<PAGE>
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- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<C> <S>
/ / TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITIONAL PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-24622
------------------------
TELSCAPE INTERNATIONAL, INC.
(Exact name of Small Business Issuer as specified in its charter)
<TABLE>
<S> <C>
TEXAS 75-2433637
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) identification number)
2700 POST OAK BLVD., SUITE 1000, 77056
HOUSTON, TEXAS
(Address of principal executive offices) (Zip Code)
</TABLE>
Issuer's telephone number including area code--713/968-0968
----------------------------------------------------------------------
(Former name, former address and former fiscal year if changed since last
report)
------------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
7,229,175 shares of Registrant's common stock ($.001 Par Value) were
outstanding as of November 11, 1999.
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<PAGE>
TELSCAPE INTERNATIONAL, INC.
TABLE OF CONTENTS
FORM 10-Q
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets--
As of December 31, 1998 and September 30, 1999
(unaudited)................................................. 1
Unaudited Condensed Consolidated Statements of
Operations--Three Months and Nine Months Ended
September 30, 1998 and 1999................................. 2
Unaudited Condensed Consolidated Statements of Cash
Flows--Nine Months Ended September 30, 1998 and 1999........ 3
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 28
(a) Exhibits................................................ 28
(b) Reports on Form 8-K..................................... 28
Signatures.............................................................. 29
</TABLE>
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 9,631,000 $ 6,040,000
Accounts receivable, less allowance for doubtful accounts
of $275,000 and $467,000 (unaudited), respectively...... 14,387,000 14,448,000
Inventories............................................... 4,581,000 4,724,000
Prepaid expenses and other................................ 3,519,000 8,311,000
Deferred income taxes..................................... 628,000 571,000
----------- ------------
Total current assets.................................... 32,746,000 34,094,000
Property and equipment, net of accumulated depreciation..... 14,576,000 53,042,000
Goodwill and other intangibles, net of accumulated
amortization.............................................. 31,416,000 29,624,000
Other assets................................................ 1,593,000 4,656,000
----------- ------------
Total assets............................................ $80,331,000 $121,416,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $22,090,000 $ 40,482,000
Accrued expenses.......................................... 10,182,000 11,907,000
Current portion of notes payable and capital lease
obligations............................................. 2,714,000 8,707,000
Convertible debentures.................................... 4,996,000 --
----------- ------------
Total current liabilities............................... 39,982,000 61,096,000
Notes payable and capital lease obligations, net of current
portion................................................... 1,488,000 27,835,000
Convertible subordinated debentures......................... 3,935,000 994,000
Minority interests.......................................... -- --
Commitments and contingencies............................... -- --
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; 6,048,909 and 7,002,458 issued,
respectively............................................ 6,000 7,000
Additional paid-in capital................................ 39,398,000 45,774,000
Accumulated deficit....................................... (3,881,000) (13,518,000)
Treasury stock............................................ (480,000) (480,000)
Capital subscriptions receivable.......................... (117,000) (292,000)
----------- ------------
Total stockholders' equity.............................. 34,926,000 31,491,000
----------- ------------
Total liabilities and stockholders' equity.............. $80,331,000 $121,416,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues................................ $36,529,000 $26,613,000 $102,306,000 $ 83,341,000
Cost of revenues........................ 29,727,000 23,602,000 86,783,000 72,861,000
----------- ----------- ------------ ------------
Gross profit............................ 6,802,000 3,011,000 15,523,000 10,480,000
Selling, general and administrative
expenses.............................. 3,660,000 5,949,000 9,365,000 15,337,000
----------- ----------- ------------ ------------
Operating income (loss) before
depreciation and amortization......... 3,142,000 (2,938,000) 6,158,000 (4,857,000)
Depreciation and amortization........... 960,000 1,601,000 2,218,000 4,638,000
----------- ----------- ------------ ------------
Operating income (loss)................. 2,182,000 (4,539,000) 3,940,000 (9,495,000)
OTHER INCOME (EXPENSE):
Interest income....................... 45,000 64,000 308,000 186,000
Interest expense...................... (317,000) (509,000) (821,000) (2,436,000)
Amortization of debt offering costs... (63,000) (292,000) (73,000) (1,152,000)
Foreign exchange income (loss)........ (581,000) 367,000 (768,000) 262,000
Other, net............................ 241,000 (74,000) 337,000 (541,000)
----------- ----------- ------------ ------------
Total other expense, net............ (675,000) (444,000) (1,017,000) (3,681,000)
----------- ----------- ------------ ------------
Income (loss) before income taxes and
minority interests.................... 1,507,000 (4,983,000) 2,923,000 (13,176,000)
Income tax benefit (expense)............ (652,000) 1,288,000 (1,547,000) 3,539,000
----------- ----------- ------------ ------------
Income (loss) before minority
interests............................. 855,000 (3,695,000) 1,376,000 (9,637,000)
Minority interests in subsidiaries...... 14,000 -- (15,000) --
----------- ----------- ------------ ------------
Net income (loss)....................... $ 869,000 $(3,695,000) $ 1,361,000 $ (9,637,000)
----------- ----------- ------------ ------------
EARNINGS (LOSS) PER SHARE:
Basic................................. $ 0.16 $ (0.53) $ 0.28 $ (1.47)
Diluted(1)............................ $ 0.11 n/a $ 0.17 $ n/a
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................. 5,547,651 6,994,998 4,877,604 6,568,371
Diluted(1)............................ 8,228,284 n/a 7,788,139 n/a
</TABLE>
- ------------------------
(1) Inclusion of additional shares under a diluted analysis for the three and
nine months ended September 30, 1999 is inappropriate due to the
anti-dilutive effect.
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,361,000 $ (9,637,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts........................... 556,000 268,000
Depreciation and amortization............................. 2,218,000 4,638,000
Interest accrued on non-interest bearing notes payable and
amortization of debt offering costs..................... 212,000 1,346,000
Charges incurred on refinancing of operating lease........ -- 327,000
Expenses incurred related to warrants issued to third
parties................................................. -- 139,000
Deferred income taxes..................................... 290,000 (1,448,000)
Minority interest in subsidiaries' income................. 15,000 --
Equity in income from unconsolidated subsidiary........... -- 89,000
Changes in assets and liabilities:
Accounts receivable..................................... (5,672,000) (329,000)
Inventories............................................. (191,000) (143,000)
Prepaid and other assets................................ (2,579,000) (6,848,000)
Accounts payable........................................ 9,490,000 11,262,000
Accrued expenses........................................ 991,000 1,724,000
------------ ------------
Net cash provided by operating activities................. 6,691,000 1,388,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (9,194,000) (26,522,000)
Acquisition of MSN, net of cash acquired.................. (2,325,000) --
Acquisition of INTERLINK, net of cash acquired............ (8,250,000) --
------------ ------------
Net cash used in investing activities....................... (19,769,000) (26,522,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations..................... (55,000) (115,000)
Payments on notes payable................................. (538,000) (1,295,000)
Purchase of treasury shares............................... (594,000) --
Payments/borrowings on line of credit, net................ 1,948,000 (1,688,000)
Proceeds from exercise of options and warrants............ 4,784,000 383,000
Proceeds from sales of common stock....................... -- 2,897,000
Payments on convertible debt.............................. -- (6,000,000)
Payments on short term notes payable...................... -- (9,000,000)
Proceeds from short term notes payable.................... -- 12,426,000
Borrowings under Lucent credit facility................... -- 23,935,000
Proceeds from issuance of convertible debt................ 10,000,000 --
------------ ------------
Net cash provided by financing activities................... 15,545,000 21,543,000
------------ ------------
Net increase (decrease) in cash and cash equivalents........ 2,467,000 (3,591,000)
------------ ------------
Cash and cash equivalents at beginning of period............ 4,734,000 9,631,000
------------ ------------
Cash and cash equivalents at end of period.................. $ 7,201,000 $ 6,040,000
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................. $ 398,000 $ 2,253,000
Income taxes paid......................................... 1,334,000 817,000
NON-CASH TRANSACTIONS:
Issuance of common stock and promissory notes in
connection with acquisition of MSN:
Promissory Notes........................................ 672,000 --
Common Stock............................................ 880,000 --
Issuance of warrants in connection with financings and to
other third parties..................................... -- 915,000
Issuance of common stock in connection with conversion of
convertible debentures.................................. 497,000 2,006,000
Network construction costs incurred and included as
accounts payable to be financed through Lucent credit
facility................................................ -- 12,000,000
Refinancing of operating lease............................ -- 2,554,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
include the accounts of Telscape International, Inc. and its subsidiaries
(collectively, the "Company"). The unaudited condensed consolidated financial
statements of the Company for the three and nine months ended September 30, 1998
and September 30, 1999 have been prepared without an audit pursuant to the rules
and regulations of the Securities and Exchange Commission. They do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, which consist of normal recurring adjustments, considered necessary
to present fairly the financial position, results of operations and cash flows
for all periods presented have been made. Operating results for the three and
nine months ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. The Company reviews all significant estimates
affecting the financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their issuance. The actual results could
differ from those estimates.
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. Significant adverse effects from any
downturns in the Mexican economy could result in an adverse effect on the
Company's operations. The Company also has a significant amount of its payables
denominated in pesos, which exposes the Company to exchange rate risk. In
addition, the Company has begun construction of a fiber-optic long distance
network in Mexico which will significantly increase its operations in Mexico.
NEW ACCOUNTING STANDARDS
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
5
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1--FINANCIAL STATEMENTS (CONTINUED)
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, 2000.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. The Company does not expect
adoption of the new standard to have a material effect on its financial
statements.
SOP 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," requires all
start-up and organizational costs to be expensed as incurred. It also requires
all remaining historically capitalized amounts of these costs existing at the
date of adoption to be expensed and reported as the cumulative effect of a
change in accounting principles. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. The adoption of SOP 98-5 did not have a
material effect on its financial statements.
SFAS No. 135, "RESCISSION OF FINANCIAL ACCOUNTING STANDARDS BOARD NO. 75
("SFAS NO. 75") AND TECHNICAL CORRECTIONS," rescinds SFAS No. 75 and amends
Statement of Financial Accounting Standards Board No. 35. SFAS No. 135 also
amends other existing authoritative literature to make various technical
corrections, clarify meanings, or describe applicability under changed
conditions. SFAS No. 135 is effective for financial statements issued for fiscal
years ending after February 15, 1999. The Company believes that the adoption of
SFAS No. 135 will not have a material effect on its financial statements.
NOTE 2--EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- ------------------------
1998 1999 1998 1999
---------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
BASIC
Net income (loss) as reported............. $ 869,000 ($ 3,695,000) $1,361,000 ($9,637,000)
Weighted average common shares
outstanding............................. 5,547,651 6,994,998 4,877,604 6,568,371
Basic earnings (loss) per share........... $ 0.16 $ (0.53) $ 0.28 $ (1.47)
DILUTED
Net income (loss) as reported............. $ 869,000 ($ 3,695,000) $1,361,000 ($9,637,000)
Weighted average common shares
outstanding............................. 5,547,651 6,994,998 4,877,604 6,568,371
Weighted average diluted potential common
shares outstanding...................... 2,680,633 2,281,057 2,910,535 2,135,921
Weighted average common and dilutive
potential common shares outstanding..... 8,228,284 9,276,056 7,788,139 8,704,292
Diluted earnings (loss) per share......... $ 0.11 $ (0.40) $ 0.17 $ (1.11)
</TABLE>
6
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2--EARNINGS (LOSS) PER SHARE (CONTINUED)
Diluted EPS for the three and nine months ended September 30, 1999 was not
disclosed on the Unaudited Condensed Consolidated Statement of Operations as the
effect is anti-dilutive. Certain performance based warrants issued in connection
with the Company's acquisitions vested upon the achievement of certain operating
performance measures. In accordance with SFAS 128, these contingently issuable
shares were included in the calculation of diluted EPS when all the necessary
conditions were met. For purposes of the diluted EPS calculations for the three
and nine months ended September 30, 1999, there were 1,170,367 and 1,238,367
options and warrants outstanding, respectively, which were not included in the
calculation of diluted EPS as their exercise prices were greater than the
average market price of the Company's common stock during the period and
inclusion of these securities in the calculation would result in an
anti-dilutive effect.
NOTE 3--CONSTRUCTION IN PROGRESS
The Company began construction of a long distance fiber optic network in
Mexico late in the second quarter of 1999. Provided that the necessary funding
is obtained, the Company expects that the network will be completed in the
fourth quarter of 1999 and become operational in the first quarter of 2000.
Amounts incurred through September 30, 1999 on the network total
$30.9 million of which $14.2 million has been funded through the Lucent
Facility. As of September 30, 1999, there are approximately $12.0 million in
costs due to Lucent classified as accounts payable awaiting funding under the
Lucent Facility once the remaining conditions precedent to additional fundings
under the Lucent Facility are satisfied.
The Company estimates that there are an additional $10-$15 million in
expenditures related to the network and its network expansions which will not be
funded through the Lucent Facility.
NOTE 4--NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The Company's notes payable and capital lease obligations consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- --------------
<S> <C> <C>
Deere Park Convertible Subordinated Debentures, bearing
interest at 8%, convertible into Common Stock, maturing
three years from closing.................................... $3,935,000 994,000
Gordon Brothers Convertible Debentures, bearing interest at
8%, convertible into Common Stock, maturing on May 29, 1999,
secured by substantially all assets of Interlink
Communications, Inc. and stock of Telereunion, Inc., repaid
in May of 1999.............................................. 4,996,000 --
Non-interest bearing promissory notes, imputed interest at
10%, unamortized discount of $228,000 and $167,000,
respectively, issued in connection with Integracion
acquisition, maturing at various dates through January 1,
2001........................................................ 1,713,000 1,299,000
</TABLE>
7
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- --------------
<S> <C> <C>
Promissory note issued to repurchase common stock, payable
in six semi-annual installments through May 20, 2000, and
bearing interest at 6%, secured by common shares
repurchased................................................. 150,000 100,000
Capital lease obligations payable in monthly installments of
$13,258 including principal and interest, maturing at
various dates through December 1, 2003 secured by equipment
and furniture............................................... 221,000 424,000
Non-interest bearing promissory note, imputed interest at
10%, unamortized discount of $49,000 and $0, respectively,
issued in connection with MSN acquisition, remaining amount
due paid in full on June 17, 1999..................... 430,000 --
Revolving credit facility maturing July 31, 1999 bearing
interest at prime plus 1%, secured by accounts receivable... 1,688,000 --
Promissory note, interest at 10.62%, payable in 36 equal
monthly installments of $52,234 including principal and
interest, maturing April 1, 2002, secured by equipment...... -- 1,371,000
Promissory note, interest at 10.93%, payable in 36 equal
monthly installments of $14,700 including principal and
interest, maturing June 1, 2002, secured by equipment....... -- 406,000
Promissory note, interest and payment terms described below,
maturing January 1, 2005, secured by equipment.............. -- 4,462,000
Promissory note, interest and payment terms described below,
maturing January 1, 2005, secured by equipment.............. -- 1,119,000
Senior Notes, interest and payment terms described below,
maturing November 5, 2000................................... -- 850,000
$2.0 million Senior notes, interest at 8%, maturing
December 18, 2000........................................... -- 2,000,000
Unsecured promissory note, interest and payment terms
described below, maturing November 24, 1999................. -- 576,000
Promissory notes, interest and payment terms described
below, maturing August 27, 2004, secured as described
below....................................................... -- 23,935,000
---------- ----------
Total notes payable and capital leases...................... 13,133,000 37,535,000
Current portion............................................. 7,710,000 8,707,000
---------- ----------
Long term portion........................................... $5,423,000 28,828,000
---------- ----------
</TABLE>
8
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
The annual maturity of the debt indicated above for the five years following
September 30, 1999 are $809,000 in 1999, $3,635,000 in 2000, $10,230,000 in
2001, $6,832,000 in 2002 and $7,732,000 in 2003 and $8,297,000 in 2004 and
following.
On January 11, 1999, the Company signed a financing arrangement with a
finance company which provides for funding of equipment purchases of up to
$7.0 million through December 31, 1999. The financing is structured as loans
maturing January 1, 2005. The loans provide for payments of interest only
through January 1, 2000. Thereafter, payments of principal and interest are due
quarterly. Interest is calculated on available basis during the interest only
period at 425 basis points above the 90 day commercial paper rate. Interest
thereafter is calculated at 500 basis points above the five year Federal Reserve
Treasury Constant Maturity Rate. The Company has drawn approximately
$5.6 million under this facility through November 5, 1999, of which
$2.5 million resulted in refinancing equipment, which was previously financed
through an operating lease. The Company is not in compliance with certain
financial covenants under this loan facility and has secured a waiver from the
finance company of their rights under the agreement to enforce default
provisions due to non compliance with these financial covenants for the third
quarter of 1999. The Company also agreed that should the lender in the Lennox
facility decide to terminate the Lennox facility prior to funding the entire
$10.0 million amount of the facility, the finance company may declare a default
under the agreement and accelerate the maturity date. The amounts outstanding
under this facility of $5.6 million have been classified as current in the
financial statements as of September 30, 1999. The Company may have to request
additional waivers from the finance company due to non compliance with financial
covenants in future quarters. The Company cannot guarantee that the finance
company would provide the Company with additional waivers in which case they
could enforce the default provisions and accelerate the maturity date. Should
that be the case, there is no guarantee that the Company would be able to obtain
a replacement facility. A default under this agreement could trigger cross
defaults with several of our other obligations totaling $31.3 million at
September 30, 1999.
In July 1999, the Company received a bridge loan of $3.0 million from Lucent
("Lucent Bridge Loan"). The Lucent Bridge Loan was repaid on August 27, 1999,
upon the funding of the Lucent facility. In connection therewith, the Company
issued to Lucent warrants to purchase an aggregate of 85,000 shares of Common
Stock at an exercise price of $8.50 per share. The warrants have a term of three
years.
On May 7, 1999, the Company issued $6,850,000 in Senior Notes (the "Senior
Notes") originally maturing in November 2000. E. Scott Crist, CEO of the
Company, is holder of the remaining $850,000 balance of the Senior Notes ("Crist
Loan"). The maturity of the Crist Loan can be extended unilaterally by the
Company through January 4, 2001. In the event that the Crist Loan is not paid by
November 5, 1999, then Mr. Crist will be issued an additional 31,805 warrants.
In the event that the Crist Loan is not paid by May 5, 2000, then Mr. Crist will
be issued an additional 31,805 warrants. As a result, the Crist Loan is
classified as long-term in the financial statements as of September 30, 1999.
The Company repaid $6,000,000 of the Senior Notes on August 27, 1999, upon the
funding of the Lucent facility. The Crist Loan bears interest at 8% from May
through November 6, 1999. Thereafter, the interest rate increases by 1 percent
for each month after November 6, 1999. Pursuant to the terms of the Senior
Notes, the Company issued to the holders of the Senior Notes a total of 256,315
warrants at an exercise price of $6.68. The proceeds from the Senior Notes were
utilized to repay the entire principal amount of the Gordon Brothers Convertible
Debentures plus $1.1 million in exit fees. The Company estimated the fair value
of the warrants by utilizing the Black-Scholes option pricing model with the
following assumptions: dividend yield
9
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
of 0%, expected volatility of 53.91%, risk free interest rate of 5% and expected
life of 3 months. The resulting cost of approximately $398,000 will be amortized
as interest expense over three months.
On June 18, 1999, the Company issued $2,000,000 in Senior Notes (the "$2
Million Senior Notes") maturing December 18, 2000. The $2 Million Senior Notes
are subject to optional prepayment provisions allowing the Company to prepay a
portion or all of the outstanding principal amount without premium or penalty.
The $2 Million Senior Notes bear interest at 8% from June through December 17,
1999. Thereafter, the interest rate increases by 1 percent for each month after
December 17, 1999. The Company also issued to the holders of the $2 Million
Senior Notes a total of 62,501 warrants with an exercise price of $8.00 per
share and a term of three years. In the event that the $2 Million Senior Notes
are not paid by December 18, 1999, then the holders will be issued an additional
62,501 warrants. In the event that the $2 Million Senior Notes are not paid by
June 18, 2000, then the holders will be issued an additional 62,501 warrants in
which case the final maturity date is December 18, 2000. The Company may
unilaterally extend the maturity date of the $2 Million Senior Notes an
additional 60 days beyond December 18, 2000. The Company estimated the fair
value of the warrants by utilizing the Black-Scholes option pricing model with
the following assumptions: dividend yield of 0%, expected volatility of 53.91%,
risk free interest rate of 5% and expected life of 2 months. The resulting cost
of approximately $116,000 will be amortized as interest expense over two months.
In July 1999, the Company's Revolving Credit Facility expired and the
Company repaid all amounts outstanding at that time.
On July 28, 1999, the Company issued an unsecured and subordinated
promissory note in the amount of $576,000 maturing on November 24, 1999. The
Company may prepay this note with no penalty subject to the following
limitations. In the event that the Company's common stock closes above $11 per
share for the five consecutive trading days prior to November 24, 1999, the
Company may elect to pay the holder the principal amount in cash plus accrued
interest at a rate of 15% per annum. In the event that the price of the
Company's stock is greater than $5.25 per share and less than $11 per share at
the time of maturity, the Company must provide the holder of the note with
91,042 shares of the Company's common stock as payment of the note and no
interest shall be owing. In the event that the price of the Company's common
stock is less than $5.25 per share, the Company agrees to pay the note in cash
at maturity plus accrued interest at 15% per annum.
On August 27, 1999, Telscape International, Inc., the registrant, along with
its subsidiaries, Telereunion S.A. de C.V. ("Telereunion"), Telereunion
International, S.A. de C.V., Telereunion, Inc., Telscape USA, Inc., MSN
Communications, Inc., Interlink Communications, Inc., TSCP International, Inc.,
Vextro De Mexico S.A. de C.V., Servicios Corporativos Vextro, S.A. de C.V.,
Telscape de Mexico S.A. de C.V., N.S.I. S.A. de C.V., Lan and Wan S.A. de C.V.
and M.S. Noticias y Telecomunicaciones, S.A. de C.V. (collectively, the
"Borrowers") signed a credit agreement ("Credit Agreement") with Lucent
Technologies, Inc. ("Lucent").
The Credit Agreement provides for up to $40 million in financing. The
registrant borrowed $23.9 million under the Credit Agreement on August 27, 1999,
of which $9.0 million was utilized to repay the $3.0 million Lucent Bridge Loan
and $6.0 million of the Senior Notes and $14.9 million was utilized to pay for
costs directly related to construction of the network and debt offering costs.
Subsequent loans under
10
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
the Credit Agreement are subject to the satisfaction of certain conditions
precedent, one of which has not been satisfied as of the date of this filing.
The Credit Agreement provides for principal payments on each Loan to be made
in nine installments with the first installment due on the first anniversary of
the closing date with each succeeding installment due in six month increments.
The amount of the payment on each installment shall be a percentage of the total
aggregate amount of the Loan, as follows: installments 1-2: 5%; installments
3-4: 10%; installments 5-6: 12.5%; installments 7-9: 15%. In addition, the
Credit Agreement provides for annual mandatory prepayments beginning in the year
ended December 31, 2000 equal to 50% of Excess Cash Flow of such year. Excess
Cash Flow is defined in the Credit Agreement and includes EBITDA (as defined)
less certain items including capital expenditures, payments of indebtedness,
income tax payments, and equity investments in telecommunications companies.
Interest under the Credit Agreement is calculated, at the Borrowers' option,
at either the London interbank offered rates plus an Applicable Margin or the
Bank of America, N.A. prime lending rate plus an Applicable Margin. Applicable
Margin is defined as follows: Year 1: 5.75%; Year 2: 6.00%; Year 3: 6.25%; Year
4: 6.75%, Year 5: 7.25%. The Company has the option of borrowing under the
Credit Facility for interest payments until the first anniversary date of the
closing date. There is a 0.75% commitment fee on the unutilized and undrawn
commitment until the commitment termination date, which is on the first
anniversary of the closing date of the Credit Agreement.
The Credit Agreement is secured by substantially all of the assets of the
Company including the network assets, accounts receivable, the capital stock and
equity interests of the subsidiaries of Telscape International, and all other
tangible and intangible assets of the Company excluding encumbered assets at the
time of signing.
The Credit Agreement includes several covenants including financial
performance covenants as well as covenants which limit the ability of the
Company to take on additional borrowings, merge with or acquire other companies
without the lender's prior approval.
On October 22, 1999, the Company signed a loan agreement with Lennox
Invest Ltd., a BVI Corporation, which provides for funding of up to
$10.0 million (the "Lennox Facility"). Each individual funding under the
agreement is to be evidenced by a Promissory Note maturing 180 days from its
respective funding. A total of $1.5 million has been funded on this facility,
which bears interest at 10% per annum. Interest on each Note is to be paid at
maturation of the respective Note. For every $1,000,000 advanced under the
agreement, the Company is obligated to issue a three year warrant to Lennox to
acquire 35,714 shares of the Company at an exercise price related to the market
price of the common stock. For every $1,000,000 that is outstanding for more
than one month, the Company is obligated to issue an additional three-year
warrant to acquire 35,714 shares of the Company. For every $1,000,000 that is
outstanding for more than two months, the Company is obligated to issue a third
three-year warrant to acquire 35,714 shares of the Company. Either party may
terminate the agreement after the funding of $3 million without any further
liability. The collateral provided for under the Lennox Facility consists of
Telscape common stock owned directly or indirectly by certain members of
management provided on a formula basis based on the level of borrowings
outstanding under the Lennox Facility and the market value of the Company's
common stock.
11
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--SEGMENT INFORMATION
The Company has two reportable segments: International Long Distance and
Advanced Services. Revenues in the International Long Distance segment are
generated on a retail and wholesale basis. Revenues in the Advanced Services
segment are generated from Network Solution services, Customer Relationship
Management and Broadband Services and Products. The Company provides
international long distance services to customers in the United States and in
Mexico. Advanced Services are provided to customers in the United States, Mexico
and Latin America. The Company measures segment profit as earnings before
interest, depreciation, amortization of intangibles, other income and taxes
(EBITDA).
Revenues, operating information and identifiable assets by business segment
are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues
International long distance:
Retail............................... $13,044,000 $15,054,000 $ 45,471,000 $49,726,000
Wholesale............................ 9,839,000 4,025,000 26,641,000 11,764,000
Advanced services:
Network solutions.................... 10,127,000 2,636,000 24,525,000 9,935,000
Customer relationship management..... 939,000 2,563,000 1,883,000 5,589,000
Broadband services and products...... 2,580,000 2,335,000 3,786,000 6,327,000
----------- ----------- ------------ -----------
Total revenues........................... $36,529,000 $26,613,000 $102,306,000 $83,341,000
Operating income (loss) before interest,
depreciation and amortization
International long distance............ $ 2,735,000 $(2,659,000) $ 5,309,000 $(2,795,000)
Advanced services...................... 940,000 756,000 2,071,000 513,000
Corporate and other.................... (533,000) (1,035,000) (1,222,000) (2,575,000)
----------- ----------- ------------ -----------
Total operating income (loss) before
interest, depreciation and
amortization........................... $ 3,142,000 $(2,938,000) $ 6,158,000 $(4,857,000)
Depreciation and amortization.......... $ 960,000 $ 1,601,000 $ 2,218,000 $ 4,638,000
Operating income (loss) as reported on
the Statements of Operations........... $ 2,182,000 $(4,539,000) $ 3,940,000 $(9,495,000)
----------- ----------- ------------ -----------
Capital Expenditures
International long distance............ $ 3,152,000 $20,910,000 $ 8,443,000 $25,241,000
Advanced services...................... 345,000 522,000 749,000 1,245,000
Corporate and other.................... 1,000 1,000 2,000 36,000
----------- ----------- ------------ -----------
Total capital expenditures......... $ 3,498,000 $21,433,000 $ 9,194,000 $26,522,000
=========== =========== ============ ===========
</TABLE>
12
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ -------------------
<S> <C> <C>
Identifiable assets
International long distance............................... $21,819,000 $ 63,582,000
Advanced services......................................... 37,043,000 36,302,000
Corporate and other....................................... 21,469,000 21,532,000
----------- ------------
Total identifiable assets............................. $80,331,000 $121,416,000
=========== ============
</TABLE>
Information concerning principal geographic areas is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues
United States.......................... $24,972,000 $20,791,000 $ 75,317,000 $66,065,000
Mexico................................. 11,065,000 5,200,000 26,407,000 15,525,000
Latin America.......................... 492,000 622,000 582,000 1,751,000
----------- ----------- ------------ -----------
Total revenues........................... $36,529,000 $26,613,000 $102,306,000 $83,341,000
=========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ -------------------
<S> <C> <C>
Fixed assets, net of accumulated depreciation
United States............................................. $ 7,297,000 $14,105,000
Mexico.................................................... 5,174,000 37,462,000
Latin America............................................. 2,105,000 1,475,000
----------- -----------
Total fixed assets.......................................... $14,576,000 $53,042,000
=========== ===========
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this Quarterly Report on Form 10-Q 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q 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.
Management wishes to caution the reader that the forward-looking statements
referred to above and contained in this Quarterly Report on Form 10-Q regarding
matters that are not historical facts involve and are based on numerous
assumptions and predictions about future conditions that could prove not to be
accurate. No assurance can be given that the future results will be achieved;
actual events, transactions or results may differ materially as a result of
risks facing the Company. Such risks include, but are not limited to, the
effectiveness of management's strategies and decisions, the ability to raise the
necessary capital to effectuate the Company's business plan, 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 any of which could cause actual results to vary
materially from the future results indicated, expressed or implied, in such
forward-looking statements. No assurance can be given that these are all of the
factors that could cause actual results to vary materially from the
forward-looking statements. Statements with respect to acquisitions and
continued trends are forward-looking and involve risks and uncertainties.
Furthermore, the Company has significant operations in Mexico, subjecting the
Company to certain political, economy and commercial risk. The Company
undertakes no obligation and does not intend to update, revise or otherwise
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect future events or circumstances.
14
<PAGE>
OUTLOOK
The Company operates in mainly two business segments: International Long
Distance and Advanced Services.
Following is a summary of revenues in each segment by types of services
provided.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
INTERNATIONAL LONG DISTANCE:
Retail................................. $13,044,000 $15,054,000 $ 45,471,000 $49,726,000
Wholesale.............................. 9,839,000 4,025,000 26,641,000 11,764,000
ADVANCED SERVICES:
Network solutions...................... 10,127,000 2,636,000 24,525,000 9,935,000
Customer relationship management....... 939,000 2,563,000 1,883,000 5,589,000
Broadband services and products........ 2,580,000 2,335,000 3,786,000 6,327,000
----------- ----------- ------------ -----------
Total revenues....................... $36,529,000 $26,613,000 $102,306,000 $83,341,000
=========== =========== ============ ===========
</TABLE>
In the International Long Distance Segment, the Company derives its revenues
from the sale of U.S. outbound international long distance services to Latin
America, principally Mexico. The Company provides these services on a wholesale
basis to other carriers and on a retail basis through the sale of prepaid phone
cards. The Company has been focusing on the expansion of its retail prepaid
calling card brand, TELEFIESTA-REGISTERED TRADEMARK-, as the long distance
business has come under increasing competitive pressure and contracting margins.
As pricing pressures have affected the international long distance revenues,
management has elected to dedicate its network assets to supporting its retail
business due to management's belief that the retail business has greater long
term value. The Company intends to expand its retail offerings in the future as
it expands it network facilities. The Company started offering prepaid calling
cards for sale in Mexico during the third quarter. The Company believes that
owning a long distance network in Mexico will increase the percentage of minutes
of traffic it carries on-net, enabling it to increase revenues, margins and
profitability and ensure quality of service on both international and domestic
long distance traffic. The Company began construction of their network late in
the second quarter of 1999 and expects to complete it by the end of the year. As
of the end of the third quarter, obligations and expenditures incurred by the
Company for its network in Mexico, accounted for as construction in progress,
totaled $30.9 million
In the Advanced Services Segment, the Company derives its revenues
principally from three areas: Network Solutions, Customer Relationship
Management and Broadband Services and Products.
The Company provides Network Solution services to private and public sector
customers in Mexico. Revenues from these services are expected to soften due to
the Company's efforts to restructure its product and services offerings to
concentrate on higher margin value-added services and away from lower margin
equipment-only sales and may soften as a result of weakening economic conditions
in Mexico. As traditional telecommunications services become more of a
commodity, the Company believes that Network Solution services will become an
increasingly important component of the Company's service offerings. The Company
has leveraged its systems integration expertise to provide outsourced network
management services to local and multi-national business customers in Mexico. A
natural migration is occurring in the Network Solutions business as customers
migrate from private networking solutions to solutions that depend on the public
network. The Company believes that the build-out of the Mexican Network will
enhance its ability to provide these services by allowing it to provide a
complete package of network solutions and data, voice, video and Internet
services under one umbrella to its customers.
The Company provides Customer Relationship Management services through its
customer management call center in Mexico. This call center was established in
late 1997 with the signing of the contract
15
<PAGE>
with the U.S. Embassy. Revenues from these services have increased significantly
with the expansion of the facility and the addition of other customers including
the Mexican Ministry of Foreign Affairs. The Company expects revenues from these
services to continue to grow in the future. The Company has secured a new
facility for the call center that will allow it to increase its capacity from
its current operator base of approximately 180 to approximately 700. The Company
expects to occupy the new facility and have it in full operation by early in the
first quarter of 2000.
The Company provides Broadband Services and Products through its INTERLINK
subsidiary. INTERLINK operates a satellite teleport facility in Mountain View,
California and provides voice, video, data and Internet services including
fractional and full T-1 data broadcast, dedicated circuits and private line
up-link and down-link services in the U.S., Latin America and other parts of the
world. INTERLINK has expanded its product offering to include
Bandwidth-on-Demand, Integrated Services Digital Network ("ISDN") video
conferencing and Internet-through-satellite services. INTERLINK serves as an
Internet backbone provider to Internet service providers ("ISPs") and
universities in remote areas where access to high speed fiber optics is limited,
such as the case in many Latin American countries.
In the second quarter of 1999, the Company began the construction of the
Mexican Network, a combined fiber-optic and microwave long distance network,
connecting the Gulf region of Mexico with certain key Mexican cities. The first
stage of the Mexican Network consists of 650 km of fiber optic cable and
microwave, circuit switched type of transmission and switching facilities, in
the Gulf region of Mexico from Mexico City to Puebla, Puebla to Veracruz and
Veracruz to Poza Rica. The Company intends to lease and swap capacity from other
long distance providers to connect with the central (Mexico City, Guanajuato and
Guadalajara) and northeast (Monterrey) regions of Mexico, and to install
switching facilities in Mexico City and Monterrey. In May 1999, the Company
signed an agreement with Avantel S.A., which owns the second largest network in
Mexico, to exchange strands of fiber along 1100 kilometers of Avantel's network
from Poza Rica to Reynosa (providing the Company with a border crossing) to
Monterrey for strands of fiber along 650 kilometers of the Company's network.
The agreement is subject to regulatory approval. The Company believes that more
than half of the domestic 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. The Company is currently negotiating fiber exchange
agreements with other concessionaires. The Company's Mexican Network, when
complete, will link 22 cities and towns and cover, including interconnection
agreements, the majority of the population in Mexico. As of the end of the third
quarter, obligations and expenditures incurred by the Company for its network in
Mexico, accounted for as construction in progress, totaled $30.9 million.
GROSS PROFIT.
The Company has been experiencing pricing pressure on its international long
distance services resulting in lowering of gross profit percentage and
contribution. The Company has not been able to reduce its termination costs as
quickly as prices have declined in the international long distance business and
has relied partially on certain lower margin outsourcing arrangements to support
its prepaid calling cards. Upon the completion of its own long distance network
in Mexico, expected in early 2000, the Company believes that the percentage of
minutes of traffic it carries on-net will increase, effectively lowering its
termination costs.
In its Advanced Services segment, the Company has been successful in
increasing the overall percentage of revenues derived from enhanced, value-added
services and as a result has seen a significant increase in gross profits as a
percentage of revenues from these services.
OPERATING EXPENSES. With the selection of Lucent to engineer, furnish and
install the Company's long distance network in Mexico, the Company is moving
into a period of significant investment in facilities and human resources. As a
result, the Company expects operating expenses to continue to increase.
16
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES decreased from $36,529,000 in 1998 to $26,613,000 in 1999. This
decrease of $9,916,000, or 27.1%, was due principally to the Company's decision
to reduce sales to distributors of low margin equipment in Mexico, a decline in
the Company's international long distance revenues, a decrease in the Company's
Broadband services and products and the weakened economic conditions in Mexico.
These declines were offset by an increase in revenues from the Company's
Customer Relationship Management services. Network Solutions revenues in Mexico
decreased $7,491,000 from $10,127,000 in 1998 to $2,636,000 in 1999. This
decline is largely attributable to the Company's refocusing on higher margin
products and a general slowdown in the market caused by weakened economic
conditions in Mexico and concerns about the Y2K virus. Wholesale international
long distance revenues decreased $5,814,000 from $9,839,000 in 1998 to
$4,025,000 in 1999. Retail international long distance revenues increased
$2,010,000 from $13,044,000 in 1998 to $15,054,000 in 1999. Customer
Relationship Management services revenues increased $1,624,000 from $939,000 in
1998 to $2,563,000 in 1999 as the Company increased its operator positions to
accommodate higher demand for its services. Broadband Services and Products
revenues decreased $245,000 from $2,580,000 in 1998 to $2,335,000 in 1999 due to
decreased sales of manufacturing products in this quarter.
COST OF REVENUES decreased from $29,727,000 in 1998 to $23,602,000 in 1999,
or $6,125,000. The 20.6% decrease in cost of revenues was due principally to the
decrease of revenues offset by the increased costs associated with the
international long distance services. The cost of revenues as a percentage of
revenues increased from 81.4% to 88.7%, or 7.3%, due principally to the increase
in costs of revenues as a percentage of revenues associated with international
long distance revenues offset by the effect of relatively lower costs of
revenues from the Company's Advanced Services business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from
$3,660,000 in 1998 to $5,949,000 in 1999, or $2,289,000. The 62.5% increase in
SG&A was due to the overhead necessary to support the growth in the Company's
Customer Relationship Management operations, the increased staffing associated
with the Mexican network build out and increased staffing at existing operations
to meet the additional resource requirements associated with these operations.
Overall SG&A as a percentage of revenues increased from 10.0% to 22.4%, or
12.4%, due to the factors stated above.
DEPRECIATION AND AMORTIZATION increased from $960,000 in 1998 to $1,601,000
in 1999, or $641,000. This increase is due to an increase in goodwill
amortization associated with the acquisition INTERLINK. In addition,
depreciation increased as a result of the Company's continuing expansion of its
communications 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), NET increased from ($272,000) in 1998 to
($445,000) in 1999, or ($173,000). This increase was mainly due to an increase
in the Company's level of borrowings, including the financing agreement used to
finance approximately $5.6 million in equipment, the Lucent credit agreement and
the Senior Notes. During the third quarter of 1999, the Company capitalized
interest expense attributable to its Mexico network construction in the amount
of $194,000.
OTHER INCOME (EXPENSE) decreased from ($403,000) in 1998 to $1,000 in 1999,
or $404,000. The Company recognized a foreign exchange gain of $367,000 in the
third quarter of 1999 as compared to a foreign exchange loss of (581,000) in the
third quarter of 1998. In addition, the Company incurred $292,000 in
amortization of debt offering costs. Included in debt offering costs are
warrants the Company issued to the holders of the Deere Park Convertible
Debentures, Gordon Brothers Convertible Debentures, the Lucent Bridge Loan, the
Senior Notes and the $2 Million Senior Notes. These warrants were
17
<PAGE>
valued utilizing the Black-Scholes pricing model and the resulting amount is
amortized as interest expense over the life of the notes.
INCOME TAX BENEFIT (EXPENSE) changed from an income tax expense of
($652,000) in 1998 to an income tax benefit of $1,288,000 in 1999. The Company's
overall effective tax benefit for the three months ended September 30, 1999, was
25.9% which reflect the tax benefits recognized on the losses realized offset by
permanent items, the most significant of which is the non deductible nature of
goodwill amortization.
NET INCOME (LOSS). The Company experienced net income of $869,000 in 1998
as compared to a net loss of ($3,695,000) in 1999 due to a combination of the
factors discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES decreased from $102,306,000 in 1998 to $83,341,000 in 1999. This
decrease of $18,965,000, or 18.5%, was due principally to the Company's decision
to reduce sales to distributors of low margin equipment in Mexico, a decline in
the Company's international long distance revenues in its wholesale segment, and
weakened economic conditions in Mexico. These declines were offset by an
increase in revenues from the Company's Customer Relationship Management
services, the incremental sales of the Company's INTERLINK subsidiary, which was
acquired in May 1998, and an increase in the Company's international long
distance revenues on a retail basis. As a result, Network Solutions revenues in
Mexico decreased $14,590,000 from $24,525,000 in 1998 to $9,935,000 in 1999.
This decline is largely attributable to the Company's refocusing on higher
margin products and a general slowdown in the market caused by the weakened
economic condition in Mexico and concerns about the Y2K virus. Wholesale
international long distance revenues decreased $14,877,000 from $26,641,000 in
1998 to $11,764,000 in 1999. Retail international long distance revenues
increased $4,255,000 from $45,471,000 in 1998 to $49,726,000 in 1999. Customer
Relationship Management services revenues increased $3,706,000 from $1,883,000
in 1998 to $5,589,000 in 1999 as the Company increased its operator positions to
accommodate higher demand for its services. Broadband Services and Products
revenues increased $2,541,000 from $3,786,000 in 1998 to $6,327,000 in 1999.
COST OF REVENUES decreased from $86,783,000 in 1998 to $72,861,000 in 1999,
or $13,922,000. The 16.0% decrease in cost of revenues was due principally to
the decrease of revenues offset by the increased costs associated with the
international long distance services. This decrease in cost of revenues was also
offset by the incremental cost of revenues associated with the acquisition of
INTERLINK. The cost of revenues as a percentage of revenues increased from 84.8%
to 87.4%, or 2.6%, due principally to the higher cost of revenues as a
percentage of revenues associated with the Company's international long distance
services. This increase was offset partially by the decrease in cost of revenues
as a percentage of revenues associated with the Customer relationship management
revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from
$9,365,000 in 1998 to $15,337,000 in 1999, or $5,972,000. The 63.8% increase in
SG&A was due to the overhead necessary to support the growth in the Company's
Customer Relationship Management operations, the incremental SG&A related to the
acquisition of INTERLINK, the increased staffing associated with the Mexican
network build out and increased staffing at existing operations to meet the
additional resource requirements associated with these operations.
Overall SG&A as a percentage of revenues increased from 9.2% to 18.4%, or
9.2%, due to the factors stated above.
DEPRECIATION AND AMORTIZATION increased from $2,218,000 in 1998 to
$4,638,000 in 1999, or $2,420,000. This increase is due to an increase in
goodwill amortization associated with the acquisitions of Telereunion and
INTERLINK. In addition, depreciation increased as a result of the Company's
continuing expansion of its communications network, which includes purchases of
switches and other telecommunications
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equipment and facilities. The Company expects depreciation expense to increase
as it continues to expand its telecommunications network.
INTEREST INCOME (EXPENSE), NET increased from ($513,000) in 1998 to
($2,250,000) in 1999, or ($1,737,000). This increase was mainly due to an
increase in the Company's level of borrowings, including the Deere Park
Convertible Debentures and Gordon Brothers Convertible Debentures issued in
connection with the INTERLINK acquisition, the Senior Notes and the $2 Million
Senior Notes.
The Gordon Brothers Convertible Debentures provide for an "exit fee" which
was paid at the time of the repayment of the Gordon Brothers Convertible
Debentures in May 1999. The Company paid an "exit fee" of $1.1 million of which
$648,000 was accrued during the six months ended June 30, 1999. In addition, the
Company repaid $1.0 million of the Deere Park Convertible Subordinated
Debentures in May 1999. The Company paid an "exit fee" of $120,000 which was
accrued during the six months ended June 30, 1999.
Lastly, the Company recognized additional interest expenses related to its
equipment financing agreements and the Lucent Credit agreement.
OTHER INCOME (EXPENSE) increased from ($504,000) in 1998 to ($1,431,000) in
1999, or $(927,000). The Company recognized a foreign exchange gain of $262,000
in the first nine months of 1999 as compared to a foreign exchange loss of
($768,000) in the first nine months of 1998. In addition, the Company incurred
$1,152,000 in amortization of debt offering costs. Included in debt offering
costs are warrants the Company issued to the holders of the Deere Park
Convertible Debentures, Gordon Brothers Convertible Debentures, the Lucent
Bridge Loan, the Senior Notes and the $2 Million Senior Notes. These warrants
were valued utilizing the Black-Scholes pricing model and the resulting amount
is amortized as interest expense over the life of the notes.
INCOME TAX BENEFIT (EXPENSE) changed from an income tax expense of
($1,547,000) in 1998 to an income tax benefit of $3,539,000 in 1999. The
Company's overall effective tax benefit for the nine months ended September 30,
1999, was 26.9% which reflect the tax benefits recognized on the losses realized
offset by permanent items, the most significant of which is the non deductible
nature of goodwill amortization.
NET INCOME (LOSS). The Company experienced net income of $1,361,000 in 1998
as compared to a net loss of $(9,637,000) in 1999 due to a combination of the
factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $6,691,000 and $1,388,000 for
the nine months ended September 30, 1998 and September 30, 1999, respectively.
The Company's operating results contributed to the decline in cash from
operating activities.
Net cash used in investing activities was ($19,769,000) and ($26,522,000)
for the nine months ended September 30, 1998 and September 30, 1999,
respectively. For the nine months ended September 30, 1998, the Company expended
approximately $9.1 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. For the nine months ended September 30,
1999, the Company expended approximately $26.5 million on purchases of property
and equipment as part of the Company's network expansion strategy.
Net cash provided by financing activities was $15,545,000 and $21,543,000
for the nine months ended September 30, 1998 and September 30, 1999,
respectively. During the nine months ended September 30, 1999, the Company
realized approximately $3.3 million (net of commissions) from sales of its
common stock and exercise of options and warrants. The Company also received
$12,426,000 in short term financing and $23,935,000 in financing under the
Lucent credit facility. The Company made payments of $1,295,000 on its notes
payable, $6,000,000 on its convertible debt, $9,000,000 on its short term
financings and $1,688,000 on the Revolving Line of Credit.
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As of September 30, 1999, the Company had cash and cash equivalents of
$6,040,000 and negative working capital of $27.0 million. Of this
$27.0 million, approximately $12.0 million represents accounts payable incurred
in connection with the construction of the Mexican Network, $5.1 million
represents long term debt reclassified as short term due to a covenant default
and $3.2 million represents other network expenditures classified as short term
obligations. The Company plans to finance the $12.0 million under the Lucent
credit agreement subject to availability as discussed below.
In the fourth quarter of 1998, the Company signed a financing arrangement
with a finance company, which provides for funding of equipment purchases of up
to $6.0 million 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 has drawn approximately
$2.0 million in the first nine months of 1999 under this facility.
On January 11, 1999, the Company signed a financing arrangement with a
finance company which provides for funding of equipment purchases of up to
$7.0 million through December 31, 1999. The financing is structured as loans
maturing January 1, 2005. The loans provide for payments of interest only
through January 1, 2000. Thereafter, payments of principal and interest are due
quarterly. Interest is calculated on available basis during the interest only
period at 425 basis points above the 90-day commercial paper rate. Interest
thereafter is calculated at 500 basis points above the five year Federal Reserve
Treasury Constant Maturity Rate. The Company has drawn approximately
$5.6 million under this facility through August 15, 1999, of which $2.5 million
resulted in refinancing equipment, which was previously financed through an
operating lease. The Company is not in compliance with certain financial
covenants under this loan facility and has secured a waiver from the finance
company of their rights under the agreement to enforce default provisions due to
non compliance with these financial covenants for the third quarter of 1999. The
Company also agreed that should the lender in the Lennox facility decide to
terminate the Lennox facility prior to funding the entire $10.0 million amount
of the facility, the finance company may declare a default under the agreement
and accelerate the maturity date. The amounts outstanding under this facility of
$5.6 million have been classified as current in the financial statements as of
September 30, 1999. The Company may have to request additional waivers from the
finance company due to non compliance with financial covenants in future
quarters. The Company cannot guarantee that the finance company would provide
the Company with additional waivers in which case they could enforce the default
provisions and accelerate the maturity date. Should that be the case, there is
no guarantee that the Company would be able to obtain a replacement facility. A
default under this agreement could trigger cross defaults with several of our
other obligations totaling $31.3 million at September 30, 1999.
In the fourth quarter of 1998, the Company entered into a stock purchase
agreement with third parties (the "Stock Purchase Commitment"), which allows the
Company to sell at the Company's option (subject to certain conditions
precedent), up to $5.0 million of the Company's Common Stock. The sale price of
the Common Stock is equal to the average of the previous 5 days closing prices
less a 20% discount. The Company sold 250,000 shares of Common Stock realizing
approximately $1.3 million (net commissions) in the fourth quarter of 1998.
These shares were sold on December 18, 1998, and may not be re-sold by the
purchasers for nine months from such date. In the first quarter of 1999, the
Company sold an additional 296,296 shares of Common Stock, realizing
approximately $1.9 million (net of commissions). These shares were sold on
March 15, 1999, and may not be re-sold by the purchasers until July 31, 1999. In
July of 1999, the Company sold an additional 146,000 shares of Common Stock,
realizing approximately $924,000 in proceeds. In addition, the Company received
$576,000 in the form of a short-term loan which is due on November 24, 1999.
In July 1999, the Company received a bridge loan of $3.0 million from Lucent
("Lucent Bridge Loan"). The Lucent Bridge Loan was repaid upon the funding of
the Credit Facility. In connection therewith, the Company issued to Lucent
warrants to purchase an aggregate of 85,000 shares of Common Stock at an
exercise price of $8.50 per share. The warrants have a term of three years.
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On August 27, 1999, Telscape International, Inc., the registrant, along with
its subsidiaries, Telereunion S.A. de C.V. ("Telereunion"), Telereunion
International, S.A. de C.V., Telereunion, Inc., Telscape USA, Inc.,
MSN Communications, Inc., Interlink Communications, Inc., TSCP
International, Inc., Vextro De Mexico S.A. de C.V., Servicios Corporativos
Vextro, S.A. de C.V., Telscape de Mexico S.A. de C.V., N.S.I. S.A. de C.V., Lan
and Wan S.A. de C.V. and M.S. Noticias y Telecomunicaciones, S.A. de C.V.
(collectively, the "Borrowers") signed a credit agreement ("Credit Agreement")
with Lucent Technologies, Inc. ("Lucent").
The Credit Agreement provides for up to $40 million in financing. The
registrant borrowed $23.9 million under the Credit Agreement on August 27, 1999,
of which $9.0 million was utilized to repay the $3.0 million Lucent Bridge Loan
and $6.0 million of the Senior Notes and $14.9 million was utilized to pay for
costs directly related to construction of the network debt offering costs.
Subsequent loans under the Credit Agreement are subject to the satisfaction of
certain conditions precedent, one of which has not been satisfied as of the date
of this filing.
On May 7, 1999, the Company issued $6,850,000 in Senior Notes (the "Senior
Notes") originally maturing in November 2000. E. Scott Crist, CEO of the
Company, is holder of the remaining $850,000 balance of the Senior Notes ("Crist
Loan"). The maturity of the Crist Loan can be extended unilaterally by the
Company through January 4, 2001. In the event that the Crist Loan is not paid by
November 5, 1999, then Mr. Crist will be issued an additional 31,805 warrants.
In the event that the Crist Loan is not paid by May 5, 2000, then Mr. Crist will
be issued an additional 31,805 warrants. As a result, the Crist Loan is
classified as long-term in the financial statements as of September 30, 1999.
The Company repaid $6,000,000 of the Senior Notes on August 27, 1999, upon the
funding of the Lucent facility. The Crist Loan bears interest at 8% from May
through November 6, 1999. Thereafter, the interest rate increases by 1 percent
for each month after November 6, 1999. Pursuant to the terms of the Senior
Notes, the Company issued to the holders of the Senior Notes a total of 256,315
warrants at an exercise price of $6.68. The proceeds from the Senior Notes were
utilized to repay the entire principal amount of the Gordon Brothers Convertible
Debentures plus $1.1 million in exit fees. The Company estimated the fair value
of the warrants by utilizing the Black-Scholes option pricing model with the
following assumptions: dividend yield of 0%, expected volatility of 53.91%, risk
free interest rate of 5% and expected life of 3 months. The resulting cost of
approximately $398,000 will be amortized as interest expense over three months.
On June 18, 1999, the Company issued $2,000,000 in Senior Notes (the "$2
Million Senior Notes") maturing December 18, 2000. The $2 Million Senior Notes
are subject to optional prepayment provisions allowing the Company to prepay a
portion or all of the outstanding principal amount without premium or penalty.
The $2 Million Senior Notes bear interest at 8% from June through December 17,
1999. Thereafter, the interest rate increases by 1 percent for each month after
December 17, 1999. The Company also issued to the holders of the $2 Million
Senior Notes a total of 62,501 warrants with an exercise price of $8.00 per
share and a term of three years. In the event that the $2 Million Senior Notes
are not paid by December 18, 1999, then the holders will be issued an additional
62,501 warrants. In the event that the $2 Million Senior Notes are not paid by
June 18, 2000, then the holders will be issued an additional 62,501 warrants in
which case the final maturity date is December 18, 2000. The Company may
unilaterally extend the maturity date of the $2 Million Senior Notes an
additional 60 days beyond December 18, 2000. The Company estimated the fair
value of the warrants by utilizing the Black-Scholes option pricing model with
the following assumptions: dividend yield of 0%, expected volatility of 53.91%,
risk free interest rate of 5% and expected life of 2 months. The resulting cost
of approximately $116,000 will be amortized as interest expense over two months.
In July 1999, the Company's Revolving Credit Facility expired and the
Company repaid all amounts outstanding at that time.
As of September 30, 1999 and the date of this filing, the Company has an
outstanding receivable of $1.4 million from a customer of its Mexican Network
Solutions services subsidiaries. This receivable has
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been outstanding since December 31, 1998. The Company has been forced to utilize
legal resources to enforce collection of this amount. In the event that the
Company determines that this amount or a portion of the amount is uncollectible
in the future, the Company may be forced to incur a charge in excess of its
current reserve for uncollectibles of $467,000.
The Company's debt at September 30, 1999 totaled $37.5 million, resulting in
a debt to equity ratio of 119% as compared to $13.1 million and 38%,
respectively, as of December 31, 1998 and $3.2 million and 14%, respectively, as
of December 31, 1997. Fully funding the Lucent Facility will significantly
increase the Company's leverage. In addition, the Company estimates that there
are an additional $10-$15 million in expenditures related to the Mexican Network
and its network expansion which will not be funded through the Lucent Facility.
In the first nine months of 1999, the Company incurred losses and had negative
cash flow from operations. The Company does not expect that cash flow from
operations will be sufficient to meet these capital expenditures and debt
repayments requirements when they are due without additional financing. The
Company intends to finance its growth, principal and interest obligations under
existing debt obligations and additional capital investments required for its
planned facility expansion through vendor financing and the sale of debt or
equity securities (or a combination of both). There can be no assurance that the
Company will be able to obtain additional financing on commercially reasonable
terms, if at all, to fund its losses generated from operations, to fund its
capital expenditures, to fund its debt service obligations as they become due or
to fund strategic investment alternatives. The Company is also exploring various
strategic investment alternatives. There can be no assurance that the Company
will be able to identify any future joint ventures, acquisitions, mergers or
strategic alliances or that, if identified, the Company will be able to
successfully execute these transactions. 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.
The Company is not in compliance with certain financial covenants under
lease agreements with a finance company that funded $5.6 million in equipment
for us earlier this year. The Company has secured a waiver from the finance
company of their rights under the agreement to enforce default provisions due to
non compliance with these financial covenants for the third quarter of 1999. The
Company also agreed that should the lender in the Lennox facility decide to
terminate the Lennox faciltiy prior to funding the entire $10.0 million amount
of the facility, the finance company may declare a default under the agreement
and accelerate the maturity date. The amounts outstanding under this facility of
$5.6 million have been classified as current in the financial statements as of
September 30, 1999. The Company may have to request additional waivers from the
finance company due to non compliance with financial covenants in future
quarters. The Company cannot guarantee that the finance company would provide
the Company with additional waivers in which case they could enforce the default
provisions and accelerate the maturity date. Should that be the case, there is
no guarantee that the Company would be able to obtain a replacement facility. A
default under this agreement could trigger cross defaults with several of our
other obligations totaling $31.3 million at September 30, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
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, 2000.
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Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. The Company does not expect
adoption of the new standard to have a material effect on its financial
statements.
SOP 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," requires all
start-up and organizational costs to be expensed as incurred. It also requires
all remaining historically capitalized amounts of these costs existing at the
date of adoption to be expensed and reported as the cumulative effect of a
change in accounting principles. SOP 98-5 is effective for all fiscal years
beginning after December 31, 1998. The adoption of SOP 98-5 did not have a
material effect on its financial statements.
SFAS No. 135, "RESCISSION OF FINANCIAL ACCOUNTING STANDARDS BOARD NO. 75
("SFAS NO. 75") AND TECHNICAL CORRECTIONS," rescinds SFAS No. 75 and amends
Statement of Financial Accounting Standards Board No. 35. SFAS No. 135 also
amends other existing authoritative literature to make various technical
corrections, clarify meanings, or describe applicability under changed
conditions. SFAS No. 135 is effective for financial statements issued for fiscal
years ending after February 15, 1999. The Company believes that the adoption of
SFAS No. 135 will not have a material effect on its financial statements.
UNCERTAINTIES
The Company continues to face many risks and uncertainties, including
general and specific market economic risks. Exploitation of opportunities
presented by the Mexican market is expected to require substantial capital. To
the extent the Company's Mexican subsidiaries do not have a positive net cash
flow from operations in 1999, it can be expected that the Company would have to
fund any shortfalls from its working capital. In addition, any capital
expenditures needed to expand the operations of the Mexican subsidiaries would
likely be funded out of the working capital of the parent corporation or through
additional financings to the extent the Company can secure these. Any such
fundings would reduce the funds available to finance and expand the Company's
strategy to compete in the international long distance services business. Also,
any economic crises in Mexico could result in the need to fund any cash flow
shortfalls of the Company's Mexican subsidiaries. As of September 30, 1999, the
Company had cash and cash equivalents of $6,040,000 and negative working capital
of $27.0 million. Of this $27.0 million, $12.0 million represents accounts
payable incurred in connection with the construction of the Mexican Network,
$5.1 million represents long term debt reclassified as short term due to a
covenant default and $3.2 million represents other network expenditures
classified as short term obligations. The Company plans to finance the
$12.0 million under the Lucent credit agreement subject to availability as
discussed above.
As in any recently deregulated market, drastic changes and adjustments of
regulations or changes in government policies may occur from time to time that
will directly affect the Company. The Company's competitive position in the
telecommunications services and long distance markets depends heavily on the
license granted by the Mexican government. Should this permit be revoked for
whatever reason, the Company would be severely impaired or unable to provide
many of its telecommunications services. In addition, the Company relies on
other carriers to complete the transmission of certain telecommunications
services. To the extent that any of these carriers was to no longer do business
with the Company, the Company would either have to find an alternate source or
not be able to provide those services.
The international long distance market, although large and rapidly growing,
is also very competitive. The Company competes in this market with companies
that have greater experience and substantially greater resources, both financial
and otherwise. In recent months, competition in the industry has seen dramatic
trends which have resulted in decreased prices which have impacted the Company's
revenues, margins and cash flow. In addition, the Company faces certain
additional risks in competing in this market, including changes in U.S. and
foreign government regulations and telecommunications standards, dependence on
strategic partners, tariffs, taxes and other trade barriers, the potential for
nationalization and economic downturns and political instability in foreign
countries. In addition, the Company could be
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adversely affected by a reversal in the trend toward deregulation of
telecommunication markets. The Company will be increasingly exposed to these
risks as the Company expands its presence in this market. The Company's growth
in this business is dependent on its ability to expand its capacity through
investments in additional facilities or entering into termination arrangements
with other carriers. There can be no assurance that the Company will be
successful in raising the capital required to fund the additional facilities or
to enter into such arrangements with other carriers, in which case the Company's
operations, the future growth in this business and the ability to compete
effectively against competitors with significantly more resources could be
materially adversely affected.
The Company will compete in this market with companies that have greater
experience and have substantially greater resources. In addition, the prepaid
phone card industry is subject to extensive U.S. federal and state regulation
including the imposition of various excise taxes and fees, including the
"Universal Service Fund". As with the wholesale international long distance
business, the Company's growth in this business is dependent on its ability to
expand its capacity through investments in additional facilities or entering in
partnering arrangements for outsourcing the telecommunications services related
to calls initiated on the prepaid phone cards it serves. There can be no
assurance that the Company will be successful in raising the capital required to
fund the additional facilities, or in obtaining such partnering arrangements, in
which case the Company's operations, the future growth in this business and the
ability to compete effectively against competitors with significantly more
resources could be materially adversely affected.
The Company is also pursuing a strategy of growth through selective
acquisitions. However, there can be no assurance that any acquisition will be
completed, that attractive candidates will be identified in the future, that the
Company will be successful in raising the capital to fund such acquisitions, or
that, if completed, any acquisition will be beneficial to the Company.
In June 1998, Telereunion S.A. de C.V. ("Telereunion S.A."), a subsidiary of
the Company, received a 30-year, facilities-based carrier license from the
Mexican government allowing it to construct and operate a long distance network
in Mexico (the "Concession"). Under the terms of the Concession,
Telereunion S.A. was to have begun operations on its network as of June 3, 1999.
In addition, under the terms of the Concession, Telereunion S.A. is required to
meet certain capitalization thresholds prior to beginning operations. The
Company has petitioned the Comision Federal de Telecomunicaciones (the
"COFETEL"), the equivalent of the Federal Communications Commission in the
United States, to have the Concession amended to extend the start of operations
date and waive or amend the equity and debt to equity requirements. The Company
obtained a waiver from the COFETEL allowing it to delay the beginning of its
network operations by December 3, 1999. The Company cannot confirm that it will
meet this deadline at the time of this filing and may have to obtain a further
waiver on this matter. Although several other concessionaires have received
certain waivers for defaults under their respective concessions, there can be no
assurance that these amendments will be obtained from the COFETEL. If such
amendments are not obtained, the Company will not have the right to operate the
Mexican Network which could have a material adverse effect on the Company's
ability to effectuate its business plan and its financial condition.
FOREIGN CURRENCY RISK
The general economic conditions of Mexico are greatly affected by the
fluctuations in exchange rates and inflation. The Company's foreign currency
risk is mitigated in Mexico due to the fact that many of the Company's customers
are multinational firms that transact and pay in U.S. dollars. In addition, most
of the customers that do pay in pesos pay at the spot exchange rate in effect at
the time of payment as opposed to the exchange rate at the time the receivable
is created. The Company's functional currency in Mexico is the U.S. dollar
because the majority of its transactions are in such currency. However, from
time to time the Company transacts in the local currency and thus faces foreign
currency risk with respect to these transactions. U.S.-originated calls will be
paid in U.S. dollars; however, the Company also expects to derive
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a certain portion of its revenues from calls originated outside of the U.S. thus
exposing the Company to additional exchange rate risk. In addition, the Company
pays its termination partners in Latin America in their respective local
currencies, exposing the Company to additional exchange rate risk. The Company
may choose to limit its exposure to foreign currency risk through the purchase
of forward foreign exchange contracts or similar hedging strategies. There can
be no assurance that any foreign currency hedging strategy would be successful
in avoiding exchange-related losses.
The Company does not currently hedge against the risk of foreign exchange
rate fluctuations. See further discussion in Item 3--Quantitative and
Qualitative Disclosures about Market Risk.
YEAR 2000 PLANS
A significant percentage of the software that runs most of the computers in
the United States relies on two-digit, rather than four-digit, date codes to
define the applicable year, resulting in date-sensitive software having the
potential inability to interpret date codes properly, misreading "00" for the
year 1900 instead of the year 2000.
This could result in a system failure or miscalculations causing disruptions
of operations, including, without limitation, a temporary inability to process
transactions, send invoices or engage in similar normal business activities,
which could have material adverse operational and financial consequences.
STATE OF READINESS
The Company has initiated a comprehensive program to identify, evaluate and
address issues associated with the ability of its information and
non-information technology systems (collectively, "Systems") to properly
recognize the Year 2000 (the "Year 2000 Readiness Program") in order to avoid
interruption of the operation of these Systems and a material adverse effect on
the Company's business, financial position and results of operation as a result
of the century change. The Company has empowered a "Y2K Committee" to manage the
Year 2000 Readiness Program. The Y2K Committee shall also review the Year 2000
compliance efforts of the Company's key vendors and customers and shall
regularly report to and be controlled by the Board of Directors.
Each of the information technology software programs that the Company
currently uses has either been certified by its respective vendor as Year 2000
compliant or will be replaced with software that is so certified prior to
year-end. The Company intends to conduct comprehensive tests of all of its
software programs for Year 2000 compliance as part of its Year 2000 Readiness
Program. An integral part of the Company's non-information technology systems,
its telecommunications switches, however, may not currently be Year 2000
compliant. The respective vendors of the Company's switches are in the process
of reviewing their switches for Year 2000 readiness. However, there can be no
assurance that such switches are Year 2000 compliant and that the Company will
not experience switch related problems in Year 2000. In addition to other
reasons, the production of accurate and timely customer invoices depends upon
the generation of accurate and timely underlying data by the Company's switches.
The Company does not believe that its other non-information technology systems
will be affected by the Year 2000, but will not know definitively until the
Company tests and evaluates such equipment. While the Company continues to exert
efforts to test and determine the state of readiness of its systems, the Company
cannot presently confirm that all the required Year 2000 compliance testing and
conversions have been completed nor can it confirm that they shall be completed
before the end of the year.
The Company's computer systems interface with the computers and technology
of many different domestic and international telecommunications companies on a
daily basis. If one of these telecommunication companies should fail or suffer
an adverse effect from a Year 2000 problem, the Company's customers could
experience impairment of services. The Company considers the Year 2000 readiness
of its international customers and vendors of particular importance given the
general concern that the computer systems abroad may not be as prepared as those
in domestic operations to handle the century change. As
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part of its Year 2000 Readiness Program, the Company continues to contact its
key vendors and customers to ascertain whether the systems used by such third
parties are Year 2000 compliant.
COSTS
The Company has not incurred any material costs to date to reprogram,
replace and test its Systems for Year 2000 compliance. The Company doesn't
expect that any remaining costs will be significant; though such expenditures
may increase materially following testing of non-information technology systems
and evaluation of the Year 2000 compliance status of integral third party
vendors and customers. Any additional costs incurred in connection with the
Company's Year 2000 compliance efforts will be expensed as incurred, unless new
systems are purchased that should be capitalized in accordance with generally
accepted accounting principles.
The Company currently anticipates that its Systems will be Year 2000
compliant before January 1, 2000, though no assurances can be given that the
Company's compliance testing will not detect unanticipated Year 2000 compliance
problems that prevent such Year 2000 compliance. Furthermore, a system failure
by any of the Company's significant customers or vendors could have a material
adverse effect on the Company's operations. Because the Company does not yet
know the Year 2000 compliance status of integral third parties, it is currently
unable to assess the likelihood or the risk to the Company of third party system
failures.
RISKS
The Company believes that a disruption in the operation of its networks,
billing system and financial and accounting systems and/or an inability to
access interconnections with other telecommunications carriers, are the major
risks associated with the inability of its Systems to process Year 2000 data
correctly. The failure of the Company to correct a material Year 2000 problem
could cause an interruption or failure of certain of the Company's normal
business functions or operations and could have a material adverse effect on the
Company's business, financial position and results of operations. In addition,
there could also be a material adverse effect on the Company's business,
financial position and results of operations 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.
Based upon risk assessment work conducted thus far, the Company believes
that the most reasonably likely worst case scenario of the failure by the
Company, or any integral third party, to resolve Year 2000 issues would be an
inability by the Company (i) to provide telecommunications services to the
Company's customers, (ii) to route and deliver telephone calls originating from
or terminating with other telecommunications carriers for an indeterminable
period of time and (iii) to timely and accurately bill customers. Such
worst-case scenario could have a material adverse affect on the Company's
business, results of operations and liquidity. These failures could also result
in a loss of customers due to service interruptions and billing errors,
substantial claims by customers and increased expenses associated with
Year 2000 litigation, stabilization of operations and executing mitigation and
contingency plans. While the Company believes that it is taking appropriate
measures to mitigate these risks, there can be no assurance that such measures
will be successful.
CONTINGENCY PLAN
At this time, the Company does not have a formal contingency plan. The
Company intends to develop contingency plans to handle Year 2000 system failures
experienced by its Systems and to handle any necessary interactions with the
computers and technology of any integral non-complying third party. The Company
expects that its plan shall continue to be under development throughout the
remainder of this year.
26
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to financial market risks, including interest rate
risk and foreign currency exchange risk. During the third quarter of 1999,
insofar as the Company is concerned, there were no material changes in financial
market risks except for the changes in the Mexican peso exchange rate to the
U.S. dollar as described below.
FOREIGN CURRENCY EXCHANGE RISK
The Company conducts a significant amount of its operations in countries
outside the United States. The Company's foreign currency exchange risk includes
the following:
In the past years, the Mexican economy has had periods of exchange rate
instability and peso devaluation. The Company's Network Solutions services and
Customer Relationship Management services business is conducted in Mexico. The
majority of the Company's revenues in the value-added services business are
contracted in dollars or in pesos indexed to the dollar at the time of
settlement. The products and services the Company sells in the value-added
services business line are generally imported from the U.S. or other countries
and are payable in dollars. The Company's remaining operating costs in this
segment are generally paid in pesos. The Company's major outsourcing contracts
with the U.S. Embassy and the Ministry of Foreign Affairs generate revenues that
are collected in pesos and costs that are paid in pesos.
The Company generally collects its revenues from the Broadband Services and
Products services in U.S. dollars and pays for its costs to provide these
services in U.S. dollars
In the International Long Distance business segment, the Company sells it
services to customers in the U.S. and thus its revenues are collected in U.S.
dollars. The Company's costs of providing these services are paid to vendors
both in the U.S. and in Mexico or other Latin American countries. A significant
portion of its costs to provide these services are structured under operating
agreements with carriers in Mexico under which the costs historically have been
settled in pesos. The Company has entered into new, additional agreements with
carriers in Mexico that will provide it with additional termination capacity in
Mexico in 1999. These new arrangements provide for settlement in U.S. dollars.
In periods in which the peso devaluates, this results in a cost reduction to the
Company as it generally extends short credit terms to its customers and has
received extended credit terms from its vendors. In periods when the peso
appreciates, this results in a cost increase to the Company. Over the last
several years, the peso has experienced devaluations in the exchange rates to
the U.S. dollar. In the second quarter of 1999, the peso exchange rate
strengthened from over 10 to 1 to an average 9.5 to 1 resulting in an increase
in the Company's cost. Due to limited credit availability, the Company has not
historically hedged its peso costs. In the future as the Company's operations in
Mexico increase, the Company's peso denominated transactions may increase
causing the Company to enter into hedging activities as credit availability
allows.
In addition, as the Company invests in the Mexican Network and begins to
generate more revenues in Mexico, the Company's foreign currency risk will
increase. Moreover, upon completion, the Lucent Facility will be denominated in
U.S. dollars.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS
VEXTRO DE MEXICO, S.A. DE C.V. VS. CONTINENTAL COMNET HOLDINGS, INC.
In September 1999, Telscape International, Inc., and Vextro S.A. de C.V.
(collectively, the "Company") filed a lawsuit against Continental Comnet
Holdings Inc. (collectively, the "Defendants"). The Company has filed a
complaint for breach of contract. The Company has prayed for relief to include
payments of amounts outstanding in the amount of no less than $1.4 million plus
attorney's fees and costs. The lawsuit is pending in the U.S. District Court for
the Southern District of Texas.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See Index to Exhibits on page 30.
(b) Reports on Form 8-K.
On September 20, 1999, the Company filed a report on Form 8-K reporting that
the Company had signed a credit agreement with Lucent Technologies, Inc. for up
to $40 million in financing.
28
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the issuer has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<TABLE>
<S> <C> <C>
TELSCAPE INTERNATIONAL, INC.
(Registrant)
By: /s/ E. SCOTT CRIST
-----------------------------------------
E. Scott Crist
Date: November 15, 1999 CEO AND PRINCIPAL EXECUTIVE OFFICER
By: /s/ TODD M. BINET
-----------------------------------------
Todd M. Binet
PRESIDENT, CFO
Date: November 15, 1999 PRINCIPAL FINANCIAL OFFICER
By: /s/ PAUL FREUDENTHALER
-----------------------------------------
Paul Freudenthaler
CHIEF ACCOUNTING OFFICER
Date: November 15, 1999 PRINCIPAL ACCOUNTING OFFICER
</TABLE>
29
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement between the Company, BT Alex.
Brown Incorporated and Lehman Brother Inc. (Incorporated
herein by reference to Exhibit 1.1 to the Company's
Registration Statement No. 333-60271)
3.1 Articles of Incorporation of the Registrant, as amended
(filed as Exhibit 3.1 to the Company's Registration
Statement No. 33-80542-D and incorporated herein by
reference)
3.2 Bylaws of the Registrant, as amended (filed as Exhibit 3.2
to the Company's Registration Statement No. 33-80542-D and
incorporated herein by reference)
3.3 Articles of Incorporation of Polish Microwave, Inc. (filed
as Exhibit 3.3 to the Company's Registration Statement
No. 33-80542-D and incorporated herein by reference)
3.4 Bylaws of Polish Microwave, Inc. (filed as Exhibit 3.4 to
the Company's Registration Statement No. 33-80542-D and
incorporated herein by reference)
3.5 Contract of Limited Liability Company of DTS/ZWUT (filed as
Exhibit 3.5 to the Company's Registration Statement
No. 33-80542-D and incorporated herein by reference)
4.1 Form of Certificate evidencing Common Stock (filed as
Exhibit 4.1 to the Company's Registration Statement
No. 33-80542-D and incorporated herein by reference)
4.2 Form of Warrant Agreement between American Stock Transfer &
Trust Company and the Company (filed as Exhibit 4.2 to the
Company's Registration Statement No. 33-80542-D and
incorporated herein by reference)
4.3 Form of Warrant Certificate evidencing the Warrants (filed
as Exhibit 4.3 to the Company's Registration Statement
No. 33-80542-D and incorporated herein by reference)
4.4 Form of Statement of the establishment of the Series B
non-voting, nonparticipating Preferred Stock (filed as
Exhibit 4.1 to the Company's Report on Form 10-QSB for the
quarter ended March 31, 1996 and incorporated herein by
reference)
10.1 Form of Representative's Warrants (filed as Exhibit 10.8 to
the Company's Registration Statement No. 33-80542-D and
incorporated herein by reference)
10.2 Warrant Agreement between the Company and S.P. Krishna
Murthy (filed as Exhibit 10.13 to the Company's Report on
Form 10-KSB for the year ended December 31, 1995 and
incorporated herein by reference)
10.3 Form of Series A Common Stock Warrant (filed as
Exhibit 10.4 to the Company's Report on Form 10-QSB for
the quarter ended March 31, 1996 and incorporated herein
by reference)
10.4 Form of Series B Common Stock Warrant (filed as
Exhibit 10.5 to the Company's Report on Form 10-QSB for
the quarter ended March 31, 1996 and incorporated herein
by reference)
10.5 Form of Employment Agreement for Manuel Landa, Ricardo Orea
Gudino and Oscar Garcia Mora (filed as Exhibit 10.6 to the
Company's Report on Form 10-QSB for the quarter ended
March 31, 1996 and incorporated herein by reference)
10.6 Form of Non-Qualified Stock Option Certificate and
Agreement, as amended, for Manuel Landa, Ricardo Orea
Gudino and Oscar Garcia Mora (filed as Exhibit 10.7 to the
Company's Report on Form 10-QSB for the quarter ended
March 31, 1996 and incorporated herein by reference)
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
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 (filed as
Exhibit 10.1 to the Company's Report on Form 8-K dated
June 3, 1996 and incorporated herein by reference)
10.8 Employment Agreement for E. Scott Crist (filed as
Exhibit 10.1 to the Company's Report on Form 10-QSB for
the quarter ended September 30, 1996 and incorporated
herein by reference)
10.9 Employment agreement for Todd Binet (filed as Exhibit 10.29
to the Company's Report on Form 10-KSB for the year ended
December 31, 1996 and incorporated herein by reference)
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 (filed as Exhibit 10.4 to
the Company's Current Report on Form 8-K dated August 5,
1997 and incorporated herein by reference)
10.11 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 (filed as Exhibit 10.4 to the
Company's Current Report on Form 8-K dated August 5, 1997
and incorporated herein by reference)
10.12 Stock Purchase Agreement dated July 1, 1997, by and among
the Company, Telscape USA, Inc., Telereunion and Jose Luis
Apan Wong, Raul de la Parra Zavala and Alejandro Apan Wong
(filed as Exhibit 10.4 to the Company's Current Report on
Form 8-K dated August 5, 1997 and incorporated herein by
reference)
10.13 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 (filed
as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated October 15, 1997 and incorporated herein by
reference)
10.14 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 (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated February 6,
1998 and incorporated herein by reference)
10.15 Stock Purchase Agreement dated May 18, 1998, by and among
Telscape International, Inc., California Microwave, Inc.
and California Microwave Services Divisions, Inc. together
with a Form of Supply Agreement between California
Microwave, Inc. and California Microwave Services
Division, Inc. as Exhibit B (Incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report
on Form 8-K dated June 9, 1998)
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.16 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 10Q
for the quarter ended March 31, 1998 and incorporated
herein by reference)
10.17 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)
10.18 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, 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)
10.19 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 19,
1998 (Incorporated herein by reference to Exhibit 10.5 to
the Company's Current Report on Form 8-K dated June 9,
1998)
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.24 Loan Agreement between Telscape USA, Inc. and MSN
Communications, Inc. and Southwest Bank of Texas dated
May 19, 1998 (Incorporated herein by reference to
Exhibit 10.24 to the Company's Registration Statement
No. 333-60271)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.25 Outside Directors Stock Option Plan of the Polish Telephones
and Microwave Corporation (Incorporated herein by
reference to Exhibit 10.24 to the Company's Registration
Statement No. 333-60271)
10.26 Form of Financing Agreement by and between the Company and
Newbridge Financial Services Networks dated as of
December 7, 1998 (Incorporated herein by reference to
Exhibit 10.26 to the Company's Report on Form 10-K for the
year ended December 31, 1998)
10.27 Form of Financing Agreement by and between the Company and
NTFC Capital Corporation dated as of January 11, 1999
(Incorporated herein by reference to Exhibit 10.27 to the
Company's Report on Form 10-K for the year ended
December 31, 1998)
10.28 Form of Securities Purchase Agreement by and between the
Company and Kendu Partners and MDNH Partners, L.P. dated
as of December 18, 1998, and Exhibit B to this agreement
representing the Form of Registration Rights Agreement
(Incorporated herein by reference to Exhibit 10.28 to the
Company's Report on Form 10-K for the year ended
December 31, 1998)
10.29 Form of Securities Purchase Agreement by and between
Telscape International, Inc., INTERLINK
Communications, Inc. and Cahill, Warnock, Strategic
Partners Fund, L.P. dated as of May 5, 1999, Exhibit A
representing the form of the Increasing Rate Secured
Promissory Note, Exhibit B representing the form of
Warrant, and Exhibit C representing the Security
Agreement. (Incorporated herein by reference to
Exhibit 10.29 to the Company's Report on Form 10-Q for the
quarter ended March 31, 1999)
10.30 Form of Securities Purchase Agreement by and between
Telscape International, Inc., INTERLINK
Communications, Inc. and Cahill, Warnock, Strategic
Partners Fund, L.P. dated as of June 18, 1999, Exhibit A
representing the form of the Increasing Rate Secured
Promissory Note, Exhibit B representing the form of
Warrant, and Exhibit C representing the Security
Agreement and Amendment No. 1 to Securities Purchase
Agreement. (Incorporated herein by reference to
Exhibit 10.30 to the Company's Report on form 10-Q for the
quarter ended June 30, 1999)
10.31 Securities Purchase Agreement dated July 19, 1999 by and
between Telscape International, Inc., Telscape USA, Inc.,
TSCP International, Inc., MSN Communications, Inc. and
Lucent Technologies Inc., together with a Form of Demand
Note in the principal amount of $3,000,000 payable to
Lucent Technologies Inc. attached as Exhibit A; a Form of
Stock Purchase Warrant for Lucent Technologies Inc. for
85,000 shares of Common Stock of Telscape
International, Inc. attached as Exhibit B; and a Security
Agreement by and between Telscape International, Inc.,
Telscape USA, Inc., MSN Communications, Inc., TSCP
International, Inc. and State Street Bank and Trust
Company attached as Exhibit C. (Incorporated herein by
reference to Exhibit 10.31 to the Company's Report on
form 10-Q for the quarter ended June 30, 1999)
10.32 Credit Agreement dated August 27, 1999 by and between
Telscape International, Inc., Telereunion S.A. de C.V.,
Telereunion International, S.A. de C.V.,
Telereunion, Inc., Telscape USA, Inc., MSN
Communications, Inc., Interlink Communications, Inc., TSCP
International, Inc., Vextro de Mexico S.A. de C.V.,
Servicios Corporativos, Telscape de Mexico S.A. de C.V.,
N.S.I. S.A de C.V., Lan and Wan S.A. de C.V., MS Noticias
y Telecomunicaciones, S.A. de C.V., and Lucent
Technologies Inc. (Incorporated herein by reference to
Exhibit 10.1 to the Company's Report on Form 8-K dated
September 20, 1999)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
*10.33 Loan Agreement dated October 22, 1999 by and between
Telscape International, Inc. and Lennox Invest Ltd.
Promissory Note dated October 22, 1999 in the principal
amount of $1,060,000 payable to Lennox Invest, Ltd., Stock
Pledge Agreement dated October 22, 1999, and Warrant
Certificate issued to Lennox Invest, Ltd. To purchase
35,714 shares of Common Stock of Telscape
International, Inc. dated October 22, 1999.
*27.1 Financial Data Schedule 1999
</TABLE>
- ------------------------
* Filed herewith
34
<PAGE>
LOAN AGREEMENT
This Loan Agreement is made and entered into as of the 22nd day of October,
1999, by and between Lennox Investment Ltd., a BVI Corporation ("Lender") and
Telscape International Inc., a Texas corporation ("Borrower").
RECITALS
WHEREAS, Lender has agreed to loan Borrower the sum of Ten Million and
no/100 ($10,000,000.00) Dollars; and,
WHEREAS, in consideration of the loan, Borrower has agreed to grant certain
rights to Lender and to pledge certain stock and Warrants as security for the
repayment of the Loan all as set forth herein; and,
WHEREAS, the parties wish to set forth their understanding and agreement.
NOW, THEREFORE, for good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, hereby agree as follows:
1. LOAN
Lender hereby agrees to loan and advance to Borrower, and Borrower hereby
borrows from Lender, the sum of Ten Million Dollars ($10,000,000.00) (the Loan).
The proceeds of the Loan shall be advanced in accordance with the scheduled
attached hereto. Upon each advance, all representations, warranties, covenants
and other obligations of Borrower hereunder and in other documents delivered in
connection herewith, shall automatically be incorporated and be deemed confirmed
as of the date thereof. The obligation to repay the Loan shall be evidenced by
the attached Promissory Note (the Note), which shall be executed and delivered
to Lender contemporaneously with the execution and delivery of this Agreement.
2. CONVERSION OPTION
(a) Notwithstanding the provisions of the Note, the Parties may elect to
convert the outstanding principal balance of the Note to a Debenture at
terms to be mutually agreed to by the Parties (Conversion Event).
(b) If the Conversion Event occurs, Borrower agrees to:
(i) Cause whatever action is necessary to convert the note to a mutually
agreed upon Debenture instrument;
(ii) Take such other actions as Lender may reasonably request to convert
the Note to a Debenture.
(c) Upon the Conversion Event and delivery of the Debenture to Lender (or
his designees), the Loan and Obligations shall be deemed satisfied in
full. Lender shall return the Note marked "Cancelled" and execute such
additional documents as Borrower may reasonably request in connection
therewith.
4. INTEREST AND REPAYMENT
The Loan shall bear interest and be repayable in accordance with the terms
of the Note.
5. REPRESENTATIONS AND WARRANTIES
(a) Borrower hereby represents and warrants and covenants to Lender, his
successors, heirs and assigns, that the following are true, correct and
complete as of the date hereof and will remain
35
<PAGE>
true, correct and complete so long as any amounts remain owing to Lender
under the Note, this Agreement, or otherwise:
(i) Borrower is duly organized, validly existing and in good standing
under the laws of the Texas and has the power and authority to enter
into this Agreement and all agreements pursuant hereto and carry out
its obligations hereunder and thereunder.
(ii) The execution and delivery of this Agreement, the Note and any
other documents in connection herewith (together, the Transaction
Documents) and the consummation of the transactions contemplated
hereby have been duly and validly authorized.
(iii) Each of the Transaction Documents constitutes the valid and binding
obligations and agreements of Borrower, and is enforceable against
it in accordance with their terms.
(iv) The execution, delivery and performance of the Transaction
documents and the transactions contemplated hereby will not result
in any violation of, be in conflict with, result in a breach of, or
constitute a default under the terms of any agreement or instrument
to which Borrower is a party, or by which it is bound; and there is
no such term which materially adversely affects the business,
operations, affairs, condition (financial or otherwise) properties,
or assets of Borrower.
(v) Except as is set forth in the Disclosure Schedules attached hereto,
there are no unpaid assessments for additional taxes in any
jurisdiction in which Borrower holds assets for any period or any
basis for any such assessment.
(vi) Except as is set forth in the Disclosure Schedules attached hereto
and the Company's filings with the Securities and Exchange
Commission which have been provided to the Lender, Borrower is
unaware of any fact that could reasonably be expected to materially
or adversely affect or threaten the assets, business, prospects,
financial condition or results of operations of the Borrower or its
ability to repay the Loan that has not been fully disclosed to
Lender.
Lender acknowledges that Borrower has disclosed the Borrower's current
financial difficulties, including, but not limited to the shortfall in
funding the Borrower's business plan. The Lender also represents that it
is a "sophisticated investor" as such term is defined in the Securities
Act of 1933, as amended.
(b) The foregoing representations and warranties shall survive execution
hereof and continue until such time as the Loan is satisfied in full.
6. INDEMNITY
Borrower shall, and hereby does, indemnify, defend and hold Lender, his
successors, heirs and assigns harmless from and against any damage, liability,
loss, cost, expense (including attorneys fees), claim or cause of action
suffered or incurred by him arising from or as a result of the breach of any
representation or warranty or the default of any covenant hereunder, and the
business and operations of Borrower generally prior to and following the date
hereof.
7. FURTHER ASSURANCES
Each of the parties hereto will, at such times as another party may request,
without any cost or expense to the party so requesting, execute and deliver or
cause to be execute and delivered to such other party such further instruments
of transfer and conveyance and will take such other actions as may reasonably be
requested to more effectively consummate the transactions contemplated by this
Agreement.
36
<PAGE>
8. GOVERNING LAW; CONSENT TO JURISDICTION
This Agreement will be governed by, and construed and enforced in accordance
with the Laws of the District of Columbia, in the United States. Each party
irrevocably consents that any legal action or proceeding to enforce this
Agreement or any term hereof shall be brought in the courts of the District of
Columbia, and each further agrees to the jurisdiction of such courts in the
event of any dispute hereunder. The foregoing shall not be interpreted to limit
or restrict the ability of Lender to institute an action to collect amounts due
hereunder in any jurisdiction.
9. LEGAL COUNSEL; DRAFTING
Each party has had such review of this Agreement and all other agreements
executed incident hereto by its counsel as it has determined necessary, having
been advised that such documents have substantial legal consequences. No
inference shall be drawn against the drafter of the documents.
10. THIRD PARTY BENEFICIARIES
No other party shall be treated as a beneficiary of the terms hereof or
entitled to enforce any of the provisions hereof.
11. WARRANTS
For each $1,000,000 advanced hereunder by the Lender to the Borrower,
Borrower shall issue to Lender a three year warrant to acquire 35,714 common
shares of Borrower at an exercise price of $7.00 per share in the form attached
hereto. For each thirty days that expire after the date of the Note, Borrower
shall issue to Lender an additional warrant to acquire 35,714 common shares of
Borrower up to a total amount of 107,142.
12. MISCELLANEOUS
(a) The provisions hereof shall survive execution of this Agreement.
(b) This Agreement may be changed only in writing signed by the party
against whom the enforcement is sought.
(c) All notices and other items sent to any party hereto shall be sent to
the addresses set forth below, unless a different address shall be
provided, in writing; notices shall be effective upon receipt.
(d) This Agreement may be executed in counterpart originals, each of which
shall constitute an original and all of which together shall constitute a
single document and shall be effective upon execution by both parties.
The parties intend that facsimile signatures shall be good and sufficient
evidence of signature on all documents and authorizations unless such
facsimile shall expressly provide that only the original signature shall
be binding.
(e) This Agreement shall be binding upon the parties hereto and their
respective successors and assigns.
(f) If any provision of this Agreement is held invalid or unenforceable by
any court of competent jurisdiction, the other provisions of this
Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or
unenforceable.
(g) The Recitals and attachments hereto are incorporated herein in their
entirety by this reference.
(h) It is acknowledged and agreed by the Parties that after the initial
Three Million ($3,000,000) Dollars is advanced either Party may terminate
this agreement as to the remaining Seven Million ($7,000,000) Dollars or
any part of it without any further liability. In the event this Agreement
is terminated prior to the advance of all funds called for hereunder,
Lender shall be repaid with all accrued interest no later than one
hundred eighty (180) days after the date of each Note.
37
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed as of the date first above written.
<TABLE>
<S> <C>
ATTEST: TELSCAPE INTERNATIONAL, INC.
By: Todd M. Binet
Its: President
Dated:
ATTEST: LENNOX INVESTMENT, LTD.
By:
Its:
Dated:
</TABLE>
10/19/99
38
<PAGE>
PROMISSORY NOTE
DATE: October 22, 1999 US $1,060,000.00
For Value Received, the undersigned, TELSCAPE INTERNATIONAL "Inc. a Texas
corporation ("Borrower"), promises to pay to the order of Lennox
Investment, Ltd., a BVI corporation ("Holder"), at the address set forth below,
the principal sum of One Million Sixty Thousand and no/100 ($1,060,000.00)
Dollars together with interest thereon at the rate of ten percent (10%) per
annum.
The principal amount of this Promissory Note shall be subject to advance to
Borrower in accordance with the terms of that certain Loan Agreement of even
date herewith between, inter alia, Borrower and Lender (the "Loan Agreement").
Interest shall accrue on principal from the date of its first advance by Holder.
1. Interest Payments
Interest shall accrue and be payable on the Maturity Date.
2. Maturity Date
The entire unpaid principal balance, all accrued but unpaid interest and all
fees, charges, costs and expenses, if any, shall be due upon the first to
occur of the following (the "Maturity Date"):
(i) one hundred eighty (180) days from the date of this Promissory Note;
(ii) the failure of Borrower to make any payment due hereunder within five
(5) days;
(iii) any default or breach by Borrower under the terms of the Loan Agreement
which is not fully cured within thirty (30) days of default or breach;
(iv) the conversion of the note into a debenture in form and substance to be
mutually agreed upon by the Borrower and Lender; and
On the Maturity Date, Borrower shall make such payments without further
notice or demand by Holder to Borrower or any other party.
3. Prepayment
Borrower shall have the right to prepay all or any portion of this
Promissory Note at any time or from time to time without penalty.
4. Default
In the event Borrower fails to pay the principal sum due following demand
within the time period set forth above, Borrower shall be in default and
Holder may pursue all legal and equitable remedies that may be available,
This Note shall thereafter bear interest at the lesser of (i) the highest
rate permitted by law; or (ii) fourteen (14%) percent. Such interest accrued
pursuant to this Section shall be due and payable to Holder on demand.
5. Application of Payments/Expenses
All payments received by Holder shall be applied to the payment of accrued
fees, charges, costs and expenses payable hereunder, to any interest due
hereunder, or to the outstanding principal balance, as determined by Holder
in his sole discretion, Borrower shall be responsible for and hereby agrees
to pay, on demand, all costs and expenses of enforcement and/or collection
of this Promissory Note, including reasonable attorney's fees, whether or
not any suit or other legal proceedings be instituted hereon.
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6. Waiver
Borrower waives demand, presentment for payment, protest, notice of
nonpayment, notice of protest, and notice of dishonor as well as any
exemptions that may be available to it under any homestead, insolvency or
similar laws.
7. Miscellaneous
(i) This Promissory Note shall be governed by and construed in accordance
with the laws of the District of Columbia,
(ii) If any provision is held to be invalid or unenforceable the other
provisions of this Promissory Note shall be deemed severable and shall
remain in full force and effect,
(iii) No modification or amendment of any term or terms of this Promissory
Note shall be effective unless in writing and signed by the parties
hereto,
(iv) This Promissory Note shall be binding upon, and inure to the benefit of
and be enforceable by, the parties hereto and their respective personal
representatives, heirs, successors and assigns of the parties hereto.
(v) All notices required or permitted under this Promissory Note shall be in
writing and shall be sufficient if given personally or by certified mail
to the addresses set forth below (or such other address as is indicated
in writing).
IN WITNESS WHEREOF, the undersigned has executed this Promissory Note under
seal and on the day and year first above written.
<TABLE>
<S> <C>
ATTEST: Telscape International, Inc.
By: Todd M. Binet
Its: President
Holder Address: Borrower Address:
</TABLE>
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STOCK PLEDGE AGREEMENT
THIS AGREEMENT, made and entered into this 22nd day of October, 1999, by and
between E. Scott Crist, Todd Binet, Manuel Landa, Forest International, Ltd.,
Ricardo Orea, Cloud International, Ltd., Oscar Garcia, and Sky
Associates, Ltd., hereinafter Collectively referred to as "Pledgor", and Lennox
Invest, Ltd. a BVI corporation, hereinafter, referred to as "Pledgee".
RECITALS
(A) Pledgor is the owner of approximately 31% of the stock of Telscape
International, Inc., a Texas Corporation ("Telscape"). Contemporaneous with the
execution of this Agreement, Pledgor and Pledgee have executed a loan agreement
("Loan Agreement"), in the amount of Ten Million and no/100 ($10,000,000.00)
Dollars. Each draw against this Loan Agreement will be evidenced by a Promissory
Note, a copy of which is attached hereto as Exhibit "A" and incorporated herein
by reference; and,
(B) Pledgor is owner and holder of an aggregate of Two Million One Hundred
Eighty Thousand Three Hundred Forty Seven (2,180,347) shares of common stock
($.001 par value) of Telscape; and,
(C) In addition, Pledgor is in control of additional warrants to acquire
shares of Telscape common stock ("Warrants") which they individually have the
right to pledge as collateral for the loan; and
(D) The Pledgor, as the owner of such issued and outstanding stock and
Warrants have agreed that some or all of such stock and Warrants will be pledged
as additional security for the repayment for any outstanding indebtedness under
such Loan Agreement.
NOW, THEREFORE, in consideration of the foregoing Recitals which shall be
deemed an integral part of this Agreement and not merely as recitals thereto,
and in consideration of the mutual agreements and covenants herein contained,
the parties hereto, intending to be legally bound thereby, agree as follows:
(1) PLEDGE
For each $1,000,000 dollars borrowed under the Loan Agreement, the Pledgor
agrees to pledge at least $2,000,000 worth of shares of unencumbered (i.e. no
liens) Telscape common stock and/or Warrants. For the initial $3,000,000
borrowed, Pledgee will only accept and Pledgor has agreed to pledge unencumbered
common stock and not Warrants, as collateral. The Pledgor herein delivers and
conveys to the Pledgee to be held in escrow by Deutsche Banc Alex.Brown located
at BT Alex Brown 1South Street, 23rd Floor Baltimore, Maryland, 21202 Attention:
Mr. Geary Stonesifer, hereinafter referred to as the "Escrow Agent" the shares
and/or Warrants of stock represented in Exhibit "B".
(2) TERM
Equitable title to such stock and or Warrants shall remain vested in the
Pledgor and the Escrow Agent shall hold such stock and or Warrants only as
security for the repayment of the indebtedness described in Exhibit "A" hereto,
and shall not encumber or dispose of such stock except in accordance with the
provisions of this Agreement. Such stock shall remain so pledged to the Pledgee
until the said indebtedness is repaid in full with interest, in accordance with
Exhibit "A" hereof.
(3) VOTING
During the term of this pledge and so long as the maker is not in default in
the performance of any of the terms of the indebtedness described in Exhibit "A"
hereof, then the Pledgor shall have the right to vote the pledged stock on all
corporate questions and the Pledgee shall execute due and timely proxies in
favor of the Pledgor as may be necessary to this end.
(4) REPRESENTATIONS AS TO ABILITY TO PLEDGE STOCK
The Pledgor warrants and represents that the Pledgor has the right to
transfer the pledged securities subject to no encumbrances.
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(5) STOCK ADJUSTMENTS, WARRANTS AND RIGHTS
In the event that during the term of this pledge any stock dividend,
reclassification, readjustment or other change is declared or made in the
capital structure of the corporate issuer of any of the pledged stock, all new
substituted and additional shares or other securities issued in respect to the
pledged stock shall be held by the Escrow Agent under the terms of this
Agreement in the same manner as the shares of stock originally pledged
hereunder; and in the event that during the term of this pledge subscription
warrants or any other rights or options shall be issued in connection with the
pledged stock, such warrants, rights and options shall be immediately assigned
by the Pledgee to the Pledgor, and if exercised by the Pledgor all new stock or
other securities so acquired by the Pledgor shall be immediately assigned to the
Pledgee to be held under the terms of this Agreement in the same manner as the
shares of stock originally pledged hereunder.
(6) RETURN OF STOCK
Upon the pledge of stock and or Warrants, Pledgee shall deliver executed
stock powers in blank to the Escrow Agent covering the pledged stock and/or
Warrants. Upon the payment in full of the indebtedness in accordance with the
terms of the Loan Agreement: (i) the Escrow Agent shall transfer to the Pledgor
all of the stock and or Warrants pledged hereunder and (ii) any security
interest of the Pledgee shall immediately and automatically terminate.
(7) DOCUMENTARY STAMPS
The Pledgor agrees to pay for any and all documentary stamps which maybe
imposed on the transfer and delivery to Escrow Agent of the pledged stock and
substitutions therefore and any additions thereto, and which may be imposed on
the retransfer and redelivery of it to the Pledgor.
(8) DEFAULT
In the event the Pledgor defaults in the performance of any of the terms of
this Agreement or in an event of default, as defined in the terms and conditions
contained in the Loan Agreement, the Pledgee shall have the following rights,
exercisable thirty (30) days after such event of default:
(a) To direct the Escrow Agent to sell the whole or any part of the
pledged stock and or exercise the Warrants and any substitutions therefore
and any additions thereto, at public or private sale, at the option of the
said Pledgee and from the proceeds derived from the said sale to pay first
the cost and expenses of said sale, including a reasonable attorneys' fee
for making said sale, and second, any interest which may then have accrued
with respect thereto and accounting thereafter to the Pledgor for any
surplus then remaining derived from said sale after making all the payments
hereinabove set forth, such surplus, if any, to be paid over and delivered
to Pledgor, and at such sale the Pledgee may be a bidder, and may purchase
the pledged stock and or Warrant or any part thereof; provided, however,
that ten (10) days notice of said sale and the time and place thereof shall
be given to Pledgor by personal delivery or by certified or registered mail
addressed to the Pledgor at Telscape International, Inc., 2700 Post Oak
Blvd., Suite 1000, Houston, Texas 77056. It is further agreed that after a
sale and purchase of the pledged stock or any part thereof there shall be no
equity or right of redemption on the part of or by the Pledgor, as all
rights of redemption are hereby expressly waived and released. It is further
understood and agreed that the obligor of the aforesaid indebtedness shall
remain liable for any deficiency that may arise after the sale or sales of
the pledged stock and or exercise and sale of the Warrants. It is further
agreed that no public advertisement of the sale of the stock and or Warrants
so pledged hereunder shall be necessary, and that the Pledgee may at any
sale sell all or any part of such stock and or Warrants hereby pledged and
that a sale or a part of such stock and or Warrants shall not operate to
prevent the sale at a later date of the remainder of such stock and or
Warrants and that such sale may continue from day to day at the option of
the Pledgee without further notice to the Pledgor.
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(b) The right to vote the pledged stock on all corporate questions until
such time as the default is cured shall vest in the Pledgee and the Pledgor
shall execute due and timely proxies in favor of the Pledgee as may be
necessary to this end.
It is understood that the Pledgee may exercise either or both options to the
extent that same, in his sole discretion, will most likely lead to the
satisfaction of the indebtedness secured by this pledge; that the rights
hereunder are in addition to any and all other rights which the Pledgee may
have under any other agreements whatsoever; and further that Pledgee may
exercise either or both of the above options whether or not he exercised any
of such additional rights.
(9) PROHIBITION OF SALE OR FURTHER ENCUMBRANCE OF STOCK
During the term of this pledge, the Pledgor agrees not to sell, assign,
dispose of or further encumber the shares of stock and or Warrants subject to
this pledge, without the written consent of Pledgee, which consent shall be in
the sole and exclusive discretion of the Pledgee.
(10) CORPORATIONS PARTIES TO THIS AGREEMENT
By being made a party to this Agreement, the corporations that are parties
to this Agreement agree to the terms and conditions hereof and further agree
that the execution and delivery of this Agreement shall be authorized by a
meeting of the Board of Directors of the corporations which are parties to this
Agreement to be held prior to or upon the consummation of this Agreement.
(11) BENEFIT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, beneficiaries, personal representatives,
successors, or assigns, and it is particularly understood and agreed that
whenever the term "Pledgee" is used in this Agreement, the said term shall
include the Pledgee's successors and assigns.
(12) This Agreement is being executed in connection with and simultaneously with
the closing of a loan to Telscape by Pledgee.
(13) Any modifications or changes in the terms of this Agreement shall be in
writing and signed by all of the parties.
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The parties hereto have executed this Agreement the day and year first above
written.
<TABLE>
<S> <C>
Telscape International, Inc. Lennox Invest, Ltd.
By: By:
Its: Its:
Pledgee:
E. Scott Crist, Pledgor
Todd Binet, Pledgor
Manuel Landa, Pledgor:
Forest International, LLC
By:
Its:
Pledgor:
Ricardo Orea, Pledgor
Cloud International, LLC
By:
Its:
Pledgor:
Oscar Garcia, Pledgor
Sky Associates International, LLC
By:
Its:
Pledgor:
</TABLE>
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EXHIBIT A
Indebtedness in the amount of $1,000,000 represented by that certain
Promissory Note, dated October 22, 1999, by and between Telscape
International, Inc. as Maker and Lennox Investments, Ltd. as Payee.
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EXHIBIT B
<TABLE>
<CAPTION>
OWNER CERTIFICATE NUMBER NUMBER OF SHARES
- ----- ------------------ ----------------
<S> <C> <C>
Ricardo Orea Gudino......................................... N1219 126,000
Manuel Landa Rangel......................................... N1212 126,000
</TABLE>
(pledge.ag)
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WARRANT
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE
SOLD, TRANSFERRED OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE SECURITIES ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
Warrant L-1
October 22, 1999
Warrant to Purchase 35,714 Shares of Common Stock of
Telscape International, Inc.
Telscape International, Inc., a Texas corporation (the "COMPANY"), hereby
acknowledges that Lennox Investment, Ltd. ("INVESTOR"), or any other Warrant
Holder is entitled, on the terms and conditions set forth below, to purchase
from the Company, at any time after the date hereof and continuing for three
years thereafter, the above number of fully paid and nonassessable shares of
Common Stock, par value $0.001 per share, of the Company (the "COMMON STOCK") at
the Purchase Price (hereinafter defined), as the same may be adjusted pursuant
to Section 5 herein.
1. DEFINITIONS. All terms not otherwise defined herein shall have the
meanings given such terms in the Agreement.
(a) "AGREEMENT" shall mean the Loan Agreement of even date herewith
between the Company and the Investor.
(b) "INVESTOR" shall mean Lennox Investment, Ltd.
(c) "PURCHASE PRICE" shall be $7.00 per share.
(d) "WARRANT HOLDER" shall mean the Investor or any permitted assignee
of all or any portion of this Warrant.
(e) "WARRANT SHARES" shall mean the shares of Common Stock or other
securities issuable upon exercise of this Warrant.
(f) Other capitalized terms used herein which are defined in the
Agreement shall have the same meanings herein as therein.
2. EXERCISE OR EXCHANGE OF WARRANT.
(a) This Warrant may be exercised by the Warrant Holder, in whole or in
part, at any time and from time to time by surrender of this Warrant,
together with the form of exercise attached hereto as Exhibit A (the
"EXERCISE FORM") duly executed by Warrant Holder, together with the full
Purchase Price (as defined in SECTION 1) for each share of Common Stock as
to which this Warrant is exercised, to the Company at the address set forth
in SECTION 15 hereof. At the option of the Warrant Holder, payment of the
Purchase Price may be made either by (i) certified check payable to the
order of the Company, (ii) surrender of certificates then held representing,
or deduction from the number of shares issuable upon exercise of this
Warrant, of that number of shares which has an aggregate fair market value
(as defined below) on the date of exercise equal to the aggregate Purchase
Price for all shares to be purchased pursuant to this Warrant or (iii) by
any combination of the foregoing methods.
In the event that the Warrant is not exercised in full, the number of
Warrant Shares shall be reduced by the number of such Warrant Shares for
which this Warrant is exercised, and the Company, at its expense, shall
forthwith issue and deliver to or upon the order of the Warrant Holder a new
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Warrant of like tenor in the name of the Warrant Holder or as the Warrant
Holder may request, reflecting such adjusted Warrant Shares.
(b) The "DATE OF EXERCISE" of the Warrant shall be the date that the
completed Exercise Form is delivered to the Company, together with the
original Warrant and payment in full of the Purchase Price.
3. DELIVERY OF STOCK CERTIFICATES.
(a) Subject to the terms and conditions of this Warrant, as soon as
practicable after the exercise of this Warrant in full or in part, and in
any event within five (5) Business Days (as defined in the Securities
Purchase Agreement) thereafter, the Company at its expense (including,
without limitation, the payment by it of any applicable issue taxes) will
cause to be issued in the name of and delivered to the Warrant Holder, or as
the Warrant Holder may lawfully direct, a certificate or certificates for
the number of fully paid and non-assessable shares of Common Stock to which
the Warrant Holder shall be entitled on such exercise, together with any
other stock or other securities or property (including cash, where
applicable) to which the Warrant Holder is entitled upon such exercise in
accordance with the provisions hereof.
(b) This Warrant may not be exercised as to fractional shares of Common
Stock. In the event that the exercise of this Warrant, in full or in part,
would result in the issuance of any fractional share of Common Stock, then
in such event the Warrant Holder shall be entitled to cash equal to the fair
market value of such fractional share. For purposes of this Warrant, "FAIR
MARKET VALUE" shall equal the closing bid price of the Common Stock on the
Nasdaq National Market or Small-Cap Market, the American Stock Exchange or
the New York Stock Exchange, whichever is the principal trading exchange or
market for the Common Stock (the "PRINCIPAL MARKET") on the date of exercise
hereof, or if the Common Stock is not listed or admitted to trading on any
national securities exchange or quoted on the Nasdaq National Market or
Small-Cap Market, the closing bid price on the over-the-counter market as
furnished by any New York Stock Exchange member firm that makes a market in
the Common Stock reasonably selected from time to time by the Company for
that purpose, or, if the Common Stock is not traded over-the-counter and the
average price cannot be determined as contemplated above, the fair market
value of the Common Stock shall be as reasonably determined in good faith by
the Company's Board of Directors.
4. COVENANTS OF THE COMPANY.
(a) The Company shall take all necessary action and proceedings as may
be required and permitted by applicable law, rule and regulation, including,
without limitation, the notification of the Principal Market, for the legal
and valid issuance of this Warrant and the Warrant Shares to the Warrant
Holder.
(b) From the date hereof through the last date on which this Warrant is
exercisable, the Company shall take all steps necessary and within its
control to insure that the Common Stock remains listed or quoted on the
Principal Market and shall not amend its Articles of Incorporation or
By-Laws so as to adversely affect any rights of the Warrant Holder under
this Warrant; provided, however, that increasing the number of authorized
shares shall not be deemed a material adverse effect.
(c) The Company shall at all times reserve and keep available, solely
for issuance and delivery as Warrant Shares hereunder, such shares of Common
Stock as shall from time to time be issuable as Warrant Shares.
(d) The Warrant Shares, when issued in accordance with the terms hereof;
will be duly authorized and, when paid for or issued in accordance with the
terms hereof, shall be validly issued,
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fully paid and non-assessable. The Company has authorized and reserved for
issuance to the Warrant Holder the requisite number of shares of Common
Stock to be issued pursuant to this Warrant.
(e) With a view to making available to the Warrant Holder the benefits
of Rule 144 promulgated under the Securities Act ("RULE 144") and any other
rule or regulation of the Securities and Exchange Commission (the "SEC"),
that may at any time permit Warrant Holder to sell securities of the Company
to the public without registration, the Company agrees to use its best
efforts to: (i) make and keep public information available, as those terms
are understood and defined in Rule 144, at all times; and (ii) file with the
SEC in a timely manner all reports and other documents required of the
Company under the Securities Act and the Exchange Act.
5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number of and
kind of securities purchasable upon exercise of this Warrant and the Purchase
Price shall be subject to adjustment from time to time as follows:
(a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the Company shall
at any time after the date hereof but prior to the expiration of this
Warrant subdivide its outstanding securities as to which purchase rights
under this Warrant exist, by split-up, spin-off, or otherwise, or combine
its outstanding securities as to which purchase rights under this Warrant
exist, the number of Warrant Shares as to which this Warrant is exercisable
as of the date of such subdivision, split-up, spin-off or combination shall
forthwith be proportionately increased in the case of a subdivision, or
proportionately decreased in the case of a combination. Appropriate
adjustments shall also be made to the Purchase Price, but the aggregate
purchase price payable for the total number of Warrant Shares purchasable
under this Warrant as of such date shall remain the same.
(b) STOCK DIVIDEND. If at any time after the date hereof the Company
declares a dividend or other distribution on Common Stock payable in Common
Stock or other securities or rights convertible into or exchangeable for
Common Stock ("COMMON STOCK EQUIVALENTS"), without payment of any
consideration by holders of Common Stock for the additional shares of Common
Stock or the Common Stock Equivalents (including the additional shares of
Common Stock issuable upon exercise or conversion thereof), then the number
of shares of Common Stock for which this Warrant may be exercised shall be
increased as of the record date (or the date of such dividend distribution
if no record date is set) for determining which holders of Common Stock
shall be entitled to receive such dividends, in proportion to the increase
in the number of outstanding shares (and shares of Common Stock issuable
upon conversion of all such securities convertible into Common Stock) of
Common Stock as a result of such dividend, and the Purchase Price shall be
adjusted so that the aggregate amount payable for the purchase of all the
Warrant Shares issuable hereunder immediately after the record date (or on
the date of such distribution, if applicable), for such dividend shall equal
the aggregate amount so payable).
(c) OTHER DISTRIBUTIONS. If at any time after the date hereof the
Company distributes to holders of its Common Stock, other than as part of a
dissolution or liquidation or the winding up of its affairs, any shares of
its capital stock, any evidence of indebtedness or any of its assets without
payment of any consideration by holders of Common Stock (other than cash,
Common Stock or securities convertible into or exchangeable for Common
Stock), then, in any such case, the Warrant Holder shall be entitled to
receive, upon exercise of this Warrant, with respect to each share of Common
Stock issuable upon such exercise, the amount of cash or evidences of
indebtedness or other securities or assets which such Warrant Holder would
have been entitled to receive with respect to each such share of Common
Stock as a result of the happening of such event had this Warrant been
exercised immediately prior to the record date or other date determining the
shareholders entitled to participate in such distribution (the
"DETERMINATION DATE").
(d) MERGER, CONSOLIDATION, ETC. If at any time after the date hereof
there shall be a merger or consolidation of the Company with or into, or a
transfer of all or substantially all of the assets of the
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Company to, another entity (a "CONSOLIDATION EVENT"), then the Warrant
Holder shall be entitled to receive upon such transfer, merger or
consolidation becoming effective, and upon payment of the aggregate Purchase
Price then in effect, the number of shares or other securities or property
of the Company or of the successor corporation resulting from such merger or
consolidation, which would have been received by Warrant Holder for the
shares of stock subject to this Warrant had this Warrant been exercised
immediately prior to such transfer, merger or consolidation becoming
effective or to the applicable record date thereof, as the case may be. The
Company shall not effect any Consolidation Event unless the resulting
successor or acquiring entity (if not the Company) assumes by written
instrument the obligation to deliver to the Warrant Holder such shares of
stock and/or securities as the Warrant Holder is entitled to receive had
this Warrant been exercised in accordance with the foregoing.
(e) RECLASSIFICATION, ETC. If at any time after the date hereof there
shall be a reclassification of any securities as to which purchase rights
under this Warrant exist, into the same or a different number of securities
of any other class or classes, then the Warrant Holder shall thereafter be
entitled to receive upon exercise of this Warrant, during the period
specified herein and upon payment of the Purchase Price then in effect, the
number of shares or other securities or property resulting from such
reorganization or reclassification, which would have been received by the
Warrant Holder for the shares of stock subject to this Warrant had this
Warrant at such time been exercised.
(f) ADJUSTMENTS; ADDITIONAL SHARES, SECURITIES OR ASSETS. In the event
that at any time, as a result of an adjustment made pursuant to this
SECTION 5, the Warrant Holder shall, upon exercise of this Warrant, become
entitled to receive shares and/or other securities or assets (other than
Common Stock) then, wherever appropriate, all references herein to shares of
Common Stock shall be deemed to refer to and include such shares and/or
other securities or assets; and thereafter the number of such shares and/or
other securities or assets shall be subject to adjustment from time to time
in a manner and upon terms as nearly equivalent as practicable to the
provisions of this SECTION 5.
7. NO IMPAIRMENT. The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Warrant Holder against
impairment. Without limiting the generality of the foregoing, the Company
(a) will not increase the par value of any Warrant Shares above the amount
payable therefor on such exercise, and (b) will take all such action as may be
reasonably necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable Warrant Shares on the exercise of
this Warrant.
8. NOTICE OF ADJUSTMENTS; NOTICES. Whenever the Purchase Price or number of
Warrant Shares purchasable hereunder shall be adjusted pursuant to SECTION 5
hereof, the Company shall execute and deliver (by first class mail, postage
prepaid) to the Warrant Holder a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated and the Purchase Price and number
of shares purchasable hereunder after giving effect to such adjustment.
9. RIGHTS AS SHAREHOLDER. Prior to exercise of this Warrant, the Warrant
Holder shall not be entitled to any rights as a shareholder of the Company with
respect to the Warrant Shares, including (without limitation) the right to vote
such shares, receive dividends or other distributions thereon or be notified of
stockholder meetings. However, in the event of any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Company shall mail to each Warrant
Holder, at least 10 days prior to the date specified
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therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
10. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of the Warrant and,
in the case of any such loss, theft or destruction of the Warrant, upon delivery
of an indemnity agreement or security reasonably satisfactory in form and amount
to the Company or, in the case of any such mutilation, on surrender and
cancellation of such Warrant, the Company at its expense will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
11. CONSENT TO JURISDICTION. THE PARTIES (I) HEREBY IRREVOCABLY SUBMIT TO
THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT LOCATED IN THE
CITY OF HOUSTON OR ANY STATE COURT LOCATED IN THE CITY OF HOUSTON, TEXAS FOR THE
PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
WARRANT AND (II) HEREBY WAIVE, AND AGREE NOT TO ASSERT IN ANY SUCH SUIT, ACTION
OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION
OF SUCH COURT, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT
FORUM OR THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. THE
PARTIES CONSENT TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING
BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO
IT UNDER THIS WARRANT AND AGREE THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND
SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS PARAGRAPH
SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED
BY LAW.
12. ENTIRE AGREEMENT; AMENDMENTS. This Warrant and the Agreement contain the
entire understanding of the parties with respect to the matters covered hereby
and thereby. No provision of this Warrant may be waived or amended other than by
a written instrument signed by the party against whom enforcement of any such
amendment or waiver is sought.
13. RESTRICTED SECURITIES.
(a) REGISTRATION OR EXEMPTION REQUIRED. This Warrant has been issued in
a transaction exempt from the registration requirements of the Securities
Act in reliance upon the provisions of Section 4(2) of the Securities Act of
1933. This Warrant and the Warrant Shares issuable upon exercise of this
Warrant may not be resold except pursuant to an effective registration
statement or an exemption to the registration requirements of the Securities
Act and applicable state laws.
(b) LEGEND. The Warrant and any Warrant Shares issued upon exercise
thereof (until a registration statement has been declared effective by the
SEC with respect to the Warrant Shares, at which time, such legend shall be
removed, and the Warrant Shares shall be freely tradeable), shall bear the
following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS.
THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE SECURITIES ACT AND
ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
(c) ASSIGNMENT. Assuming the conditions of (a) above regarding
registration or exemption have been satisfied, the Warrant Holder may sell,
transfer, assign, pledge or otherwise dispose of this Warrant, in whole or
in part. The Warrant Holder shall deliver a written notice to Company,
substantially in the form of the Assignment attached hereto as Exhibit B,
indicating the person or persons to whom the Warrant shall be assigned and
the respective number of warrants to be assigned to each assignee. The
Company shall effect the assignment within ten (10) days, and shall deliver
to
51
<PAGE>
the assignee(s) designated by the Warrant Holder after delivery to the
Company of the original Warrant or Warrants for cancellation, a Warrant or
Warrants of like tenor and terms for the appropriate number of shares.
14. NOTICES. Any notice or other communication required or permitted to be
given hereunder shall be in writing and shall be effective (a) upon hand
delivery or delivery by facsimile at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
to the Company: Telscape International, Inc.
2700 Post Oak Boulevard
Suite 1000
Houston, Texas 77056
Attention: Todd M. Binet, President
Facsimile No.: (713) 968-0930
to the Warrant Holder: [ ]
Either party hereto may from time to time change its address or facsimile
number for notices under this SECTION 14 by giving at least 10 days prior
written notice of such changed address or facsimile number to the other party
hereto.
15. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought. This Warrant shall be construed and enforced in accordance with and
governed by the laws of the State of Texas. The headings in this Warrant are for
purposes of reference only, and shall not limit or otherwise affect any of the
terms hereof. The invalidity or unenforceability of any provision hereof shall
in no way affect the validity or enforceability of any other provision.
TELSCAPE INTERNATIONAL, INC.
By: __________________________________________
Todd M. Binet
President
52
<PAGE>
EXHIBIT A
FORM OF WARRANT EXERCISE
I/we hereby exercise Telscape International, Inc. (the "Company") Common Stock
Purchases
Warrant #________________.
(a) Number of Shares of the Company common stock covered
in Purchase Warrant #____________ ________________________________________
(b) Total Exercise price (____________ per
share) ________________________________________
<TABLE>
<S> <C>
Signature Employment Identification Number
</TABLE>
__________________________________________
Name (please print)
________________________________________________________________________________
Address
________________________________________________________________________________
__________________________________________
Telephone Number
<TABLE>
<S> <C>
Signature Employment Identification Number
</TABLE>
__________________________________________
Name (please print)
________________________________________________________________________________
Address
________________________________________________________________________________
__________________________________________
Telephone Number
I wish to register my shares of the Company common stock as follows:
a. ( ) Individual Ownership
b. ( ) Husband and Wife as Community Property
c. ( ) Joint Tenants w/Right to Survivorship (JTRS)
d. ( ) Tenants in Common
e. ( ) Other ___________________________________________
Dated: ___________________________________________, 19____.
A-1
<PAGE>
EXHIBIT B
FORM OF ASSIGNMENT
(To be executed by the registered Warrant Holder desiring to transfer the
Warrant)
FOR VALUED RECEIVED, the undersigned holder of the attached Warrant hereby
sells, assigns and transfers unto the persons below named the right to purchase
shares of the Common Stock of TELSCAPE INTERNATIONAL, INC. evidenced
by the attached Warrant and does hereby irrevocably constitute and appoint
attorney to transfer the said Warrant on the books of the Company,
with full power of substitution in the premises.
Dated:
________________________________________
Signature
Fill in for new Registration of Warrant:
________________________________________
Name
________________________________________
Address
________________________________________
Please print name and address of assignee
(including zip code number)
NOTICE: The signature to the foregoing Assignment must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
B-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,040,000
<SECURITIES> 0
<RECEIVABLES> 14,915,000
<ALLOWANCES> (467,000)
<INVENTORY> 4,724,000
<CURRENT-ASSETS> 34,094,000
<PP&E> 58,136,000
<DEPRECIATION> (5,094,000)
<TOTAL-ASSETS> 121,416,000
<CURRENT-LIABILITIES> 61,096,000
<BONDS> 28,829,000
0
0
<COMMON> 7,000
<OTHER-SE> 31,484,000
<TOTAL-LIABILITY-AND-EQUITY> 121,416,000
<SALES> 83,341,000
<TOTAL-REVENUES> 83,341,000
<CGS> (72,861,000)
<TOTAL-COSTS> (72,861,000)
<OTHER-EXPENSES> (1,431,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,064,000)
<INCOME-PRETAX> (13,176,000)
<INCOME-TAX> 3,539,000
<INCOME-CONTINUING> (9,637,000)
<DISCONTINUED> (9,637,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> (1.47)
<EPS-DILUTED> 0
</TABLE>
