-dilutive effect.
13. SUBSEQUENT EVENTS (UNAUDITED)
In May 1998, pursuant to a stock purchase agreement, the Company through
its newly-formed subsidiary Interlink Communications Holding Co., Inc., a
Delaware Corporation ("Interlink"), acquired all of the outstanding shares of
California Microwave Services Division, Inc., a Delaware corporation, from
California Microwave, Inc., a Delaware corporation, which operates a teleport
and network operations facility located in Mountain View, California.
Under the terms of the agreement, Interlink paid cash of $8,154,000,
subject to post-closing adjustments to the purchase price based on changes in
the closing date balance sheet. The purchase was financed with the Convertible
Deere Park Debentures and Gordon Brothers Convertible Debentures.
In May 1998 the Company issued $3,000,000 in 8% Convertible Subordinated
Debentures (the "Deere Park Convertible Debentures") maturing three years from
closing (the "First Draw") to Deere Park Capital Management, LLC, an Illinois
limited liability company ("Deere Park"). On May 28, 1998, the Company issued
an additional $1,000,000 of the Deere Park Convertible Debentures (the "Second
Draw"). On June 30, 1998, the Company issued an additional $1,000,000 of the
Deere Park Convertible Debentures (the "Third Draw"). The Deere Park
Convertible Debentures are convertible by the holder into shares of Common Stock
at a price equal to $26 per share for the First Draw, $29 per share for the
Second Draw and $26 per share for the Third Draw, until November 1, 1998, and
thereafter, at the lesser of (i) $26 per share for the First Draw, $29 per share
for the Second Draw and $26 per share for the Third Draw or (ii) a price equal
to the average of the three highest of the five lowest closing prices of the
Common Stock for the 20 trading days preceding the conversion date. If the
Common Stock trades below $15 per share for the First Draw, $16.66 per share for
the Second Draw and $15 for the Third Draw for three consecutive trading days,
the Company may redeem all or part of such Deere Park Convertible Debentures at
107% of face value plus any accrued interest. The Company's obligation to make
interest payments on the Deere Park Convertible Debentures terminates if the
price of Common Stock closes for twenty consecutive trading days at or above $30
per share for the First Draw, at or above $33.50 per share for the Second Draw
and at or above $30 per
F-42
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
share for the Third Draw, adjusted, without limitation, for any stock splits or
combinations. In connection with the Deere Park Convertible Debentures, Deere
Park also received warrants to purchase an aggregate of 8,952 shares of Common
Stock at an exercise price of $16.76 per share (subject to adjustment for stock
splits and other share adjustments) for the First Draw, warrants to purchase an
aggregate of 2,427 shares of Common Stock at $20.60 per share (subject to
adjustment for stock splits and other share adjustments) for the Second Draw and
warrants to purchase an aggregate of 6,382 shares of Common Stock at $15.67 per
share (subject to adjustment for stock splits and other share adjustments) for
the Third Draw. The warrants have a term of three years from the effectiveness
of a registration statement covering such warrants. The Deere Park Convertible
Debentures are PARI PASSU in right of payment to the Notes.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Deere Park Convertible Debentures
(the "Deere Park Exit Fee"). The Deere Park Exit Fee varies depending upon the
date of payment, and is equal to (i) 6.6% if the payment is made within 90 days
after the closing of each respective draw, (ii) 7.2% if payment is made after 90
days and up to 180 days after the closing of each respective draw, (iii) 8.8% if
payment is made after 180 days and up to 270 days after the closing of each
respective draw and (iv) 10.0% if payment is made after 270 days after the
closing of each respective draw. The Deere Park Exit Fee is adjusted on a pro
rata basis to the extent that the prepayment is made between periods except that
a minimum Deere Park Exit Fee of 6.6% is required if the prepayment is made
prior to 90 days after closing.
In May 1998, the Company issued $5,000,000 in 8% Convertible Debentures
(the "Gordon Brothers Convertible Debentures") maturing one year from closing
to Gordon Brothers Capital, LLC, a Delaware limited liability company ("Gordon
Brothers"). The Gordon Brothers Convertible Debentures are convertible by
Gordon Brothers into shares of Common Stock at a price equal to $29.00 per share
until November 1, 1998, and thereafter, at the lesser of (i) $29.00 per share or
(ii) a price equal to the average of the three highest of the five lowest
closing prices of the Common Stock for the 20 trading days preceding the
conversion date. If the Common Stock trades below $16.66 for three consecutive
trading days, the Company may redeem all or part of such Gordon Brothers
Convertible Debentures at 107% of face value plus any accrued interest. The
Company's obligation to make interest payments on the Gordon Brothers
Convertible Debentures terminates (i) in the event the Common Stock closes, for
twenty consecutive trading days, at or above $33.50 per share, adjusted, without
limitation, for any stock splits or combinations, (ii) when a registration
statement covering the Gordon Brothers Convertible Debentures is effective and
(iii) if there exists no event of default under the Gordon Brothers Convertible
Debentures. The Gordon Brothers Convertible Debentures are secured by a pledge
of the Company's stock in Telereunion and the Company's preferred stock in
INTERLINK. In addition, the Gordon Brothers Convertible Debentures are
guaranteed by INTERLINK and such guaranty is collateralized by a security
agreement covering all of INTERLINK's assets. In connection with the Gordon
Brothers Convertible Debentures, Gordon Brothers also received warrants to
purchase an aggregate of 12,136 shares of Common Stock at an exercise price of
$20.60 per share. The warrants have a term of three years from the effectiveness
of the registration statement covering such warrants. The Gordon Brothers
Convertible Debentures are senior secured indebtedness of the Company to the
extent of the assets securing such indebtedness.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Gordon Brothers Convertible
Debentures (the "Gordon Brothers Exit Fee"). The Gordon Brothers Exit Fee
varies depending upon the date of payment, and is equal to (i) 6.5% if the
payment is made within 90 days after May 29, 1998, (ii) 13.0% if payment is made
after 90 days and up to 180 days after May 29, 1998, (iii) 19.0% if payment is
made after 180 days and up to 270 days after May 29, 1998 and (iv) 25.0% if
payment is made after 270 days and up to 365 days after May 29, 1998. The Gordon
Brothers Exit Fee with respect to any payment made after May 28, 1999 shall be
equal to (a) 25.0% plus (b) 25.0% multiplied by the number of days elapsed from
May 28, 1999 divided by 365. The Gordon Brothers Exit Fee is adjusted on a pro
rata basis to the extent that a prepayment is made between periods during the
F-43
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
first twelve months except that a minimum Gordon Brothers Exit Fee of 6.5% is
required if the prepayment is made prior to 90 days after closing.
A portion of the proceeds from the Deere Park Convertible Debentures and
the Gordon Brothers Convertible Debentures were allocated to the warrants issued
to the holders of such debentures. The amount allocated to the warrants was
determined utilizing the Black-Scholes Model. The resulting discount of the
Deere Park Convertible Debentures and the Gordon Brothers Convertible Debentures
will be amortized as interest expense over the life of the debentures.
In connection with the issuance of the Deere Park Convertible Debentures
and the Gordon Brothers Convertible Debentures, the Company issued to the
placement agent warrants to purchase 59,340 shares of Common Stock with exercise
prices ranging from $16.76 to $20.60 per share, respectively. The warrants have
a term of two years.
The warrants issued to the placement agent were valued utilizing the
Black-Scholes Model and are accounted for as deferred offering costs and
amortized over the life of the Notes.
Approximately $8.2 million of the proceeds from the Deere Park Convertible
Debentures and the Gordon Brothers Convertible Debentures were used to finance
the INTERLINK Acquisition and the remainder was utilized for capital investments
and general working capital purposes.
The Company renegotiated the terms of the revolving credit facility to
provide for borrowings of up to $2.5 million and extended the term of the
facility to July 31, 1999. As of June 30, 1998, the Company had drawn $1.9
million on this facility. The Company has also negotiated terms with certain of
its equipment vendors which call for extended payment terms and increased credit
lines, including two lines of credit each of up to $2.0 million, with sixty day
and ninety day payment terms, respectively.
Telscape USA and MSN have obtained a waiver under the Revolving Credit
Facility to (i) permit the Guarantee of the Notes by Telscape USA and MSN and
(ii) waive the defaults under the minimum current ratio, minimize tangible net
worth and prohibition on quarterly loss covenants.
In June 1998, members of the management team of the Company exercised
certain options and warrants resulting in approximately $1.2 million in proceeds
to the Company.
In June 1998, the Company financed the purchase of $1.4 million of
equipment by entering into an equipment lease arrangement with a financing
company which provides for monthly lease payments of $27,500, including
principal and interest, through May 31, 2003. The lease obligation is secured by
the financed equipment.
In July 1998, the Company financed the purchase of $972,000 of equipment by
entering into two equipment lease arrangements with a financing company which
provide for monthly lease payments of $22,100, including principal and interest
through July 6, 2003. The lease obligation are secured by the financed
equipment.
In July 1998, the Company financed the purchase of $243,000 of equipment by
entering into an equipment lease arrangement with a financing company which
provides for monthly lease payments of $6,600 including principal and interest
through July 14, 2002. The lease obligation is secured by the financed
equipment.
In July 1998, the Company received a commitment from a financing company to
fund equipment purchases of up to $6.0 million dollars through May 1999. The
financing is structured as loans maturing three years from funding at interest
rates 550 basis points above the Federal Reserve Treasury Constant Maturity Rate
(as defined). The Company expects to close this transaction in September 1998.
In May 1998, one of the Company's wholesale long distance customers filed
for petition for relief under Chapter 11 of the Bankruptcy Code. For the five
months ended May 31, 1998, this customer accounted for approximately 26% of the
Company's wholesale long distance revenues and 7% of the Company's overall
revenues. Additionally an affiliate of this customer provided switching services
and the Prepaid Card platform and arranged for other carriers to provide
telecommunications services for the
F-44
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prepaid Cards. The Company had paid the affiliate of this customer for these
services at the time the Prepaid Cards were activated. Because the Company
continued to provide service to its Prepaid Card customers by working directly
with the underlying carriers, this resulted in the Company's paying for certain
of the telecommunication services on the Prepaid Cards a second time. The
overall impact of the bankruptcy filing to the Company's earnings, including
additional Prepaid Card services costs, the write-off of uncollectible
receivables and the lost margin contributions from the loss of a wholesale
customer, is expected to result in a reduction of operating income of
approximately $2.5 million to $3.0 million in the second quarter of 1998. This
bankruptcy is not expected to have a material impact to the operating results
for the third quarter of 1998.
During June 1998, the Company adopted the "1998 Stock Option and
Appreciation Rights Plan." Pursuant to the Company's 1998 Stock Option and
Appreciation Rights Plan, the Company may grant the Company's employees,
directors and consultants non-qualified options to purchase up to 800,000 shares
of Common Stock. The maximum number of shares of Common Stock that may be
granted to any individual under this plan may not exceed 250,000 shares. The
Plan also provides for grants of SARs in connection with the grant of options
under the plan. Incentive stock options must be granted at not less than the
fair market value of the Company's Common Stock at the date of grant as
determined by the Company's Board of Directors (110% of fair market value for
stockholders owning 10% or more of the Company's Common Stock). The terms of the
options are determined by the Company's Board of Directors. Any options granted
must be exercised within ten years of the date of grant or within five years
from the date of grant for options granted to stockholders owning 10% or more of
the Company's Common Stock. Unexercised vested and unvested options terminate
immediately if the employment or service of an option holder is terminated for
cause. Unvested options terminate if the employment or service of an option
holder is terminated without cause or for disability. The Company may also grant
SARs in connection with any option, which permits cashless exercises of the
options. SARs allow an option holder to surrender an option and to receive the
difference between the exercise price of the option and the then fair market
value of the Common Stock. The Company may also make loans to any option holder
in order in order to permit the option holder to pay the purchase price upon
exercise of the option.
On May 1, 1998, the Company agreed to reduce the number of Escrow Shares
required to be sold to the Company, resulting in a reduction in the total number
of Escrow Shares being repurchased to 86,417 Escrow Shares for total
consideration of $873,000, or $10.10 per share. In July 1998, the Company
assigned the rights to purchase 80,257 of the Escrow Shares to Preferred Capital
Markets, Inc. ("Preferred"). In return for the assignment, Preferred paid the
Company $449,000. The Company has no further obligations in connection with the
Escrow Shares.
On July 23, 1998, holders of the non-interest bearing convertible notes
issued in connection with the Integracion acquisition converted these notes into
333,000 shares of Common Stock
In May 1998, Telereunion, S.A. de C.V., a Mexican corporation and an
affiliate of the Company ("Telereunion S.A."), received a 30-year,
facilities-based license from the Mexican government allowing it to construct
and operate a network and operate a network on which the Company can carry long
distance traffic in Mexico (the "Mexican Concession"). The Company intends to
(i) construct a 4,025 kilometer combined fiber optic and microwave long distance
network connecting the United States, the Gulf region of Mexico and targeted
Mexican cities (the "Mexican Network") and (ii) acquire transmission and
switching facilities for expansion of the Company's international network.
In July 1998, the Company filed two Registration Statements with the
Securities and Exchange Commission for the offering and sale of (i) $125.0
million in % Senior Unsecured Notes due 2008 and (ii) 3,400,000 shares of the
Company's Common Stock. The consummation of each respective offering is not a
condition precedent to the consummation of the other offering.
F-45
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Integracion de Redes, S.A. de C.V.:
We have audited the accompanying statements of operations and changes in
financial position for the year ended December 31, 1996 of Integracion de Redes,
S.A. de C.V., all expressed in Mexican pesos. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We have conducted our audit in accordance with auditing standards generally
accepted in Mexico, which are substantially the same as those followed in the
United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audit provides a reasonable basis
for our opinion.
As disclosed in Note 1, the financial statements referred to above have
been restated from amounts previously presented to reflect the constant
purchasing power of the Mexican peso at June 30, 1997.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and changes in financial
position for the year ended December 31, 1996 of Integracion de Redes, S.A. de
C.V., in conformity with generally accepted accounting principles in Mexico.
Accounting principles generally accepted in Mexico vary in certain
important respects from accounting principles generally accepted in the United
States. The application of the latter would have affected the determination of
net income expressed in Mexican pesos for the year ended December 31, 1996 to
the extent summarized in Note 5 to the financial statements.
De Las Fuentes, De La Mora y Valdivia, S.C.
Mexico City
September 6, 1997
F-46
<PAGE>
INTEGRACION DE REDES, S.A. DE C.V.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
MEXICAN PESOS (PS) WITH PURCHASING POWER AS OF JUNE 30, 1997 AND U.S. DOLLARS
($)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997
-------------------------- -------------------------- --------------------------
(NOTE 5) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net sales............................... Ps30,476,000 $ 3,830,000 Ps10,759,000 $ 1,352,000 Ps37,236,000 $ 4,679,000
Cost of sales........................... 20,516,000 2,578,000 6,799,000 854,000 27,552,000 3,462,000
------------- ----------- ------------- ----------- ------------- -----------
Gross profit............................ 9,960,000 1,252,000 3,960,000 498,000 9,684,000 1,217,000
Selling, general and administrative
expenses................................ 6,384,000 802,000 2,332,000 293,000 3,939,000 495,000
------------- ----------- ------------- ----------- ------------- -----------
Operating income........................ 3,576,000 450,000 1,628,000 205,000 5,745,000 722,000
Comprehensive financing expense
(income):
Interest income..................... (505,000) (63,000) -- -- (263,000) (33,000)
(Gain) loss on net monetary
position.......................... (29,000) (4,000) (17,000) (2,000) 223,000 28,000
Loss (gain) on foreign currency
exchange, net..................... 705,000 89,000 (50,000) (6,000) (64,000) (8,000)
------------- ----------- ------------- ----------- ------------- -----------
171,000 22,000 (67,000) (8,000) (104,000) (13,000)
------------- ----------- ------------- ----------- ------------- -----------
Other (income) expense, net............. 26,000 3,000 -- -- (9,000) (1,000)
------------- ----------- ------------- ----------- ------------- -----------
Income before provision for income
taxes................................... 3,379,000 425,000 1,695,000 213,000 5,858,000 736,000
Provision for income taxes.............. 329,000 41,000 163,000 20,000 2,548,000 320,000
------------- ----------- ------------- ----------- ------------- -----------
Net income.............................. Ps 3,050,000 $ 384,000 Ps1,532,000 $ 193,000 Ps 3,310,000 $ 416,000
============= =========== ============= =========== ============= ===========
Net income per share.................... Ps 6,100 $ 768 Ps3,064 $ 386 Ps 6,620 $ 832
============= =========== ============= =========== ============= ===========
Average common shares outstanding....... 500 500 500 500 500 500
============= =========== ============= =========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
INTEGRACION DE REDES, S.A. DE C.V.
STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
MEXICAN PESOS (PS) WITH PURCHASING POWER AS OF JUNE 30, 1997 AND U.S DOLLARS ($)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997
------------------------ ------------------------- ---------------------------
(NOTE 5) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
--------- ------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net income....................... Ps3,050,000 $ 384,000 Ps1,532,000 $ 193,000 Ps3,310,000 $ 416,000
Depreciation and amortization.... 238,000 29,000 73,000 9,000 160,000 20,000
Net change in accounts
receivable,
inventories, accounts payable
and other...................... (186,000) (23,000) (1,670,000) (210,000) (3,592,000) (451,000)
------------ --------- ------------- --------- ------------ -----------
Funds provided by (used in)
operations..................... 3,102,000 390,000 (65,000) (8,000) (122,000) (15,000)
------------ --------- ------------- --------- ------------ -----------
FINANCING:
Dividends paid................... -- -- -- -- (1,430,000) (180,000)
Recognition of the effects of
inflation...................... (889,000) (112,000) (889,000) (112,000) -- --
------------ --------- ------------- --------- ------------ -----------
Funds used by financing
activities..................... (889,000) (112,000) (889,000) (112,000) (1,430,000) (180,000)
------------ --------- ------------- --------- ------------ -----------
INVESTMENT:
Acquisition of equipment......... (638,000) (80,000) (196,000) (25,000) (183,000) (23,000)
------------ --------- ------------- --------- ------------ -----------
Funds used by investment
activities..................... (638,000) (80,000) (196,000) (25,000) (183,000) (23,000)
------------ --------- ------------- --------- ------------ -----------
Increase (decrease) in cash and cash
equivalents........................ 1,575,000 198,000 (1,150,000) (145,000) (1,735,000) (218,000)
Cash and cash equivalents at
beginning of year.................. 2,539,000 319,000 3,232,000 406,000 4,114,000 517,000
------------ --------- ------------- --------- ------------ -----------
Cash and cash equivalents at end of
year............................... Ps4,114,000 $ 517,000 Ps2,022,000 $ 261,000 Ps2,379,000 $ 299,000
============ ========= ============= ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
INTEGRACION DE REDES, S.A. DE C.V.
NOTES TO THE FINANCIAL STATEMENTS
MEXICAN PESOS (PS) WITH PURCHASING POWER AS OF JUNE 30, 1997 AND U.S. DOLLARS
($)
NOTE 1 THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Integracion de Redes, S.A. de C.V. (the "Company") is a Mexican
corporation engaged in the distribution and sale of voice, data and networking
equipment and provides value-added services in network integracion.
REVENUE RECOGNITION
Revenue from data and network integration value-added services are
recognized when services are performed.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company's management did not consider an allowance for doubtful
accounts necessary since the Company's history shows a minimum percentage of
uncollectible accounts.
INVENTORIES
Inventories consist principally of telecommunications equipment acquired
from manufacturers for distribution and are stated at the lower of cost
(first-in, first-out) or market.
EMPLOYEE PROFIT SHARING
Salaries and other labor related benefits are taxed at 2%. The Company has
2,000 Mexican pesos in employee profit sharing payable at December 31, 1996.
EARNINGS PER SHARE OF COMMON STOCK
Earnings per share of common stock have been computed by dividing the
results applicable to common shareholders by the weighted average number of
shares outstanding, after giving retroactive effect to the stock split and
subscription price adjustment disclosed in Note 11. The Company does not have
effects from potential dilution of securities.
INFLATION ACCOUNTING
The accompanying financial statements as of December 31, 1996 have been
prepared in accordance with the stipulations of Bulletin B-10 "Recognition of
the Effects of Inflation on Financial Information", as amended, issued by the
Mexican Institute of Public Accountants, A.C. Therefore, these statements are
expressed in Mexican pesos with purchasing power as of June 30, 1997, as
determined by applying factors derived from the National Consumer Price Index
(NCPI) published by Banco de Mexico in accordance with Mexican GAAP.
The accounts affected by the recognition of inflation include inventories,
income statement accounts, property and equipment and stockholders' equity.
INTERIM FINANCIAL STATEMENTS
The financial statements at June 30, 1997 and for the six months ended June
30, 1997 are unaudited. In the opinion of management, the unaudited financial
statements at June 30, 1997 and for the six months ended June 30, 1997, include
all normal recurring adjustments necessary for a fair presentation of the
results of operations and changes in financial position for such period. Results
of operations for the interim periods are not necessarily indicative of results
to be expected for the full year.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles in Mexico which requires management to
make estimates and assumptions that effect the
F-49
<PAGE>
INTEGRACION DE REDES, S.A. DE C.V.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
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 reporting 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.
NOTE 2 PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is restated to reflect
inflation derived from the NCPI and utilizing the purchase date as the base
year. The cost of major renewals and betterments is capitalized; repairs and
maintenance costs are expensed when incurred. Upon retirement or sale, the cost
of the assets disposed of and the related accumulated depreciation are removed
from the accounts, with any resultant gain or loss being reflected in the
statement of operations. Depreciation of property and equipment for financial
reporting purposes is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements and capital leases are
amortized over the lesser of the life of the lease or the useful life of the
asset.
NOTE 3 FOREIGN SUPPLIERS
As of December 31, 1996 the Company owed Northern Telecom, a U.S. Company,
$36,000 U.S. dollars.
NOTE 4 DIVIDENDS
Dividend distributions are subject to income tax charged to the Company
when the distributions are not made from net taxable income in retained earnings
as defined in Mexican tax law.
NOTE 5 SIGNIFICANT DIFFERENCES BETWEEN MEXICAN AND U.S. GAAP
The financial statements of the Company are presented on the basis of
accounting principles generally accepted in Mexico (Mexican GAAP).
Except for inflation accounting, Mexican GAAP are, in general terms,
similar to the accounting principles generally accepted in the United States (US
GAAP). However, there are other areas in which Mexican accounting standards and
practices differ from the requirements of US GAAP.
The principal differences between Mexican GAAP and US GAAP applicable to
the Company are as follows:
RECOGNITION OF THE EFFECTS OF INFLATION ON FINANCIAL INFORMATION:
The provisions of Bulletin B-10, as amended, relating to the recognition of
the effects of inflation in the financial statements, have no counterparts under
US GAAP. However, as Mexican GAAP includes the effects of inflation in the
primary financial statements, the US Securities and Exchange Commission does not
require the reversal of the restatement of the financial statements to recognize
the effects of inflation.
DEFERRED INCOME TAXES:
Under Mexican GAAP, deferred income taxes and compulsory profit sharing to
employees are provided on the liability method only for non-recurring and
identifiable book and tax differences that are expected to reverse over a
definite period of time. Under US GAAP, deferred taxes are recognized for the
tax consequences of all temporary differences, both recurring and nonrecurring,
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities.
F-50
<PAGE>
INTEGRACION DE REDES, S.A. DE C.V.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
CONVENIENCE STATEMENTS:
The US dollar amounts, denoted by the symbol $, shown in the financial
statements have been included solely for the convenience of the reader and were
translated from Mexican pesos at the rate quoted by Bank of Mexico for June 30,
1997 of 7.9577 pesos per US dollar. Such translation should not be construed as
a representation that the Mexican peso amounts have been or could be converted
into US dollars at this or any other rate.
STATEMENT OF CHANGES IN FINANCIAL POSITION:
Under Mexican GAAP, the Company presents statements of changes in financial
position in constant Mexican pesos. This presentation identifies the generation
and application of resources representing differences between beginning and
ending financial statement balances in constant Mexican pesos.
The changes in the financial statement balances included in this statement
constitute cash flow activity stated in constant Mexican pesos (including
monetary gains which are considered cash gains in the financial statements
presented in constant Mexican pesos.)
PERSONNEL COMPENSATION AND SENIORITY PREMIUMS:
Under Mexican GAAP, vaction expense is recognized when taken rather than in
the period it is earned by the employee, as is required under U.S. GAAP.
The Company has no pension plan. Seniority premiums are established based
upon actuarial studies, which is similar in concept to the U.S. GAAP criteria of
SFAS 87, "Employees' Accounting for Pensions".
NOTE 6 SUBSEQUENT EVENTS (UNAUDITED)
Effective July 1, 1997, pursuant to a stock purchase agreement, all the
outstanding shares of the Company were sold. Under the terms of the transaction,
the selling shareholders received the following: i) the sum of $130,000 in cash,
ii) an aggregate of $2,201,000 in non-interest bearing promissory notes maturing
at various dates through January 1, 2001, iii) an aggregate of $999,000 in
non-interest bearing convertible notes maturing on September 1, 1999, which are
convertible into 333,000 shares of common stock of the acquiring company at a
price of $3.00 per share, representing the quoted market price of the acquiring
company common stock on the date of the transaction, iv) warrants for the
purchase of up to 100,000 shares of common stock of the acquiring company based
on the Company meeting certain performance requirements and v) a covenant by the
Purchasers to pay $280,000 in the event that the Company meets certain
performance requirements over the cumulative periods beginning January 1, 1997
and ending December 31, 2000. During the year ended December 1, 1997, certain
performance requirements were met resulting in 80,000 warrants vesting. In
addition in July 1998, holders of the convertible notes converted these notes
into 333,000 shares of common stock of the acquiring company.
F-51
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of
MSN Communications, Inc.
We have audited the accompanying balance sheet of MSN Communications, Inc.
as of December 31, 1997, and the related statements of operations and
accumulated deficit and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly,
in all material respects, the financial position of MSN Communications, Inc., at
December 31, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Houston, Texas
March 6, 1998
F-52
<PAGE>
MSN COMMUNICATIONS, INC.
BALANCE SHEET
DECEMBER 31,
1997
------------
ASSETS
Current Assets:
Cash............................ $ 977,000
Accounts receivable............. 1,042,000
Inventories..................... 14,000
Prepaid expenses and other...... 19,000
------------
Total current assets....... 2,052,000
Property and equipment, less
accumulated depreciation....... 6,000
Other assets.................... 52,000
------------
Total assets............... $ 2,110,000
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................ $ 940,000
Deferred revenue................ 1,997,000
Excise tax payable.............. 283,000
Commissions Payable............. 100,000
------------
Total current
liabilities............... 3,320,000
------------
Commitments and Contingencies
Stockholders' deficit:
Common stock, no par; 100,000
shares authorized, 10,000
shares issued and
outstanding.................... 20,000
Accumulated deficit........... (1,230,000)
------------
Total stockholders'
deficit................... (1,210,000)
------------
Total liabilities and
stockholders' deficit..... $ 2,110,000
============
See accompanying notes to financial statements.
F-53
<PAGE>
MSN COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED
DECEMBER 31,
1997
------------
Revenues............................. $ 24,568,000
Cost of revenues..................... 24,241,000
------------
Gross profit......................... 327,000
Selling, general and administrative
expenses........................... 1,246,000
Depreciation and amortization........ 35,000
------------
Operating loss....................... (954,000)
Other expense:
Interest expense................ (1,000)
Other........................... (2,000)
------------
Total other expense, net... (3,000)
------------
Net Loss............................. $ (957,000)
------------
Accumulated Deficit, beginning of
year............................... (273,000)
------------
Accumulated Deficit, end of year..... $ (1,230,000)
============
Loss per share
Basic........................... $ (95.75)
Diluted......................... n/a
Weighted average shares outstanding:
Basic........................... 10,000
Diluted......................... n/a
See accompanying notes to financial statements.
F-54
<PAGE>
MSN COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED
DECEMBER 31,
1997
------------
Cash Flows From Operating Activities:
Net loss........................ $ (957,000)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Bad debt expense........... 13,000
Depreciation and
amortization.............. 35,000
Changes in assets and
liabilities:
Accounts receivable... (1,007,000)
Inventories........... (14,000)
Prepaid expenses and
other assets......... 5,000
Accounts payable...... 988,000
Deferred revenue...... 1,497,000
Excise tax payable.... 283,000
Commissions payable... 100,000
------------
Net cash
provided by
operating
activities....... 943,000
Net Cash Flows Used In Investing
Activities:
Purchases of fixed assets....... (25,000)
Net Cash Flows Used In Financing
Activities:
Repayment of related party
debt........................... (56,000)
------------
Net increase in cash................. 862,000
Cash at beginning of year............ 115,000
------------
Cash at end of year.................. $ 977,000
============
Supplemental Cash Flow Disclosures:
Interest paid................... $ 5,000
============
See accompanying notes to financial statements.
F-55
<PAGE>
MSN COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
MSN Communications, Inc. ("the Company") was incorporated in the state of
California on May 6, 1996. The Company's operations consist of sales of
international and domestic long distance telecommunications services, primarily
through the marketing of prepaid phone cards. The Company targets mainly the
Hispanic community and markets its cards to a network of distributors who sell
the cards in over one hundred cities throughout the United States. The Company's
primary markets are located in Texas, California, and Illinois.
SIGNIFICANT ACCOUNTING POLICIES
FEDERAL INCOME TAX
The stockholders of the Company elected to be taxed under the "S"
Corporation provision of the Internal Revenue Code, whereby the Company's
operating results are reported in the individual tax returns of the
stockholders. Therefore, no provision has been made for federal income taxes in
the financial statements. Ordinarily presented in connection with the
acquisition of an S-corporation by an SEC reporting entity, see Note 7, proforma
disclosures to reflect the Company's results of operations as if the Company was
a C corporation for federal income tax purposes are not necessary as the Company
operated at a loss for the year. A valuation allowance would have been recorded
on deferred tax assets resulting from net operating loss carryforwards resulting
in a net income tax provision of zero.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that effect 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 reporting 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.
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company recognizes revenue from long distance telecommunications
services at the time of customer usage. The Company recognizes deferred revenue
as its prepaid phone cards are shipped. The primary costs associated with
revenue-producing activities are carrier costs for transport of traffic
generated by use of the prepaid phone cards. The Company has entered into an
arrangement with a third party whereby this party provides the long distance
telecommunications services for the cards the Company sells at a fixed cost. The
Company recognizes revenues from the sale of cards under this agreement at time
of shipment.
ANALYSIS FOR IMPAIRMENT
In accordance with SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF," management reviews
long-lived assets for impairment whenever events or changes in circumstances
indicate the carrying amount of an asset may not be fully recoverable.
EARNINGS (LOSS) PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, Earnings Per Share. SFAS 128 is effective for the year
ended December 31, 1997. SFAS 128 simplifies the standards required under
current accounting rules for computing earning per share and replaces the
F-56
<PAGE>
MSN COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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"). A diluted earnings per share presentation
is not required because MSN has not issued any dilutive potential securities.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "REPORTING
COMPREHENSIVE INCOME," establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
Statement of Financial Accounting Standards No. 131, "DISCLOSURE ABOUT
SEGMENTS OF A BUSINESS ENTERPRISE," establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that are evaluated regularly by the chief operating decision makers in
deciding how to allocate resources and in assessing performance.
SFAS 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. Adoption of these statements are not expected to
have a material affect on the Company's financial statement disclosures.
NOTE 2 -- PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31, together with their
estimated useful lives, consisted of the following:
ESTIMATED
USEFUL LIVES
AMOUNT (YEARS)
-------- ------------
Equipment............................ $ 27,000 5
Furniture and fixtures............... 1,000 7
--------
28,000
Less accumulated depreciation........ (22,000)
--------
Net property and equipment........... $ 6,000
========
NOTE 3 -- OTHER ASSETS
Other Assets consists of capitalized organizational costs and design costs.
These costs are being amortized over 5 years utilizing the straight line method.
At December 31, 1997, organizational costs totaled $36,000, net of accumulated
amortization of $14,500 and design costs totaled $16,000, net of accumulated
amortization of $4,000. For the year ended December 31, 1997, amortization
expense for the year ended December 31, 1997 totaled $16,000.
NOTE 4 -- CONCENTRATION OF CREDIT RISK
At December 31, 1997, the Company's cash in a financial institution
exceeded the federally insured deposit limit by $857,000. The Company's credit
risks primarily consist of accounts receivable from its distributors. Management
performs ongoing credit valuations of its distributors and provides allowances
for
F-57
<PAGE>
MSN COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
credit losses when necessary. Significant customers are those that represent
greater than 10% of the Company's revenue. For the year ended December 31, 1997,
three customers represented 21%, 20% and 13% of the Company's revenues,
respectively. At December 31, 1997, the outstanding receivables from these
customers were $233,000, $374,000 and $236,000, respectively.
NOTE 5 -- RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, the Company paid commissions to
its two shareholders totaling $388,000. At December 31, 1997, an additional
$100,000 of commissions were accrued.
During the year ended December 31, 1997, the Company repaid notes payable
and accrued interest to shareholders totaling $52,000 and $5,000, respectively.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
The Company leases certain automobiles and office space under
noncancellable operating leases. Future minimum rental payments follow:
YEAR ENDED
DECEMBER 31, AMOUNT
------------- -------
1998............................... $35,000
1999............................... 34,000
2000............................... 26,000
-------
Total.............................. $95,000
=======
For the year ended December 31, 1997, rent expense totalled approximately
$50,000.
The Company is subject to regulation by various government agencies and
jurisdictions and believes it is in compliance with all applicable laws and
regulations. However, implementation and interpretation of the
Telecommunications Act of 1996 (the Act) is ongoing and subject to litigation by
various Federal and state agencies and courts. As a result, the impact of the
Act on the Company is not yet completely determinable and future interpretations
and rulings may impact the financial position and results of operations of the
Company.
The taxation of prepaid phone cards is evolving and is not specifically
addressed by many of the states in which the Company does business. While the
Company believes it has adequately provided for any such excise taxes it may
ultimately be required to pay, certain states may enact legislation which
specifically provide for taxation of such cards or may interpret current laws in
a manner resulting in additional tax liabilities.
During the fourth quarter 1997, the Internal Revenue Service issued a
ruling stating that sellers of prepaid phone cards are subject to a 3% federal
excise tax on the gross amount of cards sold. The Company accrued $283,000
relating to excise taxes for cards sold from the date of the ruling.
NOTE 7 -- SUBSEQUENT EVENTS
On January 22, 1998, the shareholders of the Company entered into a
transaction whereby they sold all of the Company's outstanding stock to Telscape
International, Inc. ("Telscape") in exchange for $3,250,000 in cash, $750,000
in non-interest bearing promissory notes, and 100,000 shares of stock in the
acquiring company. The sale became effective as of January 1, 1998.
In May 1998, one of Telscape's wholesale long distance customers filed for
petition for relief under Chapter 11 of the Bankruptcy Code. An affiliate of
this customer provided switching services, the Prepaid Card platform and
arranged for other carriers to provide telecommunications services for the
Company. Because the Company had paid the affiliate of this customer for these
services at the time the Prepaid Cards
F-58
<PAGE>
MSN COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
were activated, this resulted in the Company's paying for certain of the
telecommunication services on the Prepaid Cards a second time. The overall
impact of the bankruptcy filing to Telscape's earnings, including additional
Prepaid Card services costs, the write-off of uncollectible receivables and the
lost margin contributions from the loss of a wholesale customer, is expected to
result in a reduction of Telscape's operating income of approximately $2.5
million to $3.0 million in the second quarter of 1998. This bankruptcy is not
expected to have a material impact to Telscape's or the Company's operating
results for the third quarter of 1998.
F-59
<PAGE>
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER
CONTAINED HEREIN OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF NOR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 1
Risk Factors......................... 7
Use of Proceeds...................... 24
Capitalization....................... 25
Unaudited Pro Forma Condensed
Consolidated Financial
Statements......................... 26
Selected Consolidated Financial and
Other Data......................... 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 32
Business............................. 43
Management........................... 64
Certain Relationships and Related
Transactions....................... 73
Summary of Other Indebtedness........ 75
Description of the Notes............. 78
United States Federal Income Tax
Considerations..................... 103
Underwriting......................... 107
Legal Matters........................ 108
Experts.............................. 108
Available information................ 108
Index to Financial Statements........ F-1
----------------------
PROSPECTUS
----------------------
$125,000,000
[LOGO]
TELSCAPE
INTERNATIONAL, INC.
% SENIOR NOTES DUE 2008
BT ALEX. BROWN
LEHMAN BROTHERS
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The table below sets forth the expenses to be incurred by the Company in
connection with the issuance and distribution of the securities registered for
offer and sale hereby, other than underwriting discounts and commissions. All
amounts shown represent estimates except the Securities Act registration fee and
the NASD filing fee.
Registration fee under the Securities
Act of 1933........................ $ 36,875
Printing expenses.................... *
Registrar and Transfer Agent's fees
and expenses....................... *
Accountants' fees and expenses....... *
Legal fees and expenses (not
including Blue Sky)................ *
Financial Advisor fees............... *
Blue Sky fees and expenses........... *
Miscellaneous........................ *
---------
Total................................ $ *
- ------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's By-Laws provide that the Company shall indemnify and advance
expenses to the directors, officers, employees, agents of the Company or any
other persons serving at the request of the Company in such capacities in a
manner and to the maximum extent permitted by applicable state or federal law.
The Company's Articles of Incorporation provide that Company shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative, arbitrative, or investigative, any appeal in
such an action, suit, or proceeding, and any inquiry or investigation that could
lead to such an action, suit, or proceeding (whether or not by or in the right
of the Company), by reason of the fact that he is or was a director or officer
of the Company, or is or was serving at the request of the Company as a director
or officer, against all judgments, penalties (including excise and similar
taxes), fines, settlements, and reasonable expenses (including attorneys' fees
and court costs) actually and reasonably incurred by him in connection with such
action, suit or proceeding to the fullest extent permitted by any applicable
law, and such indemnity shall inure to the benefit of the heirs, executors and
administrators of any such person so indemnified. The right to indemnification
under the Company's Articles of Incorporation is a contract right and shall
include, with respect to directors and officers, the right to be paid by the
Company the expenses incurred in defending any such proceeding in advance of its
disposition; PROVIDED, HOWEVER, that, the payment of such expenses incurred by a
director or officer in advance of the final disposition of a proceeding shall be
made only upon delivery to the Company of (i) a written affirmation by such
director or officer of his good faith belief that he has met the standard of
conduct necessary for indemnification under the Company's Articles of
Incorporation or otherwise and (ii) a written undertaking by or on behalf of
such director or officer to repay all amounts so advanced if it shall ultimately
be determined that such director or officer is not entitled to be indemnified
under the Company's Articles of Incorporation or otherwise. The indemnification
and advancement of expenses provided by, or granted pursuant to, the Company's
Articles of Incorporation shall not be deemed exclusive of any right to which
those seeking indemnification or advancement of expenses may be entitled under
any law, by-law, agreement, vote of shareholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
II-1
<PAGE>
Persons who are not directors or officers of the Company may be similarly
indemnified in respect of such service to the extent authorized at any time by
the Board of Directors of the Company. The Company may purchase and maintain
liability insurance or make other arrangements for such obligations to the
extent permitted by the Texas Business Corporation Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following paragraphs describe all offers and sales of securities by the
Company within the last three years which were not registered under the
Securities Act of 1933, as amended, other than securities issued in connection
with stock reclassifications, stock dividends or stock splits:
On February 29, 1996, in connection with a former officer's severance
agreement, the Company issued warrants to purchase 150,000 shares of common
stock exercisable at $2.94 per share, which expire on February 29, 2001.
On May 17, 1996, as part of the consideration paid for Telereunion, Inc.
("Telereunion"), the Company issued to the shareholders of Telereunion
1,605,000 shares of common stock of the Company, 380,000 shares of the Company's
non-voting, non-participatory Series B preferred stock and warrants to purchase
up to 2,595,000 additional shares of common stock at $2.19 per share. The
warrants vest and become exercisable upon Vextro de Mexico S.A. de C.V. meeting
certain operating performance measures and expire on May 16, 2003. The shares of
Series B preferred stock were mandatorily redeemable for $380,000 in the
aggregate upon the Company meeting certain operating performance measures.
During the year ended December 31, 1997, the Company met certain of the
operating performance measures, which resulted in 2,095,000 warrants vesting and
the Company redeeming 380,000 preferred shares. In June 1998, because the
Company met certain of the operating performance measures, the remaining
warrants vested. Also in connection with the Telereunion acquisition, the
Company issued to financial advisors, warrants to purchase 79,191 shares of
common stock at $2.19 per share. The warrants expire on May 16, 2001.
On September 5, 1996, the Company acquired all of the outstanding common
stock of Orion Communications, Inc., a Texas corporation ("Orion"), and issued
to the shareholders of Orion 400,000 shares of the Company's common stock in a
transaction accounted for under the pooling-of-interests method. At the time of
the merger, the name of Orion was changed to Telscape USA, Inc.
Effective July 1, 1997, in connection with the Integracion acquisition, the
Company issued warrants to purchase 100,000 shares of common stock exercisable
at $3.00 per warrant, which expire on July 1, 2003. The warrants vesting is
contingent upon Integracion meeting certain performance requirements. During the
year ended December 31, 1997, certain of the operating performance requirements
were met, resulting in 80,000 warrants vesting.
Effective January 1, 1998, as part of the consideration paid for MSN, the
Company issued 100,000 shares of the Company's common stock to the selling
shareholders of MSN.
On May 1, 1998 and May 28, 1998, the Company issued $3,000,000 and
$1,000,000, respectively, in 8% Convertible Subordinated Debentures (the "Deere
Park Convertible Debentures") maturing three years from closing to Deere Park
Capital Management, LLC ("Deere Park"). On June 30, 1998, the Company issued
an additional $1,000,000 in Deere Park Convertible Debentures to Deere Park on
similar terms. In connection with the Deere Park Convertible Debentures, Deere
Park 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, warrants to
purchase 2,427 shares of the Company's common stock at $20.60 per share and
warrants to purchase an aggregate of 6,382 shares of common stock at $15.67 per
share. The warrants have a term of three years from the effectiveness of a
registration statement covering such warrants.
On May 29, 1998, the Company issued $5,000,000 in 8% Convertible Debentures
(the "Gordon Brothers Convertible Debentures") maturing one year from closing
to Gordon Brothers Capital, L.L.C. ("Gordon Brothers"). In connection with the
Gordon Brothers Convertible Debentures, Gordon Brothers also received warrants
to purchase an aggregate of 12,136 shares of the Company's common stock at an
exercise price of $20.60 per share. The warrants have a term of three years from
the effectiveness of a
II-2
<PAGE>
registration statement covering such warrants. See "Summary of Other
Indebtedness" in the Prospectus included in this Registration Statement for a
description of the terms of the Deere Park Convertible Debentures and the Gordon
Brothers Convertible Debentures.
In connection with the issuance of the Deere Park Convertible Debentures
and the Gordon Brothers Convertible Debentures, the Company issued to Preferred
Capital Markets, Inc., as a placement agent fee, warrants to purchase 41,136 and
15,334 shares of common stock exercisable at $20.00 and $17.88, respectively,
per share expiring in two years from the date the shares underlying the warrants
are registered.
Each issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as a
transaction by an issuer not involving any public offering. Appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Company, to
information about the Company.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- -------------------------------------------------------------
*1.1 -- Form of Underwriting Agreement
between the Company, BT Alex. Brown
Incorporated and Lehman Brothers Inc.
3.1 -- Articles of Incorporation of the
Company, as amended (Incorporated
herein by reference to Exhibit 3.1 to
the Company's Registration Statement
No. 33-80542-D)
3.2 -- Bylaws of the Company, as amended
(Incorporated herein by reference to
Exhibit 3.2 to the Company's
Registration Statement No.
33-80542-D)
4.1 -- Form of Certificate evidencing Common
Stock (Incorporated herein by
reference to Exhibit 4.1 to the
Company's Registration Statement No.
33-80542-D)
4.2 -- Form of Warrant Agreement between
American Stock Transfer & Trust
Company and the Company (Incorporated
herein by reference to Exhibit 4.2 to
the Company's Registration Statement
No. 33-80542-D)
4.3 -- Form of Warrant Certificate
evidencing the Warrants (Incorporated
herein by reference to Exhibit 4.3 to
the Company's Registration Statement
No. 33-80542-D)
4.4 -- Form of Statement of the
establishment of the Series B
non-voting, nonparticipating
Preferred Stock (Incorporated herein
by reference to the Company's Report
on Form 10-QSB for the quarter ended
March 31, 1996)
*4.5 -- Form of Indenture for % Senior
Notes due 2008.
*5.1 -- Form of Opinion regarding legality
*8.1 -- Opinion regarding tax matters
10.1 -- Form of Warrant Agreement
(Incorporated herein by reference to
Exhibit 10.8 to the Company's
Registration Statement No.
33-80542-D)
10.2 -- Warrant Agreement between the Company
and S.P. Krishna Murthy (Incorporated
herein by reference to Exhibit 10.13
to the Company's Report on Form
10-KSB for the year ended December
31, 1995)
10.3 -- Form of Series A Common Stock Warrant
(Incorporated herein by reference to
Exhibit 10.4 to the Company's Report
on Form 10-QSB for the quarter ended
March 31, 1996)
10.4 -- Form of Series B Common Stock Warrant
(Incorporated herein by reference to
Exhibit 10.5 to the Company's Report
on Form 10-QSB for the quarter ended
March 31, 1996)
10.5 -- Form of Employment Agreement for
Manuel Landa, Ricardo Orea Gudino and
Oscar Garcia Mora (Incorporated
herein by reference to Exhibit 10.6
to the Company's Report on Form
10-QSB for the quarter ended March
31, 1996)
II-3
<PAGE>
10.6 -- Form of Non-Qualified Stock Option
Certificate and Agreement, as
amended, for Manuel Landa, Ricardo
Orea Gudino and Oscar Garcia Mora
(Incorporated herein by reference to
Exhibit 10.7 to the Company's Report
on Form 10-QSB for the quarter ended
March 31, 1996)
10.7 -- Form of Series A Common Stock Warrant
dated May 17, 1996 between the
Company and Manuel Landa, Ricardo
Orea Gudino, Oscar Garcia Mora and
Christopher Efird (Incorporated
herein by reference to Exhibit 10.1
to the Company's Report on Form 8-K
dated June 3, 1996)
10.8 -- Employment Agreement for E. Scott
Crist (Incorporated herein by
reference to Exhibit 10.1 to the
Company's Report on Form 10-QSB for
the quarter ended September 30, 1996)
10.9 -- Employment agreement for Todd M.
Binet (Incorporated herein by
reference to Exhibit 10.29 to the
Company's Report on Form 10-KSB for
the year ended December 31, 1996)
10.10 -- Form of Promissory Note dated July 1,
1997, between Telereunion and Jose
Luis Apan Wong, Raul de la Parra
Zavala and Alejandro Apan Wong
(Incorporated herein by reference to
Exhibit 10.4 to the Company's Current
Report on Form 8-K dated August 5,
1997)
10.11 -- Form of Convertible Promissory Note
dated July 1, 1997, between the
Company and Telereunion and Jose Luis
Apan Wong, Raul de la Parra Zavala
and Alejandro Apan Wong (Incorporated
herein by reference to Exhibit 10.4
to the Company's Current Report on
Form 8-K dated August 5, 1997)
10.12 -- Form of Common Stock Warrant dated
July 1, 1997, between the Company and
Jose Luis Apan Wong, Raul de la Parra
Zavala and Alejandro Apan Wong
(Incorporated herein by reference to
Exhibit 10.4 to the Company's Current
Report on Form 8-K dated August 5,
1997)
10.13 -- Stock Purchase Agreement dated July
1, 1997, by and among the Company,
Telscape USA, Telereunion and Jose
Luis Apan Wong, Raul de la Parra
Zavala and Alejandro Apan Wong
(Incorporated herein by reference to
Exhibit 10.4 to the Company's Current
Report on Form 8-K dated August 5,
1997)
10.14 -- Stock Purchase Agreement dated
October 1, 1997, by and among
Telscape USA, Inc., Telereunion, Inc.
and Jose Martin Pena Nunez, Carlos
Joaquin De Lara Y Campos, Jorge Pena
Nunez, Martha Teresita Martin Del
Campo Gutierrez (Incorporated herein
by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K
dated October 15, 1997)
10.15 -- Stock Purchase Agreement dated
January 22, 1998, by and among the
Company; MSN Communications, Inc.;
Stuart Newman; and Michael Newman,
together with Form of Promissory Note
dated January 23, 1998 in the
principal amount of $375,000 payable
to Stuart Newman attached as Exhibit
B-1 and Form of Promissory Note dated
January 23, 1998 in the principal
amount of $375,000 payable to Michael
Newman attached as Exhibit B-2
(Incorporated herein by reference to
Exhibit 10.1 to the Company's Current
Report on Form 8-K dated February 6,
1998)
10.16 -- Stock Purchase Agreement dated May
18, 1998, by and among Telscape
Interna-
tional, Inc.; California Microwave,
Inc., and California Microwave
Services Divisions, Inc. together
with a Form of Supply Agreement
between California Microwave, Inc.
and California Microwave Services
Division, Inc. as Exhibit B
(Incorporated herein by reference to
Exhibit 10.1 to the Company's Current
Report on Form 8-K dated June 9,
1998)
II-4
<PAGE>
10.17 -- 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
Debenture for $3,000,000 dated May 1,
1998; Form of Stock Purchase Warrant
to Purchase 8,952 shares of Common
Stock of Telscape International, Inc.
dated May 12, 1998, (all filed as
Exhibit 4.4 to the Company's Report
on Form 10-Q for the quarter ended
March 31, 1998 and incorporated
herein by reference)
10.18 -- Form of Convertible Debenture in the
principal amount of $1,000,000
between Deere Park Capital
Management, LLC and Telscape
International, Inc. dated as of May
28, 1998; and a form of Stock
Purchase Warrant to Purchase 2,427
shares of Common Stock of Telscape
International, Inc. dated May 28,
1998 (Incorporated herein by
reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K
dated June 9, 1998)
10.19 -- Securities Purchase Agreement dated
May 29, 1998 by and between Telscape
International, Inc. and Gordon
Brothers Capital, LLC; together with
a Form of Convertible Debenture in
the principal amount of $5,000,000
payable to Gordon Brothers Capital,
LLC attached as Exhibit A; a Form of
Stock Purchase Warrant for Gordon
Brothers Capital, LLC, for 12,136
shares of Common Stock of Telscape
International, Inc. attached as
Exhibit B; and a Registration Rights
Agreement by and between Gordon
Brothers Capital, LLC and Telscape
International, Inc. attached as
Exhibit C (Incorporated herein by
reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K
dated June 9, 1998)
10.20 -- Equity Purchase Agreement by and
between Interlink Communications
Holding Co., Inc. and each of
Telscape International, Inc., E.
Russell Hardy, Stephen Strohman,
Monty J. Moore, and Salvador Giblas
dated as of May 18, 1998
(Incorporated herein by reference to
Exhibit 10.5 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.21 -- Form of Employment Agreement by and
between California Microwave Services
Division, Inc. and E. Russell Hardy
dated as of May 18, 1998
(Incorporated herein by reference to
Exhibit 10.6 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.22 -- Form of Employment Agreement by and
between California Microwave Services
Division, Inc. and Stephen Strohman
dated as of May 18, 1998
(Incorporated herein by reference to
Exhibit 10.7 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.23 -- Form of Employment Agreement by and
between California Microwave Services
Division, Inc. and Monty J. Moore
dated as of May 18, 1998
(Incorporated herein by reference to
Exhibit 10.8 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.24 -- Form of Consulting Agreement by and
between California Microwave Services
Division, Inc. and Salvador Giblas
dated as of May 18, 1998
(Incorporated herein by reference to
Exhibit 10.9 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.25 -- Loan Agreement between Telscape USA,
Inc. and MSN Communications, Inc. and
Southwest Bank of Texas dated May 19,
1998
10.26 -- Outside Directors Stock Option Plan
of the Polish Telephones and
Microwave Corporation
12.1 -- Statement re computation of ratios
16.1 -- Letter regarding change in certifying
accountant (Hoffman, McBryde & Co.,
P.C.) (Incorporated herein by
reference to Exhibit 1.1 to the
Company's Report on Form 8-KA dated
November 6, 1996)
*21.1 -- Subsidiaries of the registrant
23.1 -- Consent of BDO Seidman, LLP
II-5
<PAGE>
23.2 -- Consent of Hoffman, McBryde & Co.,
P.C.
23.3 -- Consent of De Las Fuentes, De La Mora
y Valdivia, S.C;
24.1 -- Power of Attorney
*25.1-- Statement of Trustee Eligibility
*99.1 -- Form of Letter of Transmittal
*99.2 -- Form of Notice of Guaranteed Delivery
*99.3 -- Form of Letter to Brokers, Dealers,
Commercial Banks, Trust Companies and
Other Nominees
*99.4 -- Form of Letter to Clients
*99.5 -- Guides for Certification of Taxpayer
Identification Number on Form W-9
- ------------
* To be filed by Amendment
Previously filed
(B). FINANCIAL STATEMENT SCHEDULES. Valuation and Qualifying Accounts. All
other schedules are omitted either because they are not applicable or are not
material, or the information presented therein is contained in the Financial
Statements or notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on the 25th day of September 1998.
Telscape International, Inc.
By: ______/s/__E. SCOTT CRIST_________
E. SCOTT CRIST,
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/E. SCOTT CRIST Chief Executive Officer (Principal September 25, 1998
E. SCOTT CRIST Executive Officer and Director)
Director
MANUEL LANDA
* Director September 25, 1998
OSCAR GARCIA
* Director September 25, 1998
RICARDO OREA
* Director September 25, 1998
DARREL O. KIRKLAND
Director
ENRIQUE ORIHUELA
* Chief Financial Officer, Secretary, September 25, 1998
TODD M. BINET Treasurer and Director (Principal
Financial and Accounting Officer)
</TABLE>
* E. Scott Crist by signing his name hereto, signs this document on behalf of
each of the persons so indicated above pursuant to powers of attorney duly
executed by such persons and filed with the Securities and Exchange
Commission.
/s/ E. SCOTT CRIST
E. Scott Crist
ATTORNEY IN FACT
II-7
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
*1.1 -- Form of Underwriting Agreement
between the Company, BT Alex. Brown
Incorporated and Lehman Brothers Inc.
3.1 -- Articles of Incorporation of the
Company, as amended (Incorporated
herein by reference to Exhibit 3.1 to
the Company's Registration Statement
No. 33-80542-D)
3.2 -- Bylaws of the Company, as amended
(Incorporated herein by reference to
Exhibit 3.2 to the Company's
Registration Statement No.
33-80542-D)
4.1 -- Form of Certificate evidencing Common
Stock (Incorporated herein by
reference to Exhibit 4.1 to the
Company's Registration Statement No.
33-80542-D)
4.2 -- Form of Warrant Agreement between
American Stock Transfer & Trust
Company and the Company (Incorporated
herein by reference to Exhibit 4.2 to
the Company's Registration Statement
No. 33-80542-D)
4.3 -- Form of Warrant Certificate
evidencing the Warrants (Incorporated
herein by reference to Exhibit 4.3 to
the Company's Registration Statement
No. 33-80542-D)
4.4 -- Form of Statement of the
establishment of the Series B
non-voting, nonparticipating
Preferred Stock (Incorporated herein
by reference to the Company's Report
on Form 10-QSB for the quarter ended
March 31, 1996)
*4.5 -- Form of Indenture for % Senior
Notes due 2008
*5.1 -- Form of Opinion regarding legality
10.1 -- Form of Warrant Agreement
(Incorporated herein by reference to
Exhibit 10.8 to the Company's
Registration Statement No.
33-80542-D)
10.2 -- Warrant Agreement between the Company
and S.P. Krishna Murthy (Incorporated
herein by reference to Exhibit 10.13
to the Company's Report on Form
10-KSB for the year ended December
31, 1995)
10.3 -- Form of Series A Common Stock Warrant
(Incorporated herein by reference to
Exhibit 10.4 to the Company's Report
on Form 10-QSB for the quarter ended
March 31, 1996)
10.4 -- Form of Series B Common Stock Warrant
(Incorporated herein by reference to
Exhibit 10.5 to the Company's Report
on Form 10-QSB for the quarter ended
March 31, 1996)
10.5 -- Form of Employment Agreement for
Manuel Landa, Ricardo Orea Gudino and
Oscar Garcia Mora (Incorporated
herein by reference to Exhibit 10.6
to the Company's Report on Form
10-QSB for the quarter ended March
31, 1996)
10.6 -- Form of Non-Qualified Stock Option
Certificate and Agreement, as
amended, for Manuel Landa, Ricardo
Orea Gudino and Oscar Garcia Mora
(Incorporated herein by reference to
Exhibit 10.7 to the Company's Report
on Form 10-QSB for the quarter ended
March 31, 1996)
10.7 -- Form of Series A Common Stock Warrant
dated May 17, 1996 between the
Company and Manuel Landa, Ricardo
Orea Gudino, Oscar Garcia Mora and
Christopher Efird (Incorporated
herein by reference to Exhibit 10.1
to the Company's Report on Form 8-K
dated June 3, 1996)
10.8 -- Employment Agreement for E. Scott
Crist (Incorporated herein by
reference to Exhibit 10.1 to the
Company's Report on Form 10-QSB for
the quarter ended September 30, 1996)
10.9 -- Employment agreement for Todd M.
Binet (Incorporated herein by
reference to Exhibit 10.29 to the
Company's Report on Form 10-KSB for
the year ended December 31, 1996)
10.10 -- Form of Promissory Note dated July 1,
1997, between Telereunion and Jose
Luis Apan Wong, Raul de la Parra
Zavala and Alejandro Apan Wong
(Incorporated herein by reference to
Exhibit 10.4 to the Company's Current
Report on Form 8-K dated August 5,
1997)
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
10.11 -- Form of Convertible Promissory Note
dated July 1, 1997, between the
Company and Telereunion and Jose Luis
Apan Wong, Raul de la Parra Zavala
and Alejandro Apan Wong (Incorporated
herein by reference to Exhibit 10.4
to the Company's Current Report on
Form 8-K dated August 5, 1997)
10.12 -- Form of Common Stock Warrant dated
July 1, 1997, between the Company and
Jose Luis Apan Wong, Raul de la Parra
Zavala and Alejandro Apan Wong
(Incorporated herein by reference to
Exhibit 10.4 to the Company's Current
Report on Form 8-K dated August 5,
1997)
10.13 -- Stock Purchase Agreement dated July
1, 1997, by and among the Company,
Telscape USA, Telereunion and Jose
Luis Apan Wong, Raul de la Parra
Zavala and Alejandro Apan Wong
(Incorporated herein by reference to
Exhibit 10.4 to the Company's Current
Report on Form 8-K dated August 5,
1997)
10.14 -- Stock Purchase Agreement dated
October 1, 1997, by and among
Telscape USA, Inc., Telereunion, Inc.
and Jose Martin Pena Nunez, Carlos
Joaquin De Lara Y Campos, Jorge Pena
Nunez, Martha Teresita Martin Del
Campo Gutierrez (Incorporated herein
by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K
dated October 15, 1997)
10.15 -- Stock Purchase Agreement dated
January 22, 1998, by and among the
Company; MSN Communications, Inc.;
Stuart Newman; and Michael Newman,
together with Form of Promissory Note
dated January 23, 1998 in the
principal amount of $375,000 payable
to Stuart Newman attached as Exhibit
B-1 and Form of Promissory Note dated
January 23, 1998 in the principal
amount of $375,000 payable to Michael
Newman attached as Exhibit B-2
(Incorporated herein by reference to
Exhibit 10.1 to the Company's Current
Report on Form 8-K dated February 6,
1998)
10.16 -- Stock Purchase Agreement dated May
18, 1998, by and among Telscape
Interna-
tional, Inc.; California Microwave,
Inc., and California Microwave
Services Divisions, Inc. together
with a Form of Supply Agreement
between California Microwave, Inc.
and California Microwave Services
Division, Inc. as Exhibit B
(Incorporated herein by reference to
Exhibit 10.1 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.17 -- 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
Debenture for $3,000,000 dated May 1,
1998; Form of Stock Purchase Warrant
to Purchase 8,952 shares of Common
Stock of Telscape International, Inc.
dated May 12, 1998, (all filed as
Exhibit 4.4 to the Company's Report
on Form 10-Q for the quarter ended
March 31, 1998 and incorporated
herein by reference)
10.18 -- A Form of Convertible Debenture in
the principal amount of
$1,000,000 between Deere Park Capital
Management, LLC and Telscape Interna-
tional, Inc. dated as of May 28,
1998; and a form of Stock Purchase
Warrant to Purchase 2,427 shares of
Common Stock of Telscape
International, Inc. dated May 28,
1998 (Incorporated herein by
reference to Exhibit 10.3 to the
Company's Current Report on Form 8-K
dated June 9, 1998)
10.19 -- Securities Purchase Agreement dated
May 29, 1998 by and between Telscape
International, Inc. and Gordon
Brothers Capital, LLC; together with
a Form of Convertible Debenture in
the principal amount of $5,000,000
payable to Gordon Brothers Capital,
LLC attached as Exhibit A; a Form of
Stock Purchase Warrant for Gordon
Brothers Capital, LLC, for 12,136
shares of Common Stock of Telscape
International, Inc. attached as
Exhibit B; and a Registration Rights
Agreement by and between Gordon
Brothers Capital, LLC and Telscape
International, Inc. attached as
Exhibit C (Incorporated herein by
reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K
dated June 9, 1998)
<PAGE>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
10.20 -- Equity Purchase Agreement by and
between Interlink Communications
Holding Co., Inc. and each of
Telscape International, Inc., E.
Russell Hardy, Stephen Strohman,
Monty J. Moore, and Salvador Giblas
dated as of May 18, 1998
(Incorporated herein by reference to
Exhibit 10.5 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.21 -- Form of Employment Agreement by and
between California Microwave Services
Division, Inc. and E. Russell Hardy
dated as of May 18, 1998
(Incorporated herein by reference to
Exhibit 10.6 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.22 -- Form of Employment Agreement by and
between California Microwave Services
Division, Inc. and Stephen Strohman
dated as of May 18, 1998
(Incorporated herein by reference to
Exhibit 10.7 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.23 -- Form of Employment Agreement by and
between California Microwave Services
Division, Inc. and Monty J. Moore
dated as of May 18, 1998
(Incorporated herein by reference to
Exhibit 10.8 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.24 -- Form of Consulting Agreement by and
between California Microwave Services
Division, Inc. and Salvador Giblas
dated as of May 18, 1998
(Incorporated herein by reference to
Exhibit 10.9 to the Company's Current
Report on Form 8-K dated June 9,
1998)
10.25 -- Loan Agreement between Telscape USA,
Inc. and MSN Communications, Inc. and
Southwest Bank of Texas dated May 19,
1998
10.26 -- Outside Directors Stock Option Plan
of the Polish Telephones and
Microwave Corporation
12.1 -- Statement re computation of ratios
16.1 -- Letter regarding change in certifying
accountant (Hoffman, McBryde & Co.,
P.C.) (Incorporated herein by
reference to Exhibit 1.1 to the
Company's Report on Form 8-KA dated
November 6, 1996)
*21.1 -- Subsidiaries of the registrant
23.1 -- Consent of BDO Seidman, LLP
23.2 -- Consent of Hoffman, McBryde & Co.,
P.C.
23.3 -- Consent of De Las Fuentes, De La Mora
y Valdivia, S.C;
24.1 -- Power of Attorney
*25.1-- Statement of Trustee Eligibility
*99.1 -- Form of Letter of Transmittal
*99.2 -- Form of Notice of Guaranteed Delivery
*99.3 -- Form of Letter to Brokers, Dealers,
Commercial Banks, Trust Companies and
Other Nominees
*99.4 -- Form of Letter to Clients
*99.5 -- Guides for Certification of Taxpayer
Identification Number on Form W-9
* to be filed by Amendment
+ Previously filed
EXHIBIT 10.25
05-19-1998 LOAN AGREEMENT PAGE 1
LOAN NO. 913987 (CONTINUED)
LOAN AGREEMENT
<TABLE>
<CAPTION>
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C>
$2,500,000.00 05-19-1998 06-30-1999 913987 004 O009225 MSG
References in the shaded area are for Lender's use only and no not limit the
applicability of this document to any particular loan or item.
TELSCAPE USA INC., ET AL. LENDER: SOUTHWEST BANK OF TEXAS N.A.
BORROWER: (TIN: 760499077) GALLERIA
2700 POST OAK BLVD., SUITE 1000 P.O. BOX 27459
HOUSTON, TEXAS 77056 5 POST OAK PARK/4400 POST OAK PARKWAY
HOUSTON, TEXAS 77227-7459
</TABLE>
THIS LOAN AGREEMENT between Telscape USA, Inc. and MSN Communications, Inc.
(referred to in this Agreement individually and collectively as "Borrower") and
Southwest Bank of Texas N.A. (referred to in this Agreement as "Lender") is made
and executed on the following terms and conditions. Borrower has received prior
commercial loans from Lender or has applied to Lender for a commercial loan or
loans and other financial accommodations, including those which may be described
on any exhibit or schedule attached to this Agreement. All such loans and
financial accommodations, together with all future loans and financial
accommodations from Lender to Borrower, are referred to in this Agreement
individually as the "Loan" and collectively as tho "Loans." Borrower understands
and agrees that: (a) in granting, renewing, or extending any Loan, Lender is
relying upon Borrower's representations, warranties, and agreements, as set
forth in this Agreement; (b) the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole judgment and discretion;
and (c) all such Loans shall be and shall remain subject to the following terms
and conditions of this Agreement.
TERM. This Agreement shall be effective as of MAY 19, 1998, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to Borrower
(or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
BORROWER. The word "Borrower" means individually and collectively Telscape
USA. Inc. and MSN Communications, Inc., and all other persons and entities
signing Borrowers' Note, except the Todd Binet, Scott Crist and Melinda
Wines, signers to these documents, are not Borrowers.
BORROWING BASE. The words "Borrowing Base" mean as determined by Lender from
time to time, the lesser of (a) $2,500,000.00 or (b) 80.000% of the
aggregate amount of Eligible Accounts. Up to $500,000.00 is included to the
Borrowing Base from May 19, 1998 through June 30, 1998; up to $400,000.00
from July 1, 1998 through July 31, 1998; up to $300,000.00 from August 1,
1998 through August 31, 1998; up to $200,000.00 from September 1, 1998
through September 30, 1998; up to $100,000.00 from October 1, 1998 through
October 31, 1998. In determining the amount of the Borrowing Base, all
Eligible Accounts of all Borrowers shall be included.
BUSINESS DAY. The words "Business Day" mean a day on which commercial banks
are open for business in the State of Texas.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
COLLATERAL. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien whatsoever, whether created
by law, contract, or otherwise. The word "Collateral" includes without
limitation all collateral described below in the section titled
"COLLATERAL."
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may
borrow shall exclude all returns, discounts, credits, and offsets of any
nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts
do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 2
LOAN NO. 913987 (CONTINUED)
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a resident
of the United States, except to the extent such Accounts are supported
by insurance, bonds or other assurances satisfactory to Lender.
(e) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion, deems
the creditworthiness or financial condition of the Account Debtor to be
unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under
any provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; or who has had appointed a trustee, custodian, or
receiver for the assets of such Account Debtor; or who has made an
assignment for the benefit of creditors or has become insolvent or fails
generally to pay its debts (including its payrolls) as such debts become
due.
(j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 30 DAYS from the
invoice date. The entire balance of any Account of any single Account
debtor will be ineligible whenever the portion of the Account which has
not been paid within 30 DAYS from the invoice date is in excess of
20.000% of the total amount outstanding on the Account.
(l) That portion of the Accounts of any single Account Debtor which
exceeds 20.000% of all of Borrower's Accounts.
(m) Any Accounts which are unacceptable to Lender in its sole
discretion.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of termination of
Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise.
LENDER. The word "Lender" means Southwest Bank of Texas N A., its successors
and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being contested
in good faith; (c) liens of materialmen, mechanics, warehousemen, or
carriers, or other like liens arising in the ordinary course of business and
securing
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 3
LOAN NO. 913987 (CONTINUED)
obligations which are not yet delinquent; (d) purchase money liens or
purchase money security interests upon or in any property acquired or held
by Borrower in the ordinary course of business to secure indebtedness
outstanding on the date of this Agreement or permitted to be incurred under
the paragraph of this Agreement titled "Indebtedness and Liens"; (e) liens
and security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of Borrower's
assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings
or other agreements, whether created by law, contract, or otherwise,
evidencing, governing, representing, or creating a Security Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt lien or title retention contract, lease or consignment intended as a
security device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act
of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement to
indebtedness owed by Borrower to Lender in form and substance acceptable to
Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but
including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrowers current assets,
excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject to
the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered by
Borrower to Lender.
(b) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall be
in full force and effect.
(c) All guaranties required by Lender for the Line of Credit shall have
been executed by each Guarantor, delivered to Lender, and be in full
force and effect.
(d) Lender, at its option and for its sole benefit, shall have conducted
an audit of Borrower's Accounts, books, records, and operations, and
Lender shall be satisfied as to their condition.
(e) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(f) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and Borrower
shall have delivered to Lender the compliance certificate called for in
the paragraph below titled "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
orally by authorized persons. Lender may, but need not, require that all
oral requests be confirmed in writing. Each Advance shall be conclusively
deemed to have been made at the request of and for the benefit of Borrower
(a) when credited to any deposit account of Borrower maintained with Lender
or (b) when advanced in accordance with the instructions of an authorized
person. Lender, at its option, may set a cutoff time, after which all
requests for Advances will be treated as having been requested on the next
succeeding Business Day.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of the Advances and the Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal amount
of all Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 4
LOAN NO. 913987 (CONTINUED)
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and conclusively
binding on Borrower unless Borrower notifies Lender to the contrary within
thirty (30) days after Borrower's receipt of any such statement which
Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender, Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"), including without limitation
Borrower's present and future Accounts and general intangibles. Lender's
Security Interests in the Collateral shall be continuing liens and shall include
the proceeds and products of the Collateral, including without limitation the
proceeds of any insurance. With respect to the Collateral, Borrower agrees and
represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Borrower will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Contemporaneous with the execution of this
Agreement, Borrower will execute one or more UCC financing statements and
any similar statements as may be required by applicable law and will file
such financing statements and all such similar statements in the appropriate
location or locations. Borrower hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue any Security Interest. Lender may at any time, and
without further authorization from Borrower, file a carbon, photograph,
facsimile, or other reproduction of any financing statement for use as a
financing statement. Borrower will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of Lender's
security interest in the Collateral. Borrower promptly will notify Lender of
any change in Borrower's name including any change to the assumed business
names of Borrower. Borrower also promptly will notify Lender of any change
in Borrower's Social Security Number or Employer Identification Number.
Borrower further agrees to notify Lender in writing prior to any change in
address or location of Borrower's principal governance office or should
Borrower merge or consolidate with any other entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the Accounts,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Accounts and
Account balances and agings.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender a schedule of
Accounts and Eligible Accounts, in form and substance satisfactory to the
Lender. Thereafter Borrower shall execute and deliver to Lender such
supplemental schedules of Eligible Accounts and such other matters and
information relating to Borrower's Accounts as Lender may request.
Supplemental schedules shall be delivered according to the following
schedule:
MONTHLY, WITHIN FORTY (40) DAYS OF EACH MONTH END.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; and (c) Lender,
its assigns, or agents shall have the right at any time and at Borrower's
expense to inspect, examine, and audit Borrower's records and to confirm
with Account Debtors the accuracy of such Accounts.
REMITTANCE ACCOUNT. Borrower agrees that Lender may at any time require
Borrower to institute procedures whereby the payments and other proceeds of
the Accounts shall be paid by the Account Debtors under a remittance account
or lock box arrangement with Lender, or Lender's agent, or with one or more
financial institutions designated by Lender. Borrower further agrees that,
if no Event of Default exists under this Agreement, any and all of such
funds received under such a remittance account or lock box arrangement
shall, at Lender's sole election and discretion, either be (a) paid or
turned over to Borrower; (b) deposited into one or more accounts for the
benefit of Borrower (which deposit accounts shall be subject to a security
assignment in favor of Lender); (c) deposited into one or more accounts for
the joint benefit of Borrower and Lender (which deposit accounts shall
likewise be subject to a security assignment in favor of Lender); (d) paid
or turned over to Lender to be applied to the Indebtedness in such order and
priority as Lender may determine within its sole discretion; or (e) any
combination of the foregoing as Lender shall determine from time to time.
Borrower further agrees that, should one or more Events of Default exist,
any and all funds received under such a remittance account or lock box
arrangement shall be paid or turned over to Lender to be applied to the
Indebtedness, again in such order and priority as Lender may determine
within its sole discretion.
MULTIPLE BORROWERS. This Agreement has been executed by multiple obligors who
are referred to herein individually collectively and interchangeably as
"Borrower." Unless specifically stated to the contrary, the word "Borrower" as
used in this Agreement, including without limitation all representations,
warranties and covenants, shall include all Borrowers. Borrower understands and
agrees that, with or without notice to Borrower, Lender may with respect to any
other Borrower (a) make one or more additional secured or unsecured loans or
otherwise extend additional credit, (b) alter, compromise, renew, extend,
accelerate, or otherwise change one or more times the time for payment or other
terms any indebtedness, including increases and decreases of the rate of
interest on the indebtedness; (c) exchange, enforce, waive, subordinate, fail or
decide not to perfect, and release any security, with or without the
substitution of new collateral; (d) release, substitute, agree not to sue, or
deal with any one or more of Borrower's sureties, endorsers, or other guarantors
on any terms or in any manner Lender may choose; (e) determine how, when and
what application of payments and credits shall be made on any indebtedness; (f)
apply such security and direct the order or manner of sale thereof, including
without limitation, any nonjudicial sale permitted by the terms of the
controlling security agreement or deed of trust, as Lender in its discretion may
determine; (g) sell, transfer, assign, or grant participations in all or any
part of the indebtedness; (h) exercise or refrain from exercising any rights
against Borrower or others, or otherwise act or refrain from acting; (i) settle
or compromise any indebtedness; and (j) subordinate the payment of all or any
part of any indebtedness of Borrower to Lender to the payment of any liabilities
which may be due Lender or others.
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 5
LOAN NO. 913987 (CONTINUED)
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the state of Borrower's
incorporation and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and authority
to own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all states in
which the failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not conflict
with, result in a violation of, or constitute a default under (a) any
provision of its articles of incorporation or organization, or bylaws, or
any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release" as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 19 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or
other applicable state or Federal laws, rules, or regulations adopted
pursuant to any of the foregoing. Except as disclosed to and acknowledged by
Lender in writing, Borrower represents and warrants that: (a) During the
period of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under, about
or from any of the properties; (b) Borrower has no knowledge of, or reason
to believe that there has been (i) any use, generation, manufacture,
storage, treatment, disposal, release, or threatened release of any
hazardous waste or substance on, under, about or from the properties by any
prior owners or occupants of any of the properties, or (ii) any actual or
threatened litigation or claims of any kind by any person relating to such
matters; (c) Neither Borrower nor any tenant, contractor, agent or other
authorized user of any of the properties shall use, generate, manufacture,
store, treat, dispose of, or release any hazardous waste or substance on,
under, about or from any of the properties, and any such activity shall be
conducted in compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender and
its agents to enter upon the properties to make such inspections and tests
as Lender may deem appropriate to determine compliance of the properties
with this section of the Agreement. Any inspections or tests made by Lender
shall be at Borrower's expense and for Lender's purposes only and shall not
be construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating the
properties for hazardous waste and hazardous substances. Borrower hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other costs
under any such laws, and (b) agrees to indemnify and hold harmless Lender
against any and all claims, losses, liabilities, damages, penalties, and
expenses which Lender may directly or indirectly sustain or suffer resulting
from a breach of this section of the Agreement or as a consequence of any
use, generation, manufacture, storage, disposal, release or threatened
release of a hazardous waste or substance on the properties. The provisions
of this section of the Agreement, including the obligation to indemnify,
shall survive the payment of the Indebtedness and the termination or
expiration of this Agreement and shall not be affected by Lender's
acquisition of any interest in any of the properties, whether by foreclosure
or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which may
materially adversely affect Borrower's financial condition or properties,
other than litigation, claims, or other events, if any, that have been
disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith in
the ordinary course of business and for which adequate reserves have been
provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or affecting
any of the Collateral directly or indirectly securing repayment of
Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 6
LOAN NO. 913987 (CONTINUED)
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as Upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business, or
Borrower's Chief executive office, if Borrower has more than one place of
business, is located at 2700 Post Oak Blvd., Suite 1000, Houston, TX 77056.
Unless Borrower has designated otherwise in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which such
information is dated or certified; and none of such information is or will
be incomplete by omitting to state any material fact necessary to make such
information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis, and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year ended,
prepared by Borrower, and, as soon as available, but in no event later than
forty (40) days after the end of each month, Borrower's balance sheet and
profit and loss statement for the period ended, prepared and certified as
correct to the best knowledge and belief by Borrower's chief financial
officer or other officer or person acceptable to Lender. All financial
reports required to be provided under this Agreement shall be prepared in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional Information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender
may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
CURRENT RATIO. Maintain a ratio of Current Assets to Current Liabilities
in excess of 1.25 TO 1.00. The financial covenants and ratios set forth
in this paragraph shall be determined and calculated for all Borrowers
on a consolidated basis and reference in this paragraph to "Borrower"
shall mean all "Borrowers." Except as provided above, all computations
made to determine compliance with the requirements contained in this
paragraph shall be made in accordance with generally accepted accounting
principles, applied on a consistent basis, and certified by Borrower as
being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, and coverages
reasonably acceptable to Lender.
BORROWER MAY FURNISH THE REQUIRED INSURANCE WHETHER THROUGH EXISTING
POLICIES OWNED OR CONTROLLED BY BORROWER OR THROUGH EQUIVALENT INSURANCE
FROM ANY INSURANCE COMPANY AUTHORIZED TO TRANSACT BUSINESS IN THE STATE
OF TEXAS. If Borrower fails to provide any
required insurance or fails to continue such insurance in force, Lender
may, but shall not be required to, do so at Borrower's expense, and the
cost of the insurance will be added to the Indebtedness. If any such
Insurance is procured by Lender at a rate or charge not fixed or
approved by the State Board of Insurance, Borrower will be so notified,
and Borrower will have the option for five (5) days of furnishing
equivalent insurance through any insurer authorized to transact business
in Texas. Borrower, upon request of Lender, will deliver to Lender from
time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not
be cancelled or diminished without at least ten (10) days' prior written
notice to Lender. Each Insurance policy also shall include an
endorsement providing that coverage in favor of Lender will not be
impaired in any way by any act, omission or default of Borrower or any
other person. In connection with all policies covering assets in which
Lender holds or is offered a security interest for the Loans, Borrower
will provide Lender with such loss payable or other endorsements as
Lender may require.
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 7
LOAN NO. 913987 (CONTINUED)
GUARANTIES. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantor named
below, on Lender's forms, and in the amount and under the conditions spelled
out in those guaranties.
GUARANTOR AMOUNT
--------- ------
TELSCAPE INTERNATIONAL, INC. $2,500,000.00
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed
upon Borrower or its properties, income, or profits, prior to the date on
which penalties would attach, and all lawful claims that, if unpaid, might
become a lien or charge upon any of Borrower's properties, income, or
profits. Provided however, Borrower will not be required to pay and
discharge any such assessment, tax, charge, levy, lien or claim so long as
(a) the legality of the same shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on its books adequate
reserves with respect to such contested assessment, tax, charge, levy, lien,
or claim in accordance with generally accepted accounting practices.
Borrower, upon demand of Lender, will furnish to Lender evidence of payment
of the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at any
time a written statement of any assessments, taxes, charges, levies, liens
and claims against Borrower's properties, income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely manner,
and promptly notify Lender if Borrower learns of the occurrence of any event
which constitutes an Event of Default under this Agreement or under any of
the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable federal,
state and municipal laws, ordinances, rules and regulations respecting its
properties, charters, businesses and operations, including without
limitation, compliance with the Americans With Disabilities Act and with all
minimum funding standards and other requirements of ERISA and other laws
applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds with
a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all
Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and Indebtedness to Lender contemplated by this
Agreement, create, incur or assume Indebtedness for borrowed money,
including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c) sell with recourse any of Borrower
s accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 8
LOAN NO. 913987 (CONTINUED)
(other than dividends payable in its stock) provided, however that
notwithstanding the foregoing, but only so long as no Event of Default has
occurred and is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined In the Internal Revenue
Code of 1986, as amended), Borrower may pay cash dividends on its stock to
its shareholders from time to time in amounts necessary to enable the
shareholders to pay income taxes and make estimated income tax payments to
satisfy their liabilities under federal and state law which arise solely
from their status as Shareholders of a Subchapter S Corporation because of
their ownership of shares of stock of Borrower, or (d) purchase or retire
any of Borrower's outstanding shares or alter or amend Borrower's capital
structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise
or entity, or (c) incur any obligation as surety or guarantor other than in
the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
LETTERS OF CREDIT DEFINITIONS. "Letter of Credit" means any letter of credit
issued by Lender for the account of Borrower. "Letter of Credit Liabilities"
means, at any time, the aggregate face amounts of all outstanding letters of
credit.
ADVANCES. Subject to the terms and conditions of this agreement, Lender agrees
to make one or more advances to Borrower from time to time from the date hereof
to and including the maturity date in an aggregate principal amount at any time
outstanding up to but not exceeding $500,000.00; provided that the aggregate
amount of all advances at any time outstanding shall not exceed $500,000.00.
Subject to the foregoing limitations, and the other terms and provisions of this
agreement, Borrower may borrow, repay, and reborrow hereunder.
LETTERS OF CREDIT. Subject to the terms and conditions of this Agreement, Lender
may in its sole discretion agree to issue one or more letters of credit for the
account of Borrower from time to time from the date hereof to and including the
expiration date; provided, however, that the outstanding letter of credit
liabilities shall not at any time exceed $500,000.00. Each letter of credit
shall have an expiration date not to exceed the maturity date of the revolving
line of credit, unless otherwise agreed to by Bank, provided that,
notwithstanding any other provisions of this Agreement, on the expiration date,
Borrower shall deposit with Lender cash or cash equivalent collateral in the
amount of the outstanding letter of credit liabilities. Each Letter of Credit
must support a transaction that is entered into in the ordinary course of
Borrower's business, and must otherwise be satisfactory in form and substance to
Lender. No Letter of Credit shall require any payment by Lender to the
beneficiary thereunder pursuant to a drawing prior to the third business day
following presentment of a draft and any related documents to lender. Lender
shall have no obligation to issue any Letter of Credit under this Agreement, and
the decision to issue any Letter of Credit shall be made by Lender in its sole
discretion.
PROCEDURE FOR ISSUING LETTERS OF CREDIT. Each Letter of Credit shall be issued
at the discretion of Lender on at least three (3) business days prior notice
from Borrower to Lender accompanied by such information and such documents and
instruments including, without limitation, Lender's standard Application for
Issuance of Letters of Credit (as then in effect) as Lender may require for such
notice. In such notice Borrower shall state whether each Letter of Credit is to
be issued to support a transaction of Borrower or corporate guarantor.
PAYMENTS CONSTITUTE ADVANCES. Payment by Lender pursuant to a drawing under a
Letter of Credit shall constitute and be deemed an advance by Lender to Borrower
under the note and this agreement as of the day and time such payment is made by
Lender and in the amount of such payment.
LETTER OF CREDIT FEE. Borrower shall pay to Lender a Letter of Credit fee
payable on the date each Letter of Credit is issued in an amount equal to one
and one half percent (1.5%) per annum of the stated amount of such Letter of
Credit or a $300.00 minimum for the period during which such Letter of Credit
will remain outstanding, based on a 360 day year and the actual number of days
elapsed.
ADDITIONAL COSTS IN RESPECT OF LETTERS OF CREDIT. If as a result any regulatory
change there shall be imposed, modified, or deemed applicable any tax, reserve,
special deposit, or similar requirement against or with respect to or measured
by reference to Letters of Credit issued or to be issued hereunder, or lender's
Commitment to issue Letters of Credit hereunder, and the result shall be to
increase the cost to Lender of issuing or maintaining any Letter of Credit or
its commitment to issue Letters of Credit hereunder or reduce any amount
receivable by Lender hereunder in respect of any Letter of Credit (which
increase in cost, or reduction in amount receivable, shall be the result of
Lender's reasonable allocation of the aggregate of such increases or reductions
resulting from such event), from time to time as specified by Lender, such
additional amounts as shall be sufficient to compensate Lender for such
increased costs or reductions in amount. A statement as to such increased costs
or reductions in amount incurred by Lender, submitted by Lender to Borrower,
shall be conclusive as to the amount thereof, provided that the determination
thereof is made on a reasonable basis.
OTHER CONDITIONS PRECEDENT TO EACH ADVANCE. Borrower shall deliver to Lender a
fully completed and executed Borrowing Base and No Default Certificate in the
form of Exhibit "A" attached hereto, (a) monthly, not later than thirty (30)
days after the end of each month, dated as of the last day of such month and (b)
at the time of each request for an advance, if required by Lender, dated as of a
recent date satisfactory to Lender.
COMPLIANCE CERTIFICATE. For purposes of this Agreement, Compliance Certificate
and Borrowing Base and No Default Certificate are one and the same.
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 9
LOAN NO. 913987 (CONTINUED)
ADDITIONAL FINANCIAL STATEMENTS. Borrower shall furnish Lender with monthly
financial statements which should include balance sheets, income statements no
more than forty (40) days from month end on each guarantor. In addition,
Borrower shall furnish Lender annual audited financial statements no more than
one hundred twenty days (120) from year end on each guarantor.
NOTICE OF FINAL AGREEMENT. THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO
THIS LOAN CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS LOAN.
UCC FINANCING STATEMENT. At the request of the Lender, the Grantor will join the
Lender in executing and filing one or more Financing Statements pursuant to the
Uniform Commercial Code in the form and in the places satisfactory to Lender.
The Grantor hereby authorizes Lender or its agents or assigns to execute and
file, without the signature of the Grantor, one or more such Financing
Statements if permitted in the relevant jurisdiction. The Borrower will pay the
cost of filing all such Financing Statements in all public offices wherever
filing is deemed by Lender to be necessary or desirable.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Guarantor's total assets
excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but including
leaseholds and leasehold improvements) less total Debt.
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less than
$3,800,000.00. The minimum Tangible Net Worth shall increase by $500,000.00 each
calendar quarter beginning with the quarter ending June 30, 1998.
ADDENDUM. This Agreement incorporates all addendums.
ADDITIONAL COVENANTS. Any quarterly loss of Telscape International, Inc.
constitutes an event of default.
Current ratio applies only to Telscape USA, Inc. and MSN Communications, Inc.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on
the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained
in this Agreement or in any of the Related Documents, or failure of Borrower
to comply with or to perform any other term, obligation, covenant or
condition contained in any other agreement between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at any
time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and
for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender. However this Event of
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 10
LOAN NO. 913987 (CONTINUED)
EVENTS AFFECTING CO-BORROWERS. Any of the preceding events occurs with
respect to any co-borrower of any of the Indebtedness or any co-borrower
dies or becomes incompetent, or revokes or disputes the validity of, or
liability under, any of the Indebtedness. Lender, at its option, may, but
shall not be required to, permit the co-borrower's estate to assume
unconditionally the obligations on the Indebtedness in a manner satisfactory
to Lender, and, in doing so, cure the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given a
notice of a similar default within the preceding twelve (12) months, it may
be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Agreement. No alteration of or amendment to this Agreement
shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Texas. If there is a lawsuit, and if the transaction
evidenced by this Agreement occurred in Harris County, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of Harris
County, the State of Texas. Subject to the provisions oh arbitration, this
Agreement shall be governed by and construed in accordance with the laws of
the State of Texas and applicable Federal laws.
ARBITRATION. The undersigned agree(s) that all disputes, claims and
controversies between the undersigned or between the undersigned and any
lender or the holder of this instrument, whether individual, joint, or class
in nature, arising from this instrument, or any document executed in
connection herewith or otherwise, including without limitation contract and
tort disputes, shall be arbitrated pursuant to the Rules of the American
Arbitration Association, upon request of any party. No act to take or
dispose of any collateral securing the Note or covered by this Instrument
shall constitute a waiver of this arbitration provision or be prohibited by
this arbitration provision. This includes, without limitation, obtaining
injunctive relief or a temporary restraining order; invoking a power of sale
under any deed of trust or mortgage; obtaining a writ of attachment or
imposition of a receiver; or exercising any rights relating to personal
property, including taking or disposing of such property with or without
judicial process pursuant to Article 9 of the Uniform Commercial Code. Any
disputes, claims, or controversies concerning the lawfulness or
reasonableness of any act, or exercise of any right concerning any
collateral securing the Note or covered by this instrument, including any
claim to rescind, reform, or otherwise modify any agreement relating to the
collateral securing the Note or covered by this instrument, shall also be
arbitrated, provided however that no arbitrator shall have the right or the
power to enjoin or restrain any act of any party. Judgment upon any award
rendered by any arbitrator may be entered in any court having jurisdiction;
provided, however, that nothing contained herein shall be deemed to be a
waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. Section 91, Texas Banking Code art. 342-609 or 342-705, or any
other protection provided banks by the laws of Texas or the United States.
The statute of limitations, estoppel, waiver, laches, and similar doctrines
which would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the construction,
interpretation, and enforcement of this arbitration provision. If the
Federal Arbitration Act is inapplicable to any such claim or controversy for
any reason, such arbitration shall be conducted pursuant to the Texas
General Arbitration Act and in accordance with this arbitration provision
and the Commercial Arbitration Rules of the American Arbitration
Association.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale
or transfer, whether now or later, of one or more participation interests in
the Loans to one or more purchasers, whether related or unrelated to Lender.
Lender may provide, without any limitation whatsoever, to any one or more
purchasers, or potential purchasers, any information or knowledge Lender may
have about Borrower or about any other matter relating to the Loan, and
Borrower hereby waives any rights to privacy it may have with respect to
such matters. Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of any
such participation interests will be
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 11
LOAN NO. 913987 (CONTINUED)
considered as the absolute owners of such interests in the Loans and will
have all the rights granted under the participation agreement or agreements
governing the sale of such participation Interests. Borrower further waives
all rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that Borrower
may have against Lender.
COSTS AND EXPENSES. Except as otherwise limited by the Texas Credit Title
and the Texas Finance Code, Borrower agrees to pay upon demand all of
Lender's expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may hire one or more attorneys to help collect the
Indebtedness if Borrower does not pay, and Borrower will pay Lender's
reasonable attorneys' fees. Borrower also will pay Lender all other amounts
actually incurred by Lender as court costs, lawful fees for filing,
recording, or releasing to any public office any instrument securing the
Indebtedness; the reasonable cost actually expended for repossessing,
storing, preparing for sale, and selling any security; and fees for noting a
lien on or transferring a certificate of title to any motor vehicle offered
as security for the Indebtedness, or premiums or identifiable charges
received in connection with the sale of authorized insurance.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required by
law), and shall be effective when actually delivered or when deposited with
a nationally recognized overnight courier or deposited in the United States
mail, first class, postage prepaid, addressed to the party to whom the
notice is to be given at the address shown above. Any party may change its
address for notices under this Agreement by giving formal written notice to
the other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if there is
more than one Borrower, notice to any Borrower will constitute notice to all
Borrowers. For notice purposes, Borrower will keep Lender informed at all
times of Borrower's current address(es).
PAYMENT OF INTEREST AND FEES. Notwithstanding any other provision of this
Agreement or any provision of any Related Document, Borrower does not agree
or intend to pay, and Lender does not agree or intend to contract for,
charge, collect take, reserve or receive (collectively referred to herein as
"charge or collect"), any amount in the nature of interest or in the nature
of a fee for this Loan, or any other Loan with Borrower, which would in any
way or event (including demand, prepayment, or acceleration) cause Lender to
charge or collect more for the Loan than the maximum Lender would be
permitted to charge or collect by any applicable federal law or any
applicable law of the State of Texas. Any such excess interest or
unauthorized fee shall, instead of anything stated to the contrary, be
applied first to reduce the unpaid principal balance of the Loan, and when
the principal has been paid in full, be refunded to Borrower. The right to
accelerate maturity of sums due under this Agreement does not include the
right to accelerate any interest which has not otherwise accrued on the date
of such acceleration, and Lender does not intend to charge or collect any
unearned interest in the event of acceleration. All sums paid or agreed to
be paid to Lender for the use, forbearance or detention of sums paid under
this Agreement shall, to the extent permitted by applicable law, be
amortized, prorated, allocated and spread throughout the full term of the
loan evidenced by this Agreement until payment in full so that the rate or
amount of interest on account of the loan evidenced by this Agreement does
not exceed the applicable usury ceiling. When the term "interest" is used in
the context of "payment of interest," it is the intent of the parties that
all such references shall be to accrued and unpaid interest, and in no event
will Borrower ever be required to pay unearned interest.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of this
Agreement in all other respects shall remain valid and enforceable.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other Instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
<PAGE>
05-19-1998 LOAN AGREEMENT PAGE 12
LOAN NO. 913987 (CONTINUED)
EACH BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN
AGREEMENT, AND EACH BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
MAY 19, 1998.
BORROWER:
Telscape USA, Inc.
By:_____________________________________
Todd Binet, Executive Vice President
MSN Communications, Inc., Co-Borrower
By:_____________________________________
E. Scott Crist, Secretary
LENDER:
Southwest Bank of Texas N.A.
By:_____________________________________
Authorized Officer
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.25a (c) 1998 CFI ProServices, Inc.
All rights reserved. [TX-C40 E3.25 F3.25 P3.25 913987.LNC24.OVL]
EXHIBIT 10.26
OUTSIDE DIRECTORS STOCK OPTION PLAN
OF
THE POLISH TELEPHONES AND MICROWAVE CORPORATION
1. PURPOSE OF PLAN. This Outside Directors Stock Option Plan (the "Plan")
is intended to encourage ownership of the common stock of Polish Telephones and
Microwave Corporation (the "Company") by Outside Directors (as hereinafter
defined) of the Company or any Subsidiary or Subsidiaries of the Company (as
hereinafter defined) in order to provide additional incentive for such persons
to promote the success and the business of the Company or its Subsidiaries and
to encourage them to become and remain an Outside Director of the Company or its
Subsidiaries by providing such persons an opportunity to benefit from any
appreciation of the common stock of the Company through the issuance of stock
options to such persons in accordance with the terms of the Plan. It is further
intended that options granted pursuant to this Plan shall constitute
nonqualified stock options (the "Options") within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"). As used herein the
term "Subsidiary" or "Subsidiaries" shall mean any corporation (other than the
employer corporation) in an unbroken chain of corporations beginning with the
employer corporation if, at the time of granting of the Option, each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
2. STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in Section
11 hereof, there will be reserved for the use upon the exercise of Options to be
granted from time to time under the Plan, an aggregate of One Hundred Thousand
(100,000) shares of the common stock, $0.001 par value, of the Company (the
"Common Stock"), which shares in whole or in part shall be authorized, but
unissued, shares of the Common Stock or issued shares of Common Stock which
shall have been reacquired by the Company as determined from time to time by the
Board of Directors. To determine the number of shares of Common Stock available
at any time for the granting of Options under the Plan there shall be deducted
from the total number of reserved shares of Common Stock, the number of shares
of Common Stock with respect to which Options have been granted pursuant to the
Plan which remain outstanding or which have been exercised. If and to the extent
that any Option to purchase reserved shares shall not be exercised by the
optionee for any reason or if such Option to purchase shall terminate as
provided herein, such shares which have not been so purchased hereunder shall
again become available for the purposes of the Plan unless the Plan shall have
been terminated, but such unpurchased shares shall not be deemed to increase the
aggregate number of shares specified above to be reserved for purposes of the
Plan (subject to adjustment as provided in Section 11 hereof).
The Company shall not be required upon the exercise of any Option to issue
or deliver any shares of stock prior to the completion of such registration or
other qualification of such shares under any State or Federal law, rule or
regulation as the Company shall determine to be necessary or desirable.
<PAGE>
3. ADMINISTRATION OF THE PLAN.
(a) GENERAL. The Plan shall be administered by the Compensation
Committee (the "Committee") appointed by the Board of Directors of the Company,
which Committee shall consist of not less than two (2) members of the Board of
Directors who are not eligible to participate in the Plan, and have not, for a
period of at least one (1) year prior thereto been eligible to participate in
the Plan, except that if at any time there shall be less than two (2) directors
who are qualified to serve on the Committee, then the Plan shall be administered
by the full Board of Directors. All references in this Plan to the Committee
shall be deemed to refer instead to the full Board of Directors at any time
there is not a committee of two (2) members qualified to act hereunder. The
Board of Directors may from time to time appoint members of the Committee in
substitution for or in addition to members previously appointed and may fill
vacancies, however caused, in the Committee. If the Board of Directors does not
designate a Chairman of the Committee, the Committee shall select one of its
members as its Chairman and shall hold its meetings at such times and places as
it shall deem advisable. A majority of its members shall constitute a quorum.
All action of the Committee shall be taken by a majority vote of its members.
Any action may be taken by a written instrument signed by all of the members,
and any action so taken shall be deemed fully as effective as if it had been
taken by a vote of the members present in person at the meeting duly called and
held. The Committee may appoint a Secretary, shall keep minutes of its meetings,
and shall make such rules and regulations for the conduct of its business as it
shall deem advisable.
The Committee shall have the sole authority and power, subject to the
express provisions and limitations of the Plan, to construe the Plan and option
agreements granted hereunder, and to adopt, prescribe, amend, and rescind rules
and regulations relating to the Plan, and to make all determinations necessary
or advisable for administering the Plan, including, but not limited to, (i)
which Outside Director shall be granted Options under the Plan, (ii) the term of
each Option, (iii) the number of shares covered by such Option, (iv) the
exercise price for the purchase of the shares of the Common Stock covered by the
Option, (v) the period during which the Option may be exercised, (vi) whether
the right to purchase the number of shares covered by the Option shall be fully
vested on issuance of the Option so that such shares may be purchased in full at
one time or whether the right to purchase such shares shall become vested over a
period of time so that such shares may only be purchased in installments, and
(vii) the time or times at which Options shall be granted. The Committee's
determinations under the Plan, including the above enumerated determinations,
need not be uniform and may be made by it selectively among the persons who
receive, or are eligible to receive, Options under the Plan, whether or not such
persons are similarly situated. The interpretation and construction by the
Committee of any provision of the Plan or of any Option granted hereunder shall
be final and conclusive, unless otherwise determined by the Board of Directors.
No member of the Board of Directors or the Committee shall be liable for any
action or determination made in good faith with respect to the Plan or any
Option granted under it. Upon issuing an Option under the Plan, the Committee
shall report to the Board of Directors the name of the person granted the
Option, the number of shares of Common Stock covered by the Option, and the
terms and conditions of such Option.
<PAGE>
(b) CHANGES IN LAW APPLICABLE. If the laws relating to nonqualified
stock options are changed, altered or amended during the term of the Plan, the
Board of Directors shall have full authority and power to alter or amend the
Plan with respect to Options to conform to such changes in the law without the
necessity of obtaining further shareholder approval, unless such changes require
such approval.
4. OUTSIDE DIRECTORS TO WHOM OPTIONS SHALL BE GRANTED. Options shall be
granted only to Outside Directors selected by the Committee. As used herein, the
term "Outside Directors" shall mean only those directors of the Company or any
Subsidiary of the Company who are not regular salaried employees of either the
Company or a Subsidiary as of the date an Option is granted; provided, however,
Outside Directors shall include any directors of the Company or a Subsidiary who
were formerly regular salaried employees of either the Company or a Subsidiary
but who have ceased to be regular salaried employees thereof through retirement
or otherwise as of the date an Option is granted. The determination of the
Committee shall be conclusive as to the eligibility of any director to
participate in the Plan.
5. FACTORS TO BE CONSIDERED IN GRANTING OPTIONS. In making any
determination as to Outside Directors to whom Options shall be granted and as to
the number of shares to be covered by such Options, the Committee shall take
into account the duties and responsibilities of the respective Outside
Directors, their current and potential contributions to the success of the
Company or a Subsidiary, the time devoted by such Outside Director to matters
pertaining to the Company or a Subsidiary, and such other factors as the
Committee shall deem relevant in connection with accomplishing the purpose of
the Plan.
6. TIME OF GRANTING OPTIONS. Neither anything contained in the Plan or in
any resolution adopted or to be adopted by the Board of Directors or the
Shareholders of the Company nor any action taken by the Committee shall
constitute the granting of any Option. The granting of an Option shall be
effected only when a written Option Agreement acceptable in form and substance
to the Committee, subject to the terms and conditions hereof including those set
forth in Section7 hereof, shall have been duly executed and delivered by or on
behalf of the Company and the person to whom such Option shall be granted. No
person shall have any rights under the Plan until such time, if any, as a
written Option Agreement shall have been duly executed and delivered as set
forth in this Section 6.
7. TERMS AND CONDITIONS OF OPTIONS. All Options granted pursuant to this
Plan must be granted within ten (10) years from the date the Plan is adopted by
the Board of Directors of the Company. Each Option Agreement governing an Option
granted hereunder shall be subject to at least the following terms and
conditions, and shall contain such other terms and conditions, not inconsistent
therewith, that the Committee shall deem appropriate:
(a) NUMBER OF SHARES. Each Option shall state the number of shares
of Common Stock which it represents.
(b) Option Period.
(1) GENERAL. Each Option shall state the date upon which it is
granted. Each Option shall be exercisable in whole or in part during
such period as is provided under the terms of the Option subject to
any vesting period set forth in the Option, but in no event shall an
Option be exercisable either in whole or in part after the
expiration of ten (10) years from the date of grant.
<PAGE>
(2) TERMINATION OF STATUS AS OUTSIDE DIRECTOR. In the event an
optionee's status as an Outside Director is terminated for any
reason, other than the death of such optionee or a Change of Control
(as hereinafter defined) prior to the full exercise of the Option,
such optionee may exercise his Option at any time within ninety (90)
days after such termination to the extent he was entitled to
exercise such option at the date such optionee's status as an
Outside Director terminated; provided, however, that no Option shall
be exercisable after the expiration of ten (10) years from the date
it is granted.
(3) DEATH. If an optionee dies while an Outside Director of
the Company or Subsidiary and shall not have fully exercised Options
granted pursuant to the Plan, such Options may be exercised in whole
or in part at any time within six (6) months after the optionee's
death, by the executors or administrators of the optionee's estate
or by any person or persons who shall have acquired the Options
directly from the optionee by bequest or inheritance, but only to
the extent that the Outside Director was entitled to exercise such
Option at the date of such optionee's death, subject to the
condition that no Option shall be exercisable after the expiration
of ten (10) years from the date it is granted.
(4) ACCELERATION AND EXERCISE UPON CHANGE OF CONTROL.
Notwithstanding the preceding provisions of this Section 7(b), if
any Option granted under the Plan provides for either (a) an
incremental vesting period hereby such Option may only be exercised
in installments as each such incremental vesting period is satisfied
or (b) a delayed vesting period whereby such Option may only be
exercised after the lapse of a specified period of time, such as
after the expiration of one (1) year, such vesting period shall be
accelerated upon the occurrence of a change of Control of the
Company so that such Option shall thereupon become exercisable
immediately in part or in its entirety by the holder thereof, as
such holder shall elect, subject to the condition that no Option
shall be exercisable after the expiration of ten (10) years from the
date it is granted. For the purposes of this Plan, a "Change of
Control" shall be deemed to have occurred if:
(i) Any "person," including a "group" as determined in
accordance with Section 13(d)(3) of the Securities Exchange Act of
1934 (the "Exchange Act") and the Rules and Regulations promulgated
thereunder, is or becomes, through one or a series of related
transactions or through one or more intermediaries, the beneficial
owner, directly or indirectly, of securities of the Company
representing 25% or more of the combined voting powers of the
Company's then outstanding securities, other than a person who is
such a beneficial owner on the effective date of the Plan and any
affiliate of such person;
<PAGE>
(ii) As a result of , or in connection with, any tender offer
or exchange offer, merger or other business combination, sale of
assets or contested election, or any combination of the foregoing
transactions (a "Transaction"), the persons who were Directors of
the Company before the Transaction shall cease to constitute a
majority of the Board of Directors of the Company or any successor
to the Company;
(iii) Following the effective date of the Plan, the Company is
merged or consolidated with another corporation and as a result of
such merger or consolidation less than 40% of the outstanding voting
securities of the surviving or resulting corporation shall then be
owned in the aggregate by the former shareholders of the Company,
other than (x) any party to such merger or consolidation, or (y) any
affiliates of any such party;
(iv) A tender offer or exchange offer is made and consummated
for the ownership of securities of the Company representing 25% or
more of the combined voting power of the Company's then outstanding
voting securities; or
(v) The Company transfers more than 50% of its assets, or the
last of a series of transfers result in the transfer of more than
50% of the assets of the Company to another corporation that is not
a wholly-owned corporation of the Company. For purposes of this
subsection 7(b)(4)(v), the determination of what constitutes more
than 50% of the assets of the Company shall be determined based on
the sum of the values attributed to (i) the Company's real
properties as determined by an independent appraisal thereof and
(ii) the net book value of all other assets of the Company, each
taken as of the date of the Transaction involved.
In addition, upon a Change of Control, any Options previously
granted under the Plan may be exercised to the extent not already
exercised either immediately or at any time during the term of the
Option as such holder shall elect.
(c) OPTION PRICES. The purchase price or prices of the shares
of the Common Stock of the Company which shall be offered to any
Outside Director under the Plan and covered by each Option shall be
one hundred percent (100%) of the fair market value of the Common
Stock at the time of granting the Option or such higher purchase
price as may be determined by the Committee at the time of granting
the Option. During such time as the Common Stock of the Company is
not listed upon an established stock exchange, the fair market value
per share shall be deemed to be the closing sales price of the
Common Stock on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") on the day the Option is
granted, as reported by NASDAQ, if the Common Stock is so quoted,
and if not so quoted, the mean between dealer "bid" and "ask" prices
of the Common Stock in the New York over-the-counter market on the
date the Option is granted, as reported by the National Association
of Securities Dealers, Inc. If the Common Stock is listed upon an
established stock exchange or exchanges, such fair market value
shall be deemed to be the highest closing price of the Common Stock
on such stock exchange or exchanges on the day the Option is granted
or, if no sale of the Common Stock of the Company shall have been
made on any stock exchange on such day, on the next preceding day on
which there was a sale of such stock. If there is no market price
for the Common Stock, then the Board of Directors and the Committee
may, after taking all relevant facts into consideration, determine
the fair market value of the Common Stock.
<PAGE>
(d) EXERCISE OF OPTIONS. To the extent that a holder of an
Option has a current right to exercise, the Option may be exercised
from time to time by written notice to the Company at its principal
place of business. Such notice shall state the election to exercise
the Option, the number of shares in respect of which it is being
exercised, shall be signed by the person or persons so exercising
the Option, and shall contain any investment representation required
by Section 12 hereof. Such notice shall be accompanied by payment of
the full purchase price of such shares and by the Option Agreement
evidencing the Option. In addition, if the Option shall be
exercised, pursuant to Section 7(b)(3) hereof, by any person or
persons other than the optionee, such notice shall also be
accompanied by appropriate proof of the right of such person or
persons to exercise the Option. The Company shall deliver a
certificate or certificates representing such shares as soon as
practicable after the aforesaid notice and payment of such shares
shall be received. The certificate or certificates for the shares as
to which the Option shall have been so exercised shall be registered
in the name of the person or persons so exercising the Option. In
the event the Option shall not be exercised in full, the Secretary
of the Company shall endorse or cause to be endorsed on the Option
the number of shares which has been exercised thereunder and the
number of shares that remain exercisable under the Option and return
such Option Agreement to the holder thereof.
(e) NONTRANSFERABILITY OF OPTIONS. An Option granted pursuant
to the Plan shall be exercisable only by the optionee during his or
her lifetime and shall not be assignable or transferable by him or
her otherwise than by Will or the laws of descent and distribution.
An Option granted pursuant to the Plan shall not be assigned,
pledged or hypothecated in any way (whether by operation of law or
otherwise other than by Will or the laws of descent and
distribution) and shall not be subject to execution, attachment, or
similar process. Any attempted transfer, assignment, pledge,
hypothecation, or other disposition of any Option or of any rights
granted thereunder contrary to the foregoing provisions of this
Section 7(e), or the levy of any attachment or similar process upon
an Option or such rights, shall be null and void.
<PAGE>
(f) COMPLIANCE WITH SECURITIES LAW. The Plan and the grant and
exercise of the rights to purchase shares hereunder, and the
Company's obligations to sell and deliver shares upon the exercise
of rights to purchase shares, shall be subject to all applicable
federal and state laws, rules and regulations, and to such approvals
by any regulatory or governmental agency as may, in the opinion of
counsel for the Company, be required, and shall also be subject to
all applicable rules and regulations of any stock exchange upon
which the Common Stock of the Company may then be listed. At the
time of exercise of any Option, the Company may require the optionee
to execute any documents or take any action which may be then
necessary to comply with the Securities Act of 1933, as amended (the
"Securities Act") and the rules and regulations promulgated
thereunder, or any other applicable federal or state laws regulating
the sale and issuance of securities; and the Company may, if it
deems necessary, include provisions in the stock option agreements
to assure such compliance. The Company may, from time to time,
change its requirements with respect to enforcing compliance with
federal and state securities laws including the request for and
enforcement of agreements of investment intent, such requirements to
be determined by the Company in its judgment as necessary to assure
compliance with such laws. Such changes may be made with respect to
any particular Option or stock issued upon exercise thereof. Without
limiting the generality of the foregoing, if the Common Stock
issuable upon exercise of an Option granted under the Plan is not
registered under the Securities Act, the Company at the time of
exercise will require that the registered owner execute and deliver
an investment representation agreement to the Company in form
acceptable to the Company and its counsel, and the Company will
place a legend on the certificate evidencing such Common Stock
restricting the transfer thereof, which legend shall be
substantially as follows:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAW BUT HAVE BEEN ACQUIRED FOR THE
PRIVATE INVESTMENT OF THE HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD
OR TRANSFERRED UNTIL EITHER (i) A REGISTRATION STATEMENT UNDER SUCH
SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE
BECOME EFFECTIVE WITH REGARD THERETO, OR (ii) THE COMPANY SHALL HAVE
RECEIVED AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY AND ITS
COUNSEL THAT REGISTRATION UNDER SUCH SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH
SUCH PROPOSED OFFER, SALE OR TRANSFER.
<PAGE>
(g) ADDITIONAL PROVISIONS. The option agreements authorized
under the Plan shall contain such other provisions as the Committee
shall deem advisable, including, without limitation, restrictions
upon the exercise of the Option.
8. LIMITATIONS ON OPTIONS. The maximum number of shares for which Options
may be granted under the Plan to any Outside Director during any calendar year
shall be Twenty Thousand (20,000).
9. MEDIUM AND TIME OF PAYMENT. The purchase price of the shares of the
Common Stock as to which any Option shall be exercised shall be paid in full
either (i) in cash at the time of exercise of such Option, (ii) by tendering to
the Company shares of the Company's Common Stock having a fair market value
equal to the purchase price for the number of shares of Common Stock purchased,
or (iii) partly in cash and partly in shares of the Company's Common Stock
valued at fair market value as of the date of receipt of such shares by the
Company. Cash payment for the shares of the Common Stock purchased upon exercise
of the Option shall be in the form of either a cashier's check, certified check
or money order. Personal checks may be submitted, but will not be considered as
payment for the shares of the Common Stock purchased and no certificates for
such shares will be issued until the personal check clears in normal banking
channels. If a personal check is not paid upon presentment by the Company, then
the attempted exercise of the Option will be null and void. In the event the
optionee tenders shares of the Company's Common Stock in full or partial payment
for the shares being purchased pursuant to the Option, the shares of Common
Stock so tendered shall be accompanied by fully executed stock powers endorsed
in favor of the Company with the signature on such stock power being guaranteed.
If an optionee tenders shares, such optionee assumes sole and full
responsibility for the tax consequences, if any, to such optionee arising
therefrom.
10. RIGHTS AS A SHAREHOLDER. The holder of an Option shall have no rights
as a shareholder of the Company with respect to the shares covered by the Option
until the due exercise of the Option and the date of issuance of one or more
stock certificates to such holder for such shares. No adjustment shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in Section 11
hereof.
11. ADJUSTMENTS ON CHANGES IN CAPITALIZATION OR REORGANIZATION.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by the
Shareholders of the Company, the number of shares of Common Stock covered
by the Plan, the number of shares of Common Stock covered by each
outstanding Option, and the exercise price per share specified in each
such Option, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock of the Company
resulting from a subdivision or consolidation of shares or the payment of
a stock dividend (but only on the Common Stock) or any other increase or
decrease in the number of such shares effected without receipt of
consideration by the Company after the date the Option is granted, so that
upon exercise of the Option, the optionee shall receive the same number of
shares the optionee would have received had the optionee been the holder
of all shares subject to such optionee's outstanding Option immediately
before the effective date of such change in the number of issued shares of
the Common Stock of the Company.
<PAGE>
(b) REORGANIZATION, DISSOLUTION OR LIQUIDATION. Subject to any
required action by the Shareholders of the Company, if the Company shall
be the surviving corporation in any merger or consolidation, each
outstanding Option shall pertain to and apply to the securities to which a
holder of the number of shares of Common Stock subject to the Option would
have been entitled. A dissolution or liquidation of the Company or a
merger or consolidation in which the Company is not the surviving
corporation, shall cause each outstanding Option to terminate as of a date
to be fixed by the Committee (which date shall be as of or prior to the
effective date of any such dissolution or liquidation or merger or
consolidation); provided, that not less than thirty (30) days written
notice of the date so fixed as such termination date shall be given to
each optionee, and each optionee shall, in such event, have the right,
during such period of thirty (30) days preceding such termination date, to
exercise such optionee's Option in whole or in part in the manner herein
set forth.
(c) CHANGE IN PAR VALUE. In the event of a change in the Common
Stock of the Company as presently constituted, which change is limited to
a change of all of its authorized shares with par value into the same
number of shares with a different par value or without par value, the
shares resulting from any change shall be deemed to be the Common Stock
within the meaning of the Plan.
(d) NOTICE OF ADJUSTMENTS. To the extent that the adjustments set
forth in the foregoing paragraphs of this Section 11 relate to stock or
securities of the Company, such adjustments, if any, shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive. The Company shall give timely notice of any adjustments made
to each holder of an Option under this Plan and such adjustments shall be
effective and binding on the optionee.
(e) EFFECT UPON HOLDER OF OPTION. Except as hereinbefore expressly
provided in this Section 11, the holder of an Option shall have no rights
by reason of any subdivision or consolidation of shares of stock of any
class or the payment of any stock dividend or any other increases or
decrease in the number of shares of stock of any class by reason of any
dissolution, liquidation, merger, reorganization, or consolidation, or
spin-off of assets or stock of another corporation, and any issue by the
Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall not affect, and no adjustment by
reason thereof shall be made with respect to, the number or price of
shares of Common Stock subject to the Option. Without limiting the
generality of the foregoing, no adjustment shall be made with respect to
the number or price of shares subject to any Option granted hereunder upon
the occurrence of any of the following events:
<PAGE>
(1) The grant or exercise of any other options which may be
granted or exercised under any qualified or nonqualified stock
option plan or under any other employee benefit plan of the Company
whether or not such options were outstanding on the date of grant of
the Option or thereafter granted;
(2) The sale of any shares of Common Stock in the Company's
initial or any subsequent public offering, including, without
limitation, shares sold upon the exercise of any over allotment
option granted to the underwriter in connection with such offering;
(3) The issuance, sale or exercise of any warrants to purchase
shares of Common Stock whether or not such warrants were outstanding
on the date of grant of the Option or thereafter issued;
(4) The issuance or sale of rights, promissory notes or other
securities convertible into shares of Common Stock in accordance
with the terms of such securities ("Convertible Securities") whether
or not such Convertible Securities were outstanding on the date of
grant of the Option or were thereafter issued or sold;
(5) The issuance or sale of Common Stock upon conversion or
exchange of any Convertible Securities, whether or not any
adjustment in the purchase price was made or required to be made
upon the issuance or sale of such Convertible Securities and whether
or not such Convertible Securities were outstanding on the date of
grant of the Option or were thereafter issued or sold; or
(6) Upon any amendment to or change in the terms of any rights
or warrants to subscribe for or purchase, or options for the
purchase of, Common Stock or Convertible Securities or in the terms
of any Convertible Securities, including, but not limited to, any
extension of any expiration date of any such right, warrant or
option, any change in any exercise or purchase price provided for in
any such right, warrant or option, any extension of any date through
which any Convertible Securities are convertible into or
exchangeable for Common Stock or any change in the rate at which any
Convertible Securities are convertible into or exchangeable for
Common Stock.
(f) RIGHT OF COMPANY TO MAKE ADJUSTMENTS. The grant of an Option pursuant
to the Plan shall not affect in any way the right or power of the Company
to make adjustments, reclassifications, reorganizations, or changes of its
capital or business structure or to merge or to consolidate or to
dissolve, liquidate or sell, or transfer all or any part of its business
or assets.
12. INVESTMENT PURPOSE. Each Option under the Plan shall be granted on the
condition that the purchase of the shares of stock thereunder shall be for
investment purposes, and not with a view to the sale or distribution; provided,
however, that in the event the shares of stock subject to such Option are
registered under the Securities Act or in the event a resale of such shares of
stock without such registration would otherwise be permissible, such condition
shall be inoperative if in the opinion of counsel for the Company such condition
is not required under the Securities Act or any other applicable law,
regulation, or rule of any governmental agency.
<PAGE>
13. NO OBLIGATION TO EXERCISE OPTION. The granting of an Option shall
impose no obligation upon the optionee to exercise such Option.
14. MODIFICATION, EXTENSION, AND RENEWAL OF OPTIONS. Subject to the terms
and conditions and within the limitations of the Plan, the Committee and the
Board of Directors may modify, extend or renew outstanding Options granted under
the Plan, or accept the surrender of outstanding Options (to the extent not
theretofore exercised). Neither the Committee nor the Board of Directors shall,
however, modify any outstanding Options so as to specify a lower price or accept
the surrender of outstanding Options and authorize the granting of new Options
in substitution therefor specifying a lower price. Notwithstanding the
foregoing, however, no modification of an Option shall, without the consent of
the optionee, alter or impair any rights or obligations under any Option
theretofore granted under the Plan.
15. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective on the
date of execution hereof, which is the date the Board of Directors approved and
adopted the Plan (the "Effective Date"); provided, however, if the Shareholders
of the Company shall not have approved the Plan by the requisite vote of the
Shareholders, within twelve (112) months after the Effective Date, then the Plan
shall terminate and all Options theretofore granted under the Plan shall
terminate and be null and void.
16. TERMINATION OF THE PLAN. This Plan shall terminate as of the
expiration of six (6) years from the date of execution hereof, which date of
execution is the date the plan was approved and adopted by the Board of
Directors of the Company. Options may be granted under this Plan at any time and
from time to time prior to its termination. Any Option outstanding under the
Plan at the time of its termination shall remain in effect until the Option
shall have been exercised or shall have expired.
17. AMENDMENT OF THE PLAN. The Plan may be terminated at any time by the
Board of Directors of the Company. The Board of Directors may at any time and
from time to time, without obtaining the approval of the Shareholders of the
Company, modify or amend the Plan (including the form of Option Agreement as
hereinabove mentioned) in such respects as it shall deem advisable to conform to
any change in the law, or in any other respect which shall not change: (a) the
maximum number of shares for which Options may be granted under the Plan, except
as provided in Section 11 hereof; or (b) the option prices other than to change
the manner of determining the fair market value of the Common Stock for the
purpose of Section 7(c) hereof to conform with any then applicable laws or
regulations thereunder; or (c) the periods during which Options may be granted
or exercised; or (d) the provisions relating to the determination of persons to
whom Options shall be granted and the number of shares to be covered by such
Options; or (e) the provisions relating to adjustments to be made upon changes
in capitalization. The termination or any modification or amendment of the Plan
shall not, without the consent of the person to whom any Option shall
theretofore have been granted, affect that persons' rights under an Option
theretofore granted to that person. With the consent of the person to whom such
Option was granted, an outstanding Option may be modified or amended by the
Committee in such manner as it may deem appropriate and consistent with the
requirements of this Plan applicable to the grant of a new Option on the date of
modification or amendment.
<PAGE>
18. INDEMNIFICATION OF COMMITTEE. In addition to such other rights of
indemnification as they may have as Directors or as members of the Committee,
the members of the Committee shall be indemnified by the Company against the
reasonable expenses, including attorneys' fees actually and necessarily incurred
in connection with the defense of any action, suit or proceedings, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such
Committee member is liable for negligence or misconduct in the performance of
his duties; provided that within sixty (60) days after institution of any such
action, suit or proceeding a Committee member shall in writing offer the Company
the opportunity, at its own expense, to pursue and defend the same.
19. WITHHOLDING. Whenever an optionee shall recognize compensation income
as a result of the exercise of any Option granted under the Plan, the optionee
shall remit in cash to the Company or Subsidiary the minimum amount of federal
income and employment tax withholding which the Company or Subsidiary is
required to remit to the Internal Revenue Service in accordance with the then
current provisions of the Code. The full amount of such withholding shall be
paid by the optionee simultaneously with the award or exercise of an Option, as
applicable.
20. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of Common Stock pursuant to Options granted hereunder will be used for
general corporate purposes.
21. GOVERNING LAW. This Plan shall be governed and construed in accordance
with the laws of the state of incorporation of the Company.
<PAGE>
EXECUTED this 1st day of June, 1994; effective, however, as of the
Effective Date.
POLISH TELEPHONES AND MICROWAVE CORPORATION
By:
W. Dal Berry
President
ATTEST:
EXHIBIT 12.1
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
PRO FORMA AS ADJUSTED
YEAR ENDED SIX MONTHS ENDED SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31 JUNE 30 JUNE 30 (1)
---------------------------------------------- ----------- --------------- ---------------
1993 1994 1995 1996 1997 1997 1997 1998 1998
------- ------- ------- --------- ------- ------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes ................. $(396) $(548) $(673) $(1,598) $ 2,672 $ 2,364 $ 43 $ 1,416 $(2,490)
Fixed Charges ....................... 138 101 44 172 440 601 200 939 4,845
------ ----- ----- ------- ------- ------- ----- ------- -------
Earnings from continuing operations
before income taxes and fixed charges $(258) $(447) $(629) $(1,426) $ 3,112 $ 2,965 $ 243 $ 2,355 $ 2,355
====== ===== ===== ======= ======= ======= ===== ======= =======
Fixed Charges:
Interest on debt and capital leases . (95) (59) (2) (128) (266) (427) (26) (342) (4,248)
(including amortization of debt
discount and expenses)
Interest element on rentals ......... (43) (42) (42) (44) (174) (174) (174) (597) (597)
------ ----- ----- ------- ------- ------- ----- ------- -------
Total ............................ (138) (101) (44) (172) (440) (601) (200) (939) (4,845)
Ratio of earnings to fixed charges .. N/A N/A N/A N/A 7.07x 4.93x 1.22x 2.51x 0.49x
Fixed Charges in Excess of Earnings . $ 534 $ 649 $ 717 $ 1,770 N/A N/A N/A N/A $ 7,335
</TABLE>
(1) As adjusted to reflect interest expense and amortization of expense on
Notes as if the Notes were funded as of January 1, 1998.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBIC ACCOUNTANTS
Telscape International, Inc.
Houston, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 9, 1998, relating to the
consolidated financial statements of Telscape International, Inc. and
subsidiaries (formerly Polish Telephones and Microwave Corporation), which is
contained in that Prospectus, and of our report dated March 6, 1998, relating to
the financial statements of MSN Communications, Inc., which is contained in that
Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
Houston, Texas
September 25, 1998
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
Telscape International, Inc.
Houston, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 27, 1996, relating to the
consolidated financial statements of Telscape International, Inc. and
subsidiaries (formerly Polish Telephone and Microwave Corporation) for the year
ended December 31, 1995, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ HOFFMAN, MCBRYDE & CO., P.C.
Dallas, Texas
September 25, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Telscape International, Inc.
Houston, Texas
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated September 6, 1997, relating to the
financial statements of Integracion de Redes, S.A. de C.V. as of December 31,
1996 and for the year then ended, which is contained in the Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ DE LAS FUENTES, DE LA MORA Y VALDIVIA, S.C.
Mexico City
September 25, 1998
