U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER 0-24622
TELSCAPE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2433637
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2700 POST OAK BLVD., SUITE 1000
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 968-0968
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
REDEEMABLE COMMON STOCK PURCHASE WARRANT
(TITLE OF CLASS)
COMMON STOCK ($.001 PAR VALUE)
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant (based on the closing price as reported on the NASDAQ National Market
System on March 11, 1999, was approximately $30,700,000. Shares of common stock
held by each executive officer and director and by each stockholder affiliated
with a director have been excluded from this calculation because such persons
may be deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes. The number of
outstanding shares of the registrant's Common Stock as of March 11, 1999 was
6,069,378.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of Stockholders
to be held on June 21, 1999 are incorporated by reference into Part III of this
report.
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TELSCAPE INTERNATIONAL, INC.
TABLE OF CONTENTS
FORM 10-K REPORT
DECEMBER 31, 1998
PAGE
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Part I
Item 1. Business. 1
Item 2. Properties. 18
Item 3. Legal Proceedings. 19
Item 4. Submission of Matters to a Vote of Security Holders. 19
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 20
Item 6. Selected Financial Data. 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 22
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk 32
Item 8. Financial Statements and Supplementary Data. 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 60
Part III
Item 10. Directors and Executive Officers of the Registrant. 60
Item 11. Executive Compensation. 60
Item 12. Security Ownership of Certain
Beneficial Owners and Management. 60
Item 13. Certain Relationships and Related Transactions. 60
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. 60
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The statements contained in this Annual Report on Form 10-K 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 "Business", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Annual Report on Form
10-K 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 Annual Report on Form 10-K
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, 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 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.
PART I
ITEM 1. BUSINESS.
GENERAL
Telscape International, Inc. (collectively, with its subsidiaries, the
"Company" or "Telscape") is an emerging, fully integrated telecommunications
company. The Company was founded in 1992 as Polish Telephones and Microwave. In
November 1996, the Company's name was changed to Telscape International, Inc. to
more accurately reflect the Company's overall strategy. The Company, based in
the U.S., supplies international voice, video and data services, via switched
and dedicated networks, principally to and from Latin America. In addition, the
Company provides a full range of systems integration and value-added
telecommunications services in Mexico to major public and private sector
customers. Telereunion, a Telscape subsidiary, is one of only sixteen companies
that has been granted a facilities-based long distance concession by the Mexican
government. In addition, the Company provides satellite teleport services to
customers in the U.S. and Latin America.
The Company believes that it is well-positioned to capitalize on the
opportunities presented by the large and growing international
telecommunications services market. Telscape intends to significantly expand its
facilities-based telecommunications operations over the next 12 months and to
broaden its service offerings in markets where it has established, or expects to
establish, a significant presence. The Company, through certain of its Mexican
subsidiaries, has been authorized to provide data and other value-added services
in Mexico. In addition, in June 1998, Telereunion S.A. de C.V. ("Telereunion
S.A."), an affiliate of the Company, received a 30-year, facilities-based
carrier license from the Mexican government allowing it to construct and operate
a network over which the Company plans to carry long distance traffic in Mexico
(the "Mexican Concession"). The Company owns approximately 65% of the economic
interests and 49% of the voting interests of Telereunion, S.A. In addition,
three Mexican directors of the Company own an additional 18% of the voting
interests and 2% of the economic interests in Telereunion S.A., resulting in the
Company and such directors together controlling 67% of the economic interests
and voting interests of Telereunion S.A. Under Mexican law, foreign investors
may own more than a majority of the economic interests in a concessionaire but
may not own more than 49% of the voting ownership of any concessionaire. To
deliver its services, the Company, through Telereunion S.A., intends to
construct a network in
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Mexico, which will consist of a combined fiber-optic and microwave long distance
network, connecting the United States, the Gulf region of Mexico and targeted
Mexican cities (the "Mexican Network"). The Company believes that the Mexican
Network will allow it to enhance service offerings to business customers in
Mexico while reducing its cost of terminating international traffic in Mexico.
Telscape intends to capitalize on the growth in the Latin American
telecommunications market by providing international long distance services to
and from targeted Latin American countries. The Company also intends to position
itself as an integrated telecommunications provider in Mexico by providing
domestic and international long distance services over the Mexican Network. The
Company believes that expanding its owned and leased transmission facilities in
Mexico and Latin America will allow it to increase the percentage of minutes of
traffic carried on-net, which the Company believes will enable it to increase
margins and profitability and ensure quality of service on both international
and domestic long distance traffic. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The Company is one of only 16 concession holders in Mexico. The Company
believes that its planned Mexican Network, when complete, will link 47 cities
and towns and cover, including interconnection agreements, approximately 90% of
the population in Mexico. The Mexican Network will provide the Company with the
backbone for its strategy to be an integrated telecommunications service
provider for the Mexican market. The Mexican Network will provide the Company
with significant, carrier-class, cost-effective capacity from which it can grow
its existing retail and wholesale international long distance and value-added
services businesses on both sides of the U.S.-Mexico border. The Company expects
to begin the construction of the Mexican Network in the second quarter of 1999.
The Company has selected Lucent Technologies Inc. ("Lucent") to engineer,
furnish and install the Mexican Network. In addition, the Company received a
commitment from Lucent to provide the Company with up to $40 million of long
term financing, which includes $34 million towards the purchase of Lucent
products and services (including construction of the Mexican Network) and $6
million for repayment of the Company's current obligations (the "Lucent
Facility").
In May 1998, the Company acquired California Microwave Services Division,
Inc. ("CMSD"), a subsidiary of California Microwave, Inc., for $8.8 million in
cash. As part of the acquisition, the Company formed INTERLINK Communications,
Inc. ("INTERLINK"), to acquire CMSD. The primary asset of INTERLINK is a
teleport facility in Mountain View, California. The Company believes that
INTERLINK enhances its position as an integrated telecommunications provider and
helps assure satellite capacity in its targeted markets in Latin America.
In May 1998, the Company issued $4.0 million in Deere Park Convertible
Debentures (as defined) and $5.0 million in Gordon Brothers Convertible
Debentures (as defined). In June 1998, the Company issued an additional $1.0
million in Deere Park Convertible Debentures. The proceeds from the Deere Park
Convertible Debentures and the Gordon Brothers Convertible Debentures were used
primarily in connection with the acquisition of INTERLINK, and the remainder was
used for capital investments and general working capital purposes.
In March 1998, the Company acquired a license and access code from the
government of El Salvador to provide inbound and outbound international long
distance and certain other telecommunications services.
In January 1998, Telscape acquired MSN Communications, Inc. ("MSN), a
leading provider of prepaid calling cards ("Prepaid Cards") that are marketed
under the TELEFIESTA(R) brand name primarily to Hispanic consumers residing in
the United States. The acquisition enhances Telscape's long distance business
profile by establishing a retail platform for its international long distance
services and enhancing its ability to market additional products and services to
Hispanic customers.
INDUSTRY BACKGROUND AND MARKET DEMAND
OVERVIEW
The international telecommunications industry is undergoing a period of
fundamental change that has resulted, and is expected to continue to result, in
significant growth in international telecommunications traffic and revenues.
According to the World Telecommunication Development Report 1996/97 published by
the International Telecommunications Union ("ITU") on February 20, 1997 (the
"ITU Report"), the 1998 revenue of the global telecommunications industry is
projected to exceed $1 trillion. According to TeleGeography 1999, revenues
generated from the provision of international long distance services increased
to $65.9 billion in 1997 from $26.8
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billion in 1988, a compound annual growth rate of 10.6%. Management believes
that Latin American traffic, including traffic between the United States and
Latin America, will continue to grow faster than the international
telecommunications market as a whole as a result of (i) underlying economic
growth within Latin America, (ii) growth of regional trade as a result of free
trade initiatives such as NAFTA, Mercosur and the Andean Pact, (iii)
deregulation and privatization of telecommunications carriers in the region,
(iv) projected regional increases in telephone density and (v) increasing demand
for bandwidth-intensive applications.
The Company believes that numerous factors have driven the growth in
demand for international telecommunications products and services. Those factors
include: (i) the globalization of the world's economies and the worldwide trend
toward deregulation of the telecommunications sector, (ii) declining prices and
a wider selection of products and services driven by greater competition
resulting from deregulation, (iii) increased telephone accessibility resulting
from technological advances and greater investment in telecommunications
infrastructure, including deployment of wireless networks, (iv) increased
international business and leisure travel and (v) growth of computerized
transmission of voice and data information. These trends have sharply increased
the use of, and reliance upon, telecommunications products and services
throughout the world. The Company expects these trends to continue for the
foreseeable future.
The growth in the use of telecommunications services and the rapidly
changing international telecommunications market have created a significant
opportunity for carriers such as the Company that can offer high quality, low
cost comprehensive telecommunications products, systems and services. The
Company believes that a high percentage of the world's business and residential
consumers continue to be subject to high prices with poor quality and lack of
availability of service which have been characteristic of many Post, Telephone &
Telegraph administrations ("PTTs"). Demand for improved service and lower prices
has created opportunities for private companies to compete in the international
telecommunications market and has spurred a broadening of products and services.
New technologies have contributed to improved quality and increased transmission
capacity and speed. The Company therefore believes that recent and on-going
deregulation and increasing access to telecommunications facilities in emerging
markets will bring a high level of growth in the demand for telecommunications
services outside the United States, particularly in Latin America.
By eroding the traditional monopolies held by PTTs, many of which are or
were wholly or partially government owned, deregulation is providing U.S.-based
providers the opportunity to negotiate more favorable agreements with both the
traditional PTTs and emerging foreign providers. In addition, deregulation in
certain foreign countries is enabling U.S.-based providers to establish local
switching and transmission facilities in order to terminate their own traffic
and begin to carry international long distance traffic originating in those
countries. Deregulation, privatization, the expansion of the resale market and
other trends influencing the international telecommunications market are
resulting in decreased termination costs, a proliferation of routing options and
increased competition.
Advances in technology have created multiple ways for telecommunications
carriers to provide customer access to their networks and services. Overall,
these changes have resulted in a trend towards bypassing traditional
international long distance operating agreements as international long distance
companies seek to operate more efficiently. In markets that have not deregulated
or are in the process of implementing deregulation, international long distance
carriers have used advances in technology to develop innovative alternative
methods to meet customer demand.
Recent legislation and the World Trade Organization agreement ("WTO
Agreement") among numerous countries are expected to lead to increased
liberalization of the majority of the world's telecommunication markets.
Specifically, the WTO Agreement created a framework under which 69 countries
committed to liberalize their telecommunications laws to permit increased
competition and, in most cases, foreign ownership in their telecommunications
markets, beginning in 1998. The Telecommunications Act of 1996 established a
framework for increasing competition in the U.S. telecommunications services
market and the European Union's Services Directive abolished exclusive rights
for the provision of voice telephony services throughout the European Union
("EU") and the local Public Switched Telephone Network ("PSTN") of any member
country of the EU by January 1, 1998.
The Company believes that these initiatives, as well as other proposed
legislation and agreements, will provide increased opportunities for emerging
competitive carriers such as Telscape to provide telecommunications services in
targeted markets. Deregulation has encouraged competition, which in turn has
prompted carriers to offer a wider selection of services and reduce prices. The
industry's projections for substantially increased international minutes of use
and revenue by 2000 are based in part on the belief that reduced pricing as a
result of deregulation and competition will result in a substantial increase in
the demand for telecommunications services in most markets.
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LATIN AMERICA
The telecommunications market in Latin America is undergoing a period of
deregulation, privatization, increased competition and rapid growth. According
to TeleGeography 1999, growth in the demand for telecommunications services
across Latin America in 1996-1997 increased at a rate of 7.6%.
The Company seeks to focus on the opportunities created by deregulation
and market growth in the rapidly changing international telecommunications
markets in Latin America. Countries in the Latin American region generally are
experiencing a solid period of economic, business and infrastructure growth,
reduced inflation and economic and political stability. Substantial
opportunities exist for providers of telecommunications equipment, system
integration, value-added services and voice and data services as Latin American
countries move toward privatization and greater liberalization of their
telecommunications markets.
The Company believes that the small- to medium-sized business segment is
the target market in many countries in Latin America for value-added services
such as teleconferencing, advanced facsimile, advanced phone, unified messaging,
frame relay and Asynchronous Transfer Mode technology ("ATM"). Unlike larger
businesses which have the resources and traffic volume to support the internal
development of a wide range of value-added services, developing and maintaining
such services is not economical for smaller businesses. Accordingly, to meet
these needs smaller businesses may either purchase such services or outsource
their telecommunications services to third parties specializing in such
services, such as the Company. The Company believes that its experience and
expertise in providing these services will enable it to compete in this market.
The Company believes that it is well-positioned to capitalize on these
opportunities by providing high quality, low-cost comprehensive
telecommunications services. As a rule, Latin American countries have extremely
low telephone density, and the markets have been subject to characteristically
inefficient, poor-quality service, as well as the unavailability of new and
innovative systems and services. In addition, the Latin American markets in
which the Company is offering services or in which it seeks to compete generally
are characterized by a lack of fiber optic cable capacity. Existing
satellite-based capacity offers limited capability to meet the increasing demand
for bandwidth-intensive applications in the Company's targeted countries in the
region. There exists a critical and growing demand for the type of high-quality,
innovative systems, products and services that the Company is currently
providing and seeks to provide in expanding in its current markets and
exploiting the opportunities in new markets throughout Latin America.
The Company believes that the Latin American region is poised for growth
in telecommunications usage based on the political and economic changes in many
Latin American countries that have modernized their economies, increased
transparency in business and governmental practice and sustained strong economic
growth. In addition, telecommunications growth will be spurred as a result of
the recent and ongoing privatizations by many Latin American governments of
their previously state-owned telecommunications monopolies, as well as ongoing
liberalization of the regulatory frameworks in many countries in the region to
promote competition in telecommunications services.
MEXICO
The market for telecommunications services in Mexico is undergoing rapid
expansion. According to TeleGeography 1999, the volume of telecommunication
traffic to Mexico increased 16.2% in 1996 and 58% in 1997. The 1997 traffic
along the U.S.-Mexico route accounted for 12.1% of the U.S. international market
and 88.6% of the Mexican international telecommunications market. According to a
report issued by the Federal Communications Commission's ("FCC") Common Carrier
Bureau in November 1998, revenues for sales on the U.S.-Mexico route exceeded
$1.1 billion in 1997.
As a result of legislation enacted in 1995, Mexico began the process of
opening its telecommunications market to competition. National and international
long distance services were opened to competition in August 1996, subject to the
issuance of individual concessions. Pure switched international resale is not
allowed in Mexico to date. Value-added services are fully open to competition
and subject to a simple registration process.
The Company believes that it is well-positioned to take advantage of the
growing demand for telecommunications services between the United States and
Mexico. The Company currently provides a full range of systems integration and
value-added services to major public and private customers. Additionally, in
June 1998,
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Telereunion S.A. received the Mexican Concession from the Secretaria de
Comunicaciones de Telecomunicaciones ("SCT"), allowing it to originate and
terminate domestic and international long distance services in Mexico.
OTHER LATIN AMERICAN MARKETS
The Company intends to focus on the opportunities created by deregulation
of telecommunications services in other telecommunications markets in Latin
America. Latin American markets have undergone rapid expansion as a result of
regional and global deregulation.
Countries within Latin America have different national regulatory schemes
and are in varying stages of deregulation. The requirements for the Company to
obtain the necessary approvals to offer value-added services and various other
telecommunications services, including voice telephony, vary from country to
country. The Company has recently obtained the authority to provide inbound and
outbound international long distance as well as certain other telecommunications
services in El Salvador.
STRATEGY
The Company's objective is to become a leading provider of high quality,
competitively priced, international long distance services between the United
States and Latin America, and a leading provider of international long distance
services, domestic long distance services and integrated value-added services to
customers in Mexico and other targeted countries in Latin America. The key
elements of the Company's strategy are to:
o EXPAND NETWORK SERVICES. The Company intends to expand its network by
acquiring switching and transmission facilities and additional fiber optic
and satellite transmission capacity for the provision of international and
domestic voice, video and data services. The Company's objectives in
making these investments are to: (i) provide on-net capacity to allow
growth in its long distance services business; (ii) increase profitability
for switched services by reducing the amount of the Company's traffic
terminated by other long distance carriers pursuant to resale
arrangements; and (iii) use the expanded network as a platform to support
advanced, bandwidth-intensive data and media applications.
o PROVIDE AN INTEGRATED SUITE OF SERVICE OFFERINGS. The Company seeks to
provide its commercial customers in Mexico with a comprehensive suite of
telecommunications services, including international and domestic long
distance services, systems integration, call centers, conference calling,
Internet access and other broadband data services. The Company believes
that providing multiple service offerings improves customer retention and
the profitability of individual customer relationships. Management
believes that Telscape is one of the few companies to offer a wide array
of high quality and competitively priced telecommunications services to
commercial customers in Mexico, and expects to pursue opportunities to
provide similar services as it expands into other Latin American markets.
o EXPAND SCALE AND SCOPE OF RETAIL BUSINESS. Management believes that its
TELEFIESTA(R) Prepaid Cards position the Company for expanded growth in
the retail sector of the international telecommunications market. The
Company has signed operating agreements with concessionaires in Mexico
which provide for significant additional carrier quality and
cost-effective termination capacity to Mexico in the short-term. The
Company believes that these agreements together with the Mexican Network
will provide it with the necessary capacity to allow for the anticipated
growth in this rapidly expanding market.
o PURSUE STRATEGIC ALLIANCES, JOINT VENTURES AND ACQUISITIONS. The Company
continues to pursue strategic alliances, joint ventures and acquisitions
to expand its business, increase its customer base, add network and
circuit capacity, enter additional markets and develop new products and
services. The Company seeks to acquire interests in companies that have
network facilities, service offerings or technologies that complement
those of the Company. Since 1996, the Company has completed six
acquisitions, including a U.S.-based provider of satellite
telecommunications services with access to satellites covering Central and
South America, a U.S.-based Prepaid Card provider focused on Hispanic
consumers in the United States and Latin American markets, three data and
systems integration businesses in Mexico and a U.S.-based reseller of long
distance services.
o BUILD BRAND AWARENESS. The Company seeks to build brand awareness of its
TELEFIESTA(R) and Telereunion brands. Management believes that it will be
able to continue building customer awareness of its TELEFIESTA(R) brand
name through sales of TELEFIESTA(R) services to its U.S. customers as it
opens new international long distance markets throughout Latin America. In
addition, the Company intends to distribute TELEFIESTA(R) services in
targeted Latin American countries as continued deregulation and market
conditions permit. Management
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also intends to continue building customer awareness of its systems
integration and value-added services through the Telereunion brand name,
which it plans to leverage as it commences international and domestic long
distance services in Mexico.
o EXPAND LATIN AMERICAN PRESENCE. The Company seeks to expand its Latin
American presence in order to capitalize on the relatively high growth of
traffic between the United States and Latin America. The Company believes
that management's international telecommunications expertise, combined
with Telscape's established reputation and extensive operations in Mexico,
will enable the Company to identify and capitalize on the increasing
deregulation in targeted Latin American markets.
SERVICES
Telscape currently operates principally three lines of business:
value-added services, international long distance and satellite teleport
services. All three business lines will be significantly enhanced by the Mexican
Network, which is scheduled to initiate operations during the fourth quarter of
1999. The Company's business lines are designed to serve its targeted customers,
commercial customers and consumers. The Company's current network operations
support its services to these customers with the Mexican Network focusing on
unifying Mexican traffic onto its own network. Financial information about the
Company's business segments for each of the three years ended December 31, 1996,
1997 and 1998 are disclosed in Footnote 9 in the Notes to the Consolidated
Financial Statements.
VALUE-ADDED SERVICES
The Company provides a full range of systems integration solutions to
major public and private customers in Mexico. The Company also provides
outsourced network services in Mexico to the U.S. Embassy, the Mexican Stock
Exchange and other large public agencies and private businesses.
SYSTEMS INTEGRATION
Telscape is one of the two largest systems integrators in Mexico,
providing customized and turn-key solutions to corporations and institutions
under the same management team since 1986. Services include developing,
building, installing and servicing corporate voice, video and data networks.
Post-sales support consists of maintenance contracts, outsourcing, network
management and monitoring services. Although the Company expects that systems
integration revenues will not increase as rapidly as those from the Company's
other lines of business, it will remain an important part of the Company's
strategy to introduce commercial customers to the Company's other
telecommunications services and essential in its strategy to provide its
customers with a comprehensive suite of telecommunications services.
Since 1992, the Company has been one of five distributors in Mexico of
Nortel telecommunications equipment. The Company also distributes voice and
teleconferencing products manufactured by Polycom, Centigram and VTEL and
distributes, installs and maintains data and networking equipment manufactured
by 3Com Corporation, Nortel, Newbridge Networks, ADC Kentrox and Cisco. The
Company is the largest Nortel and 3Com distributor in Mexico and is consistently
recognized as the industry leader in systems integration. Among its many honors,
the Company recently was awarded the BEST ADVANCED SOLUTION PARTNER IN LATIN
AMERICA by 3Com in 1998.
The Company anticipates that traditional long distance and local exchange
services will increasingly involve sophisticated, application-oriented services
such as audio, data and video conferencing, enhanced facsimile, telemarketing,
interactive voice response ("IVR"), help-desk, advanced Internet and other
content and service intensive value-added services. The Company has provided
value-added services in Mexico since 1995, giving it both technical and
marketing experience needed to compete in the value-added services market.
The Company's sales and technical personnel are organized as teams that
combine strong sales capabilities with specialized technical expertise in
cutting-edge, product-specific areas such as ATM and Frame Relay networks,
virtual private networks and telemedicine - distance learning, help desks and
teleconferencing solutions. For example, Telscape was the first company in
Mexico to offer conference call services. Telscape's systems integration
business also provides a natural channel to introduce, with a high degree of
credibility, commercial customers to the Company's other products and services,
further broadening the Company's relationships with its customers. For example,
the Company now offers its Mexican clients the opportunity to take advantage of
advanced bandwidth-on-demand and disaster recovery services through the
Company's teleport in Mountain View, California. Telscape believes that much of
the expertise developed in Mexico can be replicated in other Latin American
countries.
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OUTSOURCED NETWORK SERVICES
As traditional telecommunications services become more of a commodity,
Telscape believes that value-added services will become an increasingly
important component of the Company's service offerings. The Company has
leveraged its systems integration expertise to provide outsourced network
services, including help desk support and network management services. Customers
in Mexico include the U.S. Embassy, the Mexican Ministry of Foreign Affairs, the
Mexican Stock Exchange, Pepsico (Frito Lay), Hewlett Packard, ICA (the largest
construction company in Latin America) and Mabe (a GE joint venture).
The Company's expanding presence in value-added telecommunications
services resulted in an outsourcing contract, signed in the third quarter of
1997, with the U.S. Embassy in Mexico City. The contract is a one year contract
and the U.S. government has the option to renew the contract for up to four
additional one-year terms. This contract has been renewed for the first
additional year through the fourth quarter of 1999. The system is designed to
automate the delivery of visa applications and enables callers to request visa
information from either a live operator or from an automated touch-tone system.
Revenues from this contract for the year ended December 31, 1998 totaled $2.7
million. In connection with this contract, the Company established a call center
in Mexico City, which the Company believes will serve as a platform for
additional growth. In the fourth quarter of fiscal 1998, the Company received
approval from the Mexican Ministry of Foreign Affairs to provide passport
information and other information to the Mexican public via its help desk
operations. With this approval, the Company entered into a contract with a trust
formed by the Ministry of Foreign Affairs to provide these services on a
non-exclusive basis for an indefinite term.
The Company had fiscal 1998 revenues of approximately $32.9 million from
value-added services, representing 24.9% of the Company's consolidated revenues.
INTERNATIONAL LONG DISTANCE
PREPAID CARDS & ENHANCED SERVICES
Telscape provides national and international long distance services to
consumers in the U.S., primarily first and second generation Hispanic
individuals, through Prepaid Cards under the Company's TELEFIESTA(R) brand name.
The Company believes that Prepaid Cards are the most effective vehicle to
provide long distance and other telecommunications services to its targeted
Hispanic residential customer segment, as well as benefiting customers by
enabling them to purchase the card anonymously and in various fixed dollar
amounts. Telscape recently added dual-country capabilities to its Prepaid Cards,
offering usage in both the U.S. and Mexico, and, plans to add other countries
throughout Latin America. Additionally, the Company is developing other enhanced
services such as mailbox-on-demand (international voice-mail), virtual telephone
and money transfer services. The Company believes that TELEFIESTA(R) is one of
the most widely recognized brand names for Prepaid Card services among the 30
million Hispanics in the U.S. and that it currently enjoys a market share of
approximately 10% of the total U.S. Prepaid Card market to Latin America.
The Company's TELEFIESTA(R) cards, which provide service to more than 200
countries and territories, are sold through distributors to independent retail
outlets across the United States. The cards are marketed primarily to Hispanic
communities in the U.S., specifically Chicago, Los Angeles, Miami, New York and
the border states (particularly Texas), that generate high levels of
international traffic to targeted Latin American countries. Since its inception,
the Company has focused on building a substantial network of wholesale
distributors that sell either to sub-distributors or directly to retail outlets.
The Company intends to expand its internal sales department in order to sell
directly to large retail chains, department stores, the tourist industry,
airport and hotel gift shops, gas stations and other retail outlets owned or
franchised by larger companies.
To capitalize on its knowledge of the local markets and its success in the
U.S., the Company recently developed a Prepaid Card service focusing primarily
on Mexican residents with U.S. calling needs. The Prepaid Card service is being
offered in the U.S. and Mexico through separate marketing and interconnection
agreements with selected Mexican operators. These agreements provide a
significant two-fold increase in capacity for Prepaid Card services for the
Company at cost-effective, carrier-class quality. The Company believes that this
uniquely designed service will be able to fill a substantial, unsatisfied demand
in Mexico for economically priced Mexico - U.S. calling services. Customers will
be able to purchase the Prepaid Card, with certain enhanced features, in the
U.S., and it intends to offer these cards in Mexico in the future. The cards
have the capabilities to call from the U.S. to Mexico and from Mexico to U.S. As
a result, for example, Mexicans residing in the U.S. are able to purchase
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minutes for friends and relatives residing in Mexico in order to make Mexico -
U.S. calls. The Company believes that this northbound traffic represents a
unique opportunity for Prepaid Card services which is currently under-served.
WHOLESALE SERVICES
The Company provides its wholesale carrier services to first and
second-tier carriers in the U.S. to complement its retail traffic pattern.
Providing both retail and wholesale services on its network enables the Company
to maximize efficiency and better utilize its network. In addition, the Company
has negotiated advantageous rates in its targeted Latin American countries by
leveraging its extensive relationships with local carriers. The Company markets
its wholesale capacity through a direct sales effort and has 15 wholesale
carrier customers.
The Company believes that its business model will enable it to take
advantage of the rapidly growing wholesale international long distance market on
a more permanent basis than would be possible by relying on temporary,
regulatory-driven pricing distortions and arbitrage opportunities. The Company
will establish this position by effectively "pulling" valuable proportionate
return related traffic out of Latin America. The "pulling" is accomplished by
utilizing the Company's extensive Prepaid Card distribution system in the U.S.
to effectively transfer the higher purchasing power of the immigrants in the
U.S. to their relatives in Latin America. For example, a person buying the
TELEFIESTA(R) Prepaid Card in the U.S. will be able to share it with their
relatives in Mexico by giving them the Mexican local access number and the PIN
(personal identification number), or simply by mailing the card itself.
Furthermore, for every minute of outbound use, the Company will generate
valuable proportionate return traffic, which can also be used to supplement the
wholesale business.
The Company had fiscal 1998 revenues of $93.2 million from its
international long distance business, representing 70.5% of the Company's
consolidated revenues.
SATELLITE TELEPORT SERVICES
The Company through its subsidiary, INTERLINK, owns and operates a
satellite teleport facility in Mountain View, California. INTERLINK provides
voice, video and data transport services including fractional and full T-1 data
broadcast, dedicated circuits and private line up-link and down-link services to
Latin America and other parts of the world. INTERLINK's satellite teleport has
been operational for more than a decade and the Company believes it is among the
most reliable in the U.S. INTERLINK's satellite teleport services both the
Company's network needs for its international long distance customers as well as
INTERLINK's customers mainly in the telecommunications, broadcasting and weather
service industries. In addition, INTERLINK has introduced Bandwidth-on-Demand,
Integrated Services Digital Network ("ISDN") videoconferencing and
Internet-through-satellite services and also serves as an Internet backbone
provider to Internet service providers ("ISPs") in remote areas where access to
high speed fiber optics is limited, as is the case in most Latin American
countries. The Company believes that INTERLINK enjoys an excellent reputation
within the industry for its reliability and services and has positioned itself
as a natural "conduit" to provide services from and to the United States with an
emphasis on Latin America. The Company believes that INTERLINK has the ability
to significantly expand its services and future revenue. Currently, INTERLINK
utilizes less than 15% of the satellite teleport's capacity and the new Satmex V
satellite provides robust installed up-link capacity and additional bandwidth.
INTERLINK also produces radar detectors, VSATs (Very Small Aperture Terminals)
and telecommunications amplifiers, which represent less than one third of
INTERLINK's projected revenues for 1999.
The Company intends to utilize INTERLINK's satellite teleport capabilities
to target, as part of its Mexican Network, low density population towns in
Mexico which historically have not been targeted by concessionaires and
currently are only served by Telefonos de Mexico S.A. de C.V. ("Telmex"). The
Company's market analysis has determined that certain of these towns are high
volume users of TELEFIESTA(R) Prepaid Cards. By utilizing INTERLINK's satellite
teleport capabilities and installing smaller satellite receiving and
transmitting facilities in these towns, the Company can expand the Mexican
Network to these under-served cities which are current consumers of its services
in a cost-effective manner.
INTERLINK had revenues for fiscal 1998 of $6.0 million, accounting for
4.6% of consolidated revenues and representing seven months of revenue since it
was acquired by the Company effective June 1, 1998.
NETWORK
The Company currently manages its own telecommunications network and also
utilizes the transmission capacity of several carriers. The Company believes
that increasing the percentage of traffic it carries on-net will enable it to
increase margins and profitability and ensure quality. In addition, the
Company's use of multiple carriers
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increases cost efficiencies by establishing additional routing capability and
enabling the Company to obtain sufficient capacity to support its rapid growth.
NETWORK STRATEGY
The Company's network is comprised of leased, partitioned and owned
switches, fixed cost point-to-point fiber optic cable leases and leased
satellite capacity to provide connectivity for many Central and South American
cities. The Company intends to expand its network primarily by using traditional
circuit-based technology, acquiring additional satellite and fiber optic
transmission capacity and installing switching equipment in targeted U.S. and
Latin American markets. In countries in which the Company currently operates
without a switch and in each new market the Company enters, the Company intends
to install switching facilities and integrate them into its network to improve
the Company's overall cost structure. The Company expects that it will be able
to realize significant cost savings by routing an increasing portion of its
Mexican domestic long distance and international traffic on-net.
The Company intends to market certain domestic long distance services
directly to customers in the Gulf region of Mexico primarily through the
development of the Mexican Network. The Company's Mexican Network will support
multiple lines of international and domestic national telephone services in
Mexico, as well as provide Telscape with an essential element for its plan to
become a significant market force in Mexico by securing for the Company control
over its bandwidth and transmission quality requirements. The Company has
targeted the Gulf region of Mexico for these services because (i) the region
currently lacks extensive telecommunications infrastructure, (ii) other major
competitors of the Company have not targeted the region for development, (iii)
there is a developed business community with a high potential for long distance
usage in the region, (iv) the region is sufficiently populated to permit the
efficient use of new infrastructure, and (v) the region is in close proximity to
the United States.
The Company expects to complete the Mexican Network by the end of the
fiscal year 1999. (See discussion at International Origination and Termination
Facilities-The Mexican Network). The Company believes that the Mexican Network,
when complete, will link 47 cities and towns and cover, including
interconnection agreements, approximately 90% of the population in Mexico. The
Mexican Network will provide the Company with the backbone for its strategy to
be a complete telecommunications service provider for the Latin American market,
beginning with Mexico. With the Mexican Network, the Company will be one of few
companies with a significant presence on both sides of the U.S.- Mexico border.
The Mexican Network will provide the Company with significant, carrier-class,
cost-effective capacity from which it can grow its existing retail and wholesale
international long distance and value-added services businesses.
INTERNATIONAL ORIGINATION AND TERMINATION FACILITIES
SWITCHING FACILITIES
The Company owns and operates a Nortel DMS-250, state-of-the-art digital
switch in Houston, Texas. The Company currently operates additional switching
platforms in Mexico. The Company also currently partitions a switch in New York
and has an outsourcing arrangement in Texas for a Prepaid Card platform, which
has interconnection with the DMS-250 switch in Houston.
As part of the Company's strategy to expand its Prepaid Card operations,
it plans to install or purchase additional Prepaid Card switching platforms in
selected cities in North America. These switches will be capable of managing
local and 800 Prepaid Card traffic in high-volume gateway cities such as
Houston, New York, Chicago, San Francisco and Los Angeles.
SATELLITE FACILITIES
In connection with the acquisition of INTERLINK, the Company acquired a
teleport facility in Mountain View, California. The Company believes that this
acquisition enhances its position as an integrated telecommunications provider,
and helps assure satellite capacity to its targeted markets in Latin America. As
part of the Mexican Network, the Company intends to implement satellite
facilities in certain towns in Mexico which will link to its teleport facility
in Mountain View, California.
NETWORK CAPACITY
The Company purchases transmission services on a per minute basis and
leases transmission capacity on a fixed cost basis from a variety of local and
long distance carriers. The Company is currently expanding its leased on-net
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capacity in an attempt to lower costs in its largest distribution areas. The
Company obtains private line capacity from local domestic and international
carriers. The Company's agreements with these carriers fix the private line cost
for a minimum of one year. The Company's agreements with its carriers provide
that some international per minute rates may fluctuate with rate change notice
periods varying from five days to one month. The variable nature of the cost of
services and many of the Company's contracts and agreements subject the Company
to the possibility of unanticipated cost increases and the loss of
cost-effective routing alternatives.
The Company has signed a contract with a third party for the third party
vendor to provide telecommunications services to the Company including the
origination of inbound 800 dialed phone calls for its Prepaid Cards, and the
termination of U.S. domestic long distance and international long distance. The
contract term is through June 1, 2001, and provides for a minimum monthly
purchase commitment of $360,000 and a total purchase commitment of $12,660,000.
The Company can cancel the minimum monthly purchase commitment with 30 days
notice upon meeting its total minimum purchase commitment. The Company estimates
that total purchases from this third party exceeded $6.5 million as of March 31,
1999.
TELECOMMUNICATIONS NETWORK MANAGEMENT AND INFORMATION SYSTEMS
The Company's network management and information systems enable it to (i)
economically and efficiently route traffic over the Company's network and the
networks of other carriers, (ii) offer reliable services with high call
completion rates and voice quality and (iii) manage an advanced voice, data and
video multi-service platform. The Company believes that these systems,
particularly their ability to provide flexible, high quality service to
international destinations, provide it with a competitive advantage relative to
many other providers of telecommunications services. The Company monitors its
network and initiates changes to its overall switch network and traffic routing
where appropriate to optimize routing and minimize costs. Because a substantial
portion of the traffic carried by the Company terminates internationally and
call completions vary by carrier, the Company monitors the call completion
efficiencies of its suppliers. The Company intends to continue configuring large
portions of its network with Common Channel Signaling System 7 ("SS7"). SS7
reduces voice call setup and connect time delays and provides additional
technical capabilities and efficiencies for call routing and network
engineering.
NETWORK OPERATIONS CENTER
The Company has a network operations center ("NOC") in Mexico City,
Mexico, which the Company will use to monitor and control all switches and other
transmission equipment used in its network. The NOC operates seven days a week,
24 hours per day, 365 days a year.
THE MEXICAN NETWORK
The Company's network philosophy is to invest in network facilities only
after it has developed a customer base and to the extent such an investment can
improve its network cost structure and services provided to its customers. The
Company has developed a substantial presence in Mexico over the last 13 years,
and, in June 1998, Telereunion S.A., an affiliate of the Company in which the
Company owns a 65% economic and 49% voting interest, received the Mexican
Concession, a 30-year, facilities-based carrier license from the Mexican
government. Telereunion S.A. is one of only 16 concession holders in Mexico. The
Mexican Concession enables the Company to construct and operate a network over
which the Company can carry telecommunications traffic, including voice, video
and data transport services, throughout Mexico. To deliver its services, the
Company intends to construct the Mexican Network, a combined fiber-optic and
microwave long distance network, connecting the United States, the Gulf region
of Mexico and targeted international gateway cities.
The Company's objectives in constructing the Mexican Network are to: (i)
provide capacity to allow growth in its long distance services business; (ii)
increase profitability and significantly lower its costs by bringing traffic
on-net; (iii) use the expanded network to provide long distance services to
domestic corporate and prepaid customers not currently served; and (iv) support
advanced, packet-based, bandwidth-intensive data and multimedia networking
applications to its large Mexican systems integration customer base.
The Company plans to develop the first stage of its Mexican Network,
consisting of 650 km of fiber optic cable and microwave, circuit switched type
of transmission and switching facilities, in the Gulf region of Mexico. The
Mexican Network will provide connectivity from Mexico City to Puebla, and from
Puebla to Veracruz and 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. The Company believes
that more than half of the domestic long
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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 Mexican Network will also be located near PEMEX, the largest and most
bandwidth-intensive user of telecommunications services in Mexico and a current
customer of the Company. The Company is currently negotiating interconnection
agreements with other concessionaires. The Company's planned Mexican Network,
when complete, will link 47 cities and towns and cover, including
interconnection agreements, an estimated 90% of the population in Mexico.
The Company intends to utilize INTERLINK's teleport capabilities to
target, as part of its Mexican Network, low density population towns in Mexico
which historically have not been targeted by concessionaires and currently are
only served by Telmex. The Company's market analysis has determined that certain
of these towns are high volume users of TELEFIESTA(R) Prepaid Cards. By
utilizing INTERLINK's teleport capabilities and installing smaller satellite
receiving and transmitting facilities in these towns, the Company can expand the
Mexican Network to these under-served cities which are current consumers of its
services in a cost-effective manner.
The Company has selected Lucent to engineer, furnish and install the
Mexican Network. In addition, the Company received a commitment from Lucent to
provide the Company with up to $40 million of long term financing, which
includes $34 million towards the purchase of Lucent products and services
(including construction of the Mexican Network) and $6 million for repayment of
the Company's current obligations. See discussion in Liquidity and Capital
Resources.
The Company expects to begin the construction of the Mexican Network in
the second quarter of 1999. The Company believes that the Mexican Network can be
fully operational by the end of 1999.
SALES, MARKETING AND DISTRIBUTION
VALUE-ADDED SERVICES
To serve the complex needs of its customers, the Company has formed a team
of sales and technical personnel that combines strong sales capabilities with
specialized technical expertise in product-specific areas such as Private Branch
Exchange ("PBX"), voice processing, Internet, video conferencing and ATM and
Frame Relay networks. Management believes that this sales approach allows the
Company to provide innovative solutions to complex systems integration projects.
In Mexico, the Company promotes its value-added services through a
combination of advertising, trade shows, direct mail and telemarketing. The
Company has historically utilized its own direct sales force but has recently
developed a dealer network to broaden its distribution channel. The Company's
product managers focus on cultivating relationships with one or more vendors and
with coordinating sales efforts for their specific product lines.
The Company markets its value-added telecommunications services through
advertising in trade magazines, telemarketing, direct mail and attending trade
shows. The Company believes that its systems integration service base provides
an excellent platform for the follow-up sales of advanced telecommunications
services, since many of the Company's customers have developed confidence in the
Company's ability to implement complex projects.
The Company's direct sales effort begins with understanding the customer's
business. Sales personnel then identify potential areas where the Company's
value-added services could improve the customer's business, suggesting specific
services, customizing those services to meet the customer's specific needs,
implementing value-added solutions and monitoring the results and potential
changes in the customer's needs.
LONG DISTANCE SERVICES
PREPAID CARDS
The Company markets its Prepaid Cards under the TELEFIESTA(R) brand name.
The Company's TELEFIESTA(R) Prepaid Cards are sold through distributors to
independent retail outlets throughout the United States. The Company has focused
on building a substantial network of wholesale distributors that sell to
sub-distributors and directly to retail outlets. The sub-distributors generally
sell only to retail outlets.
The Company targets heavily populated metropolitan areas in the United
States with substantial Hispanic populations that generate significant
international calling volume. Many of the Company's distributors are members of
such ethnic communities or otherwise have personal or business relationships in
such communities. In developing relationships with distributors, the Company
also focuses on expansion into new geographic and metropolitan areas
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with substantial Hispanic populations. The Company believes that the success of
its Prepaid Cards has created significant brand loyalty and encourages
distributors and retail outlets to actively market the Company's products. The
Company regularly provides distributors and retail outlets with point of
purchase advertising and explanatory materials. The Company frequently adds new
Prepaid Card products to its service offerings, and adjusts its pricing for
particular traffic segments in order to target certain customer groups, respond
to competitive pressures and otherwise increase market share.
INTERNATIONAL WHOLESALE SERVICES
The Company's carrier resale department markets its international outbound
switched and dedicated services on a wholesale basis to other telecommunications
companies through a direct sales effort. At March 15, 1999, the Company had
approximately 15 wholesale carrier agreements in place. To provide a more
complete package of international rates to its customers, the Company intends to
establish strategic relationships with entities that have gateways to
international destinations. When appropriate, the Company may establish
in-country relationships for the termination of international long distance.
SATELLITE TELEPORT SERVICES
The Company's satellite teleport services business markets its satellite
teleport services to other telecommunications companies through a direct sales
effort. Its service offerings include voice, video and data transport services
including fractional and full T-1 data broadcast, dedicated circuits and private
line up-link and down-link services to Latin America and other parts of the
world. The Company has also introduced Bandwidth-on-Demand, ISDN
videoconferencing and Internet-through-satellite services and also serves as an
Internet backbone provider to ISPs in remote areas where access to high speed
fiber optics is limited, as is the case in most Latin American countries. The
Company has also began cross-selling its teleport services through its
value-added sales force in Mexico and its international long distance wholesale
carrier sales force in the U.S.
CUSTOMERS
VALUE-ADDED SERVICES
The Company performs substantially all of its value-added services for
business customers located in Mexico. During the year ended December 31, 1998,
no single value-added services customer represented more than 10% of the
Company's overall revenues.
LONG DISTANCE SERVICES
PREPAID CARDS
The Company markets its Prepaid Cards primarily to Hispanic communities in
the United States that generate high levels of international traffic to targeted
Latin American countries where the Company has favorable termination agreements.
The Company sells its Prepaid Cards through a network of distributors, who
distribute the Prepaid Cards to independent retail outlets in 100 cities
throughout the United States. During the year ended December 31, 1998, no single
distributor represented more than 10% of the Company's overall revenues.
INTERNATIONAL WHOLESALE SERVICES
The Company's wholesale customers are primarily other international
carriers that seek termination services in one or more Latin American countries.
During the year ended December 31, 1998, no single wholesale carrier customer
represented more than 10% of the Company's consolidated revenues.
SATELLITE TELEPORT SERVICES
The Company's satellite teleport services customers include other
international carriers both in the U.S. and in Latin America which utilize its
services as a low cost, dependable and high speed alternative to fiber optic
connectivity between the U.S. and Latin America; private and public corporate
companies which utilize its private line, dedicated circuits and bandwidth on
demand services; and Latin American ISPs which utilize its services as a source
for high-speed connectivity to Tier I Internet backbone providers in the U.S.
During the year ended December 31, 1998, no single satellite teleport services
customer represented more than 10% of the Company's consolidated revenues.
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CUSTOMER SUPPORT AND BILLING
Telscape believes that reliable, sophisticated and flexible billing and
information systems are essential to its ability to remain competitive in the
global telecommunications market. Accordingly, the Company has invested
substantial resources in an IBM AS-400 platform for rating and billing services.
The Company's billing system enables the Company to (i) accurately analyze
its network traffic, revenues and margins by customer and by route on a daily
basis, (ii) validate carrier settlements, and (iii) monitor least cost routing
of customer traffic. These reports produce efficiencies by reducing the need for
monitoring by the Company's employees. The Company believes that the accuracy
and efficiency of its management information systems provide it with a
significant strategic advantage over other emerging carriers.
COMPETITION
The international and national telecommunications industry is highly
competitive, is subject to rapid change precipitated by advances in technology
and deregulation and is significantly influenced by the pricing and marketing
decisions of larger industry participants. The Company's success depends upon
its ability to compete with a variety of other telecommunications providers in
each of its markets, including the respective PTT in each country in which the
Company operates. Other competitors of the Company include large,
facilities-based, multinational carriers and smaller facilities-based wholesale
long distance service providers in the United States and overseas that have
emerged as a result of deregulation, switched-based resellers of international
long distance services, providers of systems integration and/or value-added
services, Prepaid Card providers and global alliances among some of the world's
largest telecommunications carriers. The Company anticipates that it will
encounter additional competition as a result of the formation of global
alliances among large telecommunications providers. Recent examples of such
alliances include AT&T's alliance with Unisource, known as "Uniworld", Cable &
Wireless Plc's recent alliance with Italy's STET/Telecom Italia to serve
international customers with a primary focus on the Latin American and European
regions, WorldCom's merger with MCI, the alliance between MCI WorldCom and
Telefonica de Espana, and Sprint's alliance with Deutsche Telekom and France
Telecom, known as "Global One", and the joint venture between Sprint and Telmex.
Consolidation in the telecommunications industry may create even larger
competitors with greater financial and other resources. The effect of the
aforementioned or other similar mergers and alliances could create increased
competition in the telecommunications services market and potentially reduce the
number of customers that purchase wholesale international long distance services
from the Company. In the Prepaid Card business, the Company currently competes
with all of the first tier telecommunications carriers as well as emerging
multinational carriers such as Star Telecommunications, Inc., RSL
Communications, Ltd. and IDT Corporation, many of which have greater financial
resources than the Company. Because certain of the Company's current competitors
also are or could be the Company's customers, the Company's business would be
materially adversely affected to the extent that a significant number of such
customers limit or cease doing business with the Company for competitive or
other reasons.
International telecommunications providers such as the Company compete on
the basis of price, customer service, transmission quality, breadth of service
offerings and value-added services, and the Company's carrier and Prepaid Card
customers are especially price sensitive. In addition, many of the Company's
competitors enjoy economies of scale that can result in a lower cost structure
for termination and network costs, which could cause significant pricing
pressures within the international communications industry. In recent years,
prices for international and other telecommunications services have decreased
substantially, and are expected to continue to decrease, in most of the markets
in which the Company currently competes or intends to compete. The intensity of
such competition has recently increased, and the Company expects that such
competition will continue to intensify as the number of new entrants increases
as a result of the new competitive opportunities created by the 1996
Telecommunications Act, implementation by the FCC of the U.S. commitment to the
WTO and privatization, deregulation and changes in legislation and regulation in
various of the Company's foreign target markets. There can be no assurance that
the Company will be able to compete successfully in the future, or that such
intense competition will not have a material adverse effect on the Company's
business, financial condition and results of operations.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources, larger
networks and a broader portfolio of services than the Company. Additionally,
many competitors have strong name recognition and "brand" loyalty, long-standing
relationships with the Company's target customers and economies of scale that
can result in a lower relative cost structure for transmission and related
costs. These competitors include, among others, AT&T, MCI WorldCom and Sprint
which provide long distance services in the U.S., Telmex, concessionaires and
other registered value-added services providers in Mexico, as well as PTTs and
emerging competitors in other Latin American markets where the Company seeks to
compete. In
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Mexico, the regulatory authorities have granted concessions to 16 companies,
including Telmex and Telereunion S.A., to construct and operate public, long
distance telecommunications networks in Mexico. Some of these new competitive
entrants have as their partners major U.S. telecommunications providers,
including AT&T (Alestra), MCI WorldCom (Avantel) and Bell Atlantic (Iusatel). In
addition, the regulatory authorities in Mexico have granted concessions to
several competitive local exchange providers, such as Telinor, Megacable,
Amaritel, Unitel, MetroNet, and Red de Servicios and several of Mexico's long
distance concessionaires. With regard to the provision of services in Mexico,
the Company competes or will compete in Mexico with numerous other systems
integration, value-added services and voice and data services providers, some of
which focus their efforts on the same customers targeted by the Company. In
addition to these competitors, recent and pending deregulation in Mexico and
various other Latin American countries may encourage new entrants. Moreover,
while the WTO Agreement could create opportunities for the Company to enter new
foreign markets, implementation of the accord by the United States and other
countries could result in new competition from PTTs previously banned or limited
from providing services in the United States. For example, the joint venture
between Sprint and Telmex was granted by the FCC for authority to enter the U.S.
market and to provide resold international switched services between the United
States and Mexico, subject to various conditions. Increased competition in such
countries as a result of the foregoing, and other competitive developments,
including entry by ISPs into the long-distance market, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company believes that PTTs generally have certain competitive
advantages due to their control over local connectivity and close ties with
national regulatory authorities. The Company also believes that, in certain
instances, some regulators have shown a reluctance to adopt policies and grant
regulatory approvals that would result in increased competition for the local
PTT. If a PTT were to successfully pressure national regulators to prevent the
Company from providing its services, the Company could be denied regulatory
approval in certain jurisdictions in which its services would otherwise be
permitted, thereby requiring the Company to seek judicial or other legal
enforcement of its right to provide services or to abandon its proposed market
entry. Any delay in obtaining approval, or failure to obtain approval, could
have a material adverse effect on the Company's business, financial condition
and results of operations. If the Company encounters anti-competitive behavior
in countries in which it operates or intends to operate or if the PTT in any
country in which the Company operates uses its competitive advantages to the
fullest extent, the Company's business, financial condition and results of
operations could be materially adversely affected.
GOVERNMENT REGULATION
GENERAL
The global telecommunications industry is subject to international
treaties and agreements, and to laws and regulations which vary from country to
country. Enforcement and interpretation of these treaties, agreements, laws and
regulations can be unpredictable and are often subject to informal views of
government officials and ministries that regulate telecommunications in each
country. In certain countries, including certain of the Company's target Latin
American markets, such government officials and ministries may be subject to
influence by the local PTT.
The Company has pursued and expects to continue to pursue a strategy of
providing its services to the maximum extent it believes to be permissible under
applicable laws and regulations. To the extent that the interpretation or
enforcement of applicable laws and regulations is uncertain or unclear, the
Company's aggressive strategy may result in the Company (i) providing services
or using transmission methods that are found to violate the laws or regulations
of those countries where it operates or plans to operate or (ii) failing to
obtain approvals or make filings subsequently found to be required under such
laws or regulations. If the Company's interpretation of applicable laws and
regulations proves incorrect, it could lose, or be unable to obtain, regulatory
approvals necessary to provide certain of its services or to use certain of its
transmission methods, or to lose its investments in that country. There can be
no assurance that the Company will not be subject to fines, penalties or other
sanctions, including being denied the ability to offer its products and
services, as a result of violations regardless of whether such violations are
knowing or willful and regardless of whether such violations are corrected. To
the Company's knowledge, it is not currently subject to any material regulatory
inquiry or investigation.
In numerous countries where the Company operates or plans to operate,
local laws or regulations limit the ability of telecommunication companies to
provide telecommunications services in competition with state-owned or
state-sanctioned monopoly carriers. There can be no assurance that future
regulatory, judicial, legislative or political considerations will permit the
Company to offer all or any of its products and services in such countries, that
regulators or third parties will not raise material issues regarding the
Company's compliance with applicable laws or regulations, or that such
regulatory, judicial, legislative or political decisions will not have a
material adverse effect on the Company. If the Company is unable to provide the
services that it presently provides or intends to provide or
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to use its existing or contemplated transmission methods due to its inability to
obtain or retain the requisite governmental approvals for such services or
transmission methods or because it is subjected to adverse regulatory inquiry,
investigation or action, or for any other reason related to regulatory
compliance or lack thereof, such developments could have a material adverse
effect on the Company's business, financial condition and results of operations.
On February 15, 1997, the United States and 68 other countries signed the
WTO Agreement, agreeing to open their respective telecommunications markets to
competition and foreign ownership and to adopt regulatory measures to protect
market entrants against anticompetitive behavior by dominant telephone
companies. FCC rules implementing the WTO Agreement became effective in February
1998. The FCC also adopted streamlined license granting procedures for carriers
from WTO Agreement signatory countries, pursuant to which the FCC granted more
than 200 international applications in the first 90 days after the streamlined
procedures became effective. The FCC adopted additional streamlining measures on
March 18, 1999. Although the Company believes that the WTO Agreement could
provide the Company with significant opportunities to compete in markets that
were not previously accessible, reduce its costs and provide more reliable
services, it could also provide similar opportunities to the Company's
competitors. There can be no assurance that the pro-competitive effects of the
WTO Agreement will not have a material adverse effect on the Company's business,
financial condition and results of operations or that members of the WTO will
implement the terms of the WTO Agreement.
UNITED STATES
In the United States, to the extent that the Company offers services as a
carrier, the provision of the Company's services is subject to the provisions of
the Communications Act of 1934, as amended, the Telecommunications Act of 1996
and the regulations of the FCC thereunder. There can be no assurance that future
regulatory, judicial and legislative changes will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Moreover, to the extent that the interpretation or enforcement of applicable
laws and regulations is uncertain or unclear, the Company's aggressive strategy
may result in the Company (i) providing services or using transmission methods
that are found to violate the Communications Act, the Telecommunications Act of
1996 or FCC regulations or (ii) failing to obtain approvals or make filings
subsequently found to be required under such laws or regulations. If the
Company's interpretation of applicable laws and regulations proves incorrect, it
could lose, or be unable to obtain, regulatory approvals necessary to provide
certain of its services or to use certain of its transmission methods. There can
be no assurance that the Company will not be subject to fines, penalties or
other sanctions as a result of violations regardless of whether such violations
are knowing or willful and regardless of whether such violations are corrected.
There can be no assurance that if the Company's interpretation of applicable
laws and regulations proves incorrect and/or if the Company is subject to fines,
penalties or other sanctions as a result, that these events will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
U.S. INTERNATIONAL LONG DISTANCE SERVICES
To the extent the Company offers services as a carrier, it is subject to
FCC rules requiring authorization from the FCC prior to leasing international
capacity, acquiring international facilities, and/or purchasing switched
minutes, and initiating international service between the United States and
foreign points, as well as to FCC rules that also regulate the manner in which
the Company's international services may be provided, including the
circumstances under which the Company may provide international switched
services by using private lines or routing traffic through third countries. FCC
rules also require prior authorization before transferring control of or
assigning FCC authorizations, and impose various reporting and filing
requirements on companies providing international services under an FCC
authorization. In order to offer international long distance services, the
Company is also required to file and has filed with the FCC a tariff containing
the rates, terms and conditions applicable to its international
telecommunications services. MSN has filed a tariff with respect to
international services. The Company has a continuing obligation to ensure that
the tariffs accurately reflect the terms and conditions associated with its
service offerings. The Company is also required to file certain carrier to
carrier agreements with the FCC. The FCC also requires carriers such as the
Company to report any affiliations, as defined by the FCC, with foreign
carriers. The FCC may also impose restrictions on affiliations with certain
foreign telecommunications companies. Failure to comply with the FCC's rules
could result in fines, penalties or forfeiture of the Company's FCC
authorizations, each of which could have a material adverse effect on the
Company business, financial condition and results of operations.
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<PAGE>
THE FCC'S PRIVATE LINE RESALE POLICY
The FCC's private line resale policy currently prohibits a carrier from
reselling international private leased circuits to provide switched services
(known as "ISR") to or from a country unless the FCC has designated that country
as one that affords U.S. carriers equivalent opportunities to engage in similar
activities in that country or that the country is a member of the WTO and the
local PTT offers U.S. carriers settlement rates at or below the FCC-prescribed
benchmark for terminating the U.S. carriers' traffic. There can be no assurance,
however, that the FCC or any other country's regulatory authority will change
their policies in a way that would have a beneficial impact on the Company or
that would not have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, it is possible,
although the Company believes not likely, that the FCC could take the view that
certain arrangements by which the Company provides international services do not
comply with the existing Private Line Resale Policy. If the FCC, on its own
motion or in response to a challenge filed by a third party, determines that
such arrangements do not comply with FCC rules, among other measures, it may
issue a cease and desist order, impose fines on the Company or, in extreme
circumstances, revoke or suspend its FCC authorizations.
INTERNATIONAL SETTLEMENTS POLICY
The International Settlements Policy (the "Policy") establishes the
framework governing U.S. carriers' relationships with their foreign
correspondents. Specifically, the Policy governs the exchange of traffic and
settlements between U.S. carriers and their foreign correspondents of the cost
of terminating traffic over each other's networks and prevents foreign carriers
from discriminating among U.S. carriers in bilateral accounting rate
negotiations. The Policy requires: (1) the equal division of accounting rates;
(2) non-discriminatory treatment of U.S. carriers; and (3) proportionate return
of inbound traffic. The FCC enacted certain changes in its rules designed to
permit alternative or flexible arrangements outside of its Policy as a means of
encouraging competition and achieving lower, cost-based accounting rates as
foreign markets deregulate. Specifically, the FCC allows U.S. carriers, subject
to certain competitive safeguards, to propose methods to pay for international
call termination that deviate from traditional bilateral accounting rates and
the Policy. The FCC has also established lower ceilings ("benchmarks") for the
rates that U.S. carriers can pay foreign carriers for the termination of
international services. Moreover, the FCC has changed its rules to implement the
WTO Agreement, in part by adopting a rebuttable presumption that flexibility is
permitted for WTO member countries, and by allowing U.S. carriers, under certain
circumstances, to accept special concessions from foreign carriers. While these
rule changes provide the Company with more flexibility to respond more rapidly
to changes in the global telecommunications market, they also provide similar
flexibility to the Company's competitors.
U.S. DOMESTIC LONG DISTANCE SERVICES
The Company's ability to provide domestic long distance service in the
United States is subject to regulation by the FCC and relevant state Public
Utility Commissions ("PUC") that regulate the offering of interstate and
intrastate telecommunications services, respectively. No formal authority is
required for the offering of interstate services. The Company, however, is
required by the FCC to file tariffs listing the rates, terms and conditions of
domestic long distance services provided.
Prior to the initiation of intrastate service, depending on the state, the
Company generally must obtain certification from or register with the relevant
state PUC. Providers of intrastate services may also be required to file tariffs
or rate schedules, and may be subject to certain reporting obligations with the
relevant PUC. Telscape USA has obtained the authorizations or has registered
with state regulatory authorities in 40 states. MSN has certification in eight
states. The Company has not yet filed tariffs in the states that require tariffs
to be filed, because the Company is not currently offering intrastate
interexchange service in any state. For the same reason, the Company has not
filed any reports with state PUCs. Failure to comply with state law and/or the
rules, regulations and policies of the PUCs may result in challenges by third
parties, and/or actions by the PUCs including conditioning, modifying or
revoking state authorization to provide telecommunications services within the
respective state and/or subject the provider to fines and penalties.
In addition, the FCC has adopted certain measures to implement the 1996
Telecommunications Act that will impose new regulatory requirements, including
the requirement that the Company contribute some portion of its
telecommunications revenues to a "universal service fund" designated to fund
affordable telephone service for consumers, schools, libraries and rural health
care providers. These contributions became payable beginning in 1998 for all
interexchange carriers. The contribution percentages vary quarterly, and the
factors for the first and second quarters of 1999 equal approximately 3.18% and
3.05%, respectively, of interstate and international gross end user
telecommunications revenues for the high cost and low income fund, and
approximately 0.58% and 0.57%,
16
<PAGE>
respectively, of intrastate, interstate and international gross end user
telecommunications revenues for the schools, libraries and health care fund. The
Company cannot predict the amount of universal service fund contributions for
the remaining quarters of 1999, or thereafter, until the FCC issues contribution
factors for such periods.
MEXICO
In June 1998, Telereunion S.A. received a 30-year facilities-based carrier
license from the SCT, allowing it to originate and terminate long distance
services and to provide data and other value-added services in Mexico. The
Foreign Investment Law and Telecom Law ("FTL") opened the local and long
distance telecommunications service markets to competition and imposed varying
levels of regulation on Mexican telecommunications providers. Pursuant to the
FTL, the SCT and the Comision Federal de Telecomunicaciones ("COFETEL")
implement the provisions of the FTL. The FTL imposes regulations on public
carriers. Facilities-based public carriers, those that use the radio spectrum,
satellite links or any form of land-based cables to provide telecommunications
services, must obtain concessions prior to providing service. Concessionaires
may also resell the facilities and services of other concessionaires. Vendors
(resellers) of telecommunications services may not own their own facilities but
need only obtain a permit to provide service. Although the FTL provides for the
existence of resellers, the Mexican government has not issued the implementing
rules and regulations to allow their entry into the market. Consequently,
Mexican law does not currently permit pure switched international resale.
Carriers wishing to offer value-added services need only register with the
COFETEL's Telecommunications Registry.
In addition to the FTL, the Mexican Long Distance International Rules (the
"International Rules") establish the specific regulatory framework that governs
international long distance services. Among other matters, the International
Rules (i) mandate uniform accounting rate and proportionate return for three
years for all international traffic; (ii) require concessionaires to obtain
additional specific authorization to install and operate international gateways;
(iii) implicitly prohibit ISR for three years; and (iv) regulate international
correspondent agreements, which must reflect the uniform accounting rate and
proportionate return rules. The International Rules prohibit all
telecommunications operators, except those concessionaires that have obtained
the specific authorization from the COFETEL, to install and operate
international gateway switches. Those concessionaires that have not received
such specific authorization, as well as any other companies that provide
telecommunications services, such as providers of value-added services, cellular
concessionaires and paging service providers cannot directly transmit
international switched traffic. To date, the SCT and the COFETEL have granted 16
companies, including Telmex and Telereunion S.A., concessions for the
installation, operation and exploitation of long distance public
telecommunications networks, of which eight have received authorization to
install and operate international gateway facilities. In addition, the SCT and
the COFETEL have granted eight concessions for local switched services as well
as numerous registrations for value-added services.
Pursuant to the FTL, concessions for public telecommunication networks may
only be granted to Mexican citizens or Mexican companies. Foreign investors may
own minority interests in concessionaires, but may not own more than 49% of the
voting ownership interest of the company except for companies that provide
cellular service. NAFTA removed certain Mexican restrictions on foreign
investment and U.S. companies may now maintain 100% ownership interests in
companies that provide value-added services in Mexico. Pursuant to Mexican law,
only Mexican citizens or companies incorporated and domiciled in Mexico can
register as providers of value-added services.
OTHER LATIN AMERICAN MARKETS
The Company's provision of services elsewhere in Latin America are subject
to the developing laws and regulations governing the competitive provision of
telecommunications services in each Latin American country in which it provides
or seeks to provide services. Each such Latin American country in which the
Company currently conducts or intends to conduct business has a different
national regulatory scheme. Historically, Latin American countries have
prohibited voice telephony except by the PTT. The available opportunities and
the requirements for the Company to obtain necessary approvals to offer
value-added services, systems integration or the full range of
telecommunications services, including voice telephony, vary considerably from
country to country. The Company currently plans to provide a limited range of
services in certain Latin American countries, as permitted by regulatory
conditions in those markets, and to expand its operations as these markets
implement liberalization to permit competition in the full range of
telecommunications services. The nature, extent and timing of the opportunity
for the Company to compete in these markets will be determined, in part, by the
actions taken by the governments in these countries to implement competition and
the response of incumbent carriers to these efforts. There can be no assurance
that any of these countries will implement competition in the near future or at
all, that the Company will be able to take advantage of any such liberalization
in a timely manner, or that the Company's operations in any such country will be
successful. There can be no assurance that the Company has received all
necessary approvals, filed
17
<PAGE>
applications for such approvals, received comfort letters or obtained all
necessary licenses from the applicable regulatory authorities to offer
telecommunications services in the Latin American countries where it currently
provides services or those in which it seeks to provide services in the future,
or that it will do so in the future. The Company's failure to obtain, or retain
necessary approvals could have a material adverse effect on the Company's
business, financial condition and results of operations.
Liberalization in Latin America is proceeding rapidly and the Company
seeks to keep pace with competition even where PTTs retain a legally mandated
monopoly on voice telephony. The Company is currently offering or plans to offer
certain systems integration, enhanced services, or value-added services in a
number of Latin America countries where the PTT retains the legally mandated
monopoly on voice telephony. While the Company believes that it will not be
found to be offering voice telephony in these countries prior to the expiration
of the PTT's monopoly on such services, the Company has received no assurance
from the respective PTTs or from the respective regulating authorities that this
will be the case. It is possible that the Company could be fined, or that the
Company's facilities or equipment could be confiscated, or that the Company
would not be allowed to provide specific services in these countries, among
other sanctions, if the Company were found to be providing voice telephony
before the date in which the PTT's monopoly on Voice Telephony ceases. Any of
such actions could have a material adverse impact on the Company's business,
financial condition and results of operations.
Moreover, the Company may be incorrect in its assumption that (i) each
Latin American country will abolish, on a timely basis, the respective PTT's
monopoly to provide voice telephony within and between other countries, (ii)
deregulation will continue to occur and (iii) the Company will be allowed to
continue to provide and to expand its services in the Latin American countries.
There can be no assurance that any or all of the Latin American countries will
not adopt laws or regulatory requirements that will adversely affect the
Company. Additionally, there can be no assurance that future regulatory,
judicial or legislative changes in any or all of the Latin American countries
will not have a material adverse effect on the Company or that regulators or
third parties will not raise material issues with regard to the Company's
compliance with applicable laws or regulations. If the Company is unable to
provide the services it is presently providing or intends to provide or to use
its existing or contemplated transmission methods due to its inability to
receive or retain formal or informal approvals for such services or transmission
methods, or for any other reason related to regulatory compliance or the lack
thereof, such events could have a material adverse effect on the Company's
business, financial condition and results of operations.
INTELLECTUAL PROPERTY
The Company uses the names "Telscape International," "Telscape" and "TSCP
International" as its primary business names, and has filed for federal
trademark protection for the "Telscape" name and distinctive logo. These filings
are pending, and the Company has no assurance that they will be granted. The
Company owns a federal trademark registration for the "TELEFIESTA"(R) Prepaid
Cards. Telereunion S.A. has a national trademark registration in Mexico for
"TELEREUNION." The Company regards its trademarks, servicemarks, tradenames and
logos as valuable assets and believes they have value in the marketing of its
products and services. The Company intends to protect and defend its name,
servicemarks and trademarks in the United States and internationally.
EMPLOYEES
As of March 15, 1999, the Company had 403 full-time employees, with 311
residing in Mexico and 92 residing in the United States. Of the total employees,
there are 64 in sales and marketing, 96 in general and administrative and 243 in
operations, engineering, manufacturing and assembly. None of the Company's
employees are subject to a collective bargaining agreement, and the Company has
not experienced any work stoppage. The Company believes that its relations with
its employees are good.
ITEM 2. PROPERTIES.
The Company's international headquarters are located in Houston, Texas,
where the Company leases approximately 7,940 square feet of an office building.
The Company also leases additional facilities in Houston, Texas totaling
approximately 9,873 square feet relating to its Prepaid Card operations and to
house telecommunications equipment relating to its long distance services
operations. The Company leases facilities in Mexico City, Guadalajara and
Tijuana, totaling approximately 34,000 square feet and consisting of office and
warehousing facilities. The Company leases facilities in Sunnyvale and Mountain
View, California totaling 80,492 square feet.
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ITEM 3. LEGAL PROCEEDINGS.
No material litigation outstanding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock traded on the NASDAQ Small Cap Market under the
symbol "PTMC" from August 10, 1994 until June 28, 1996, when it began trading
under the symbol "TSCP." The Company's Common Stock began trading on the NASDAQ
National Market System ("NASDAQ NMS") on July 31, 1998. The following table sets
forth the range of the quarterly high and low sales prices for the Common Stock,
as reported by the NASDAQ Small Cap Market and the NASDAQ NMS for each quarter
within the last two fiscal years.
HIGH Low
1997
First Quarter $ 3.750 $ 2.000
Second Quarter 4.250 2.625
Third Quarter 10.75 3.688
Fourth Quarter 15.25 7.500
1998
First Quarter $ 17.625 $ 8.25
Second Quarter 23.1875 14.125
Third Quarter 16.375 7.00
Fourth Quarter 10.250 6.688
As of March 15, 1999, there were approximately 88 holders of record of the
Company's Common Stock.
The Company has never paid any cash dividends on its Common Stock. The
Company expects that it will retain all available earnings generated by its
operations for the development and growth of its business and does not
anticipate paying any cash dividends in the foreseeable future. In addition, the
Company's ability to pay dividends may be adversely affected if, in the future,
the Mexican government were to impose restrictions on the Company's ability to
repatriate profits.
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ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain historical financial data relating
to the Company. The information set forth below is not necessarily indicative of
the results of future operations and should be read in conjunction with "Item 7
- - - Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included in Item 8 of this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues ........................................ $ 972,000 $ 1,108,000 $ 5,705,000 $ 36,154,000 $ 132,179,000
Cost of revenues ................................ 439,000 619,000 3,041,000 24,396,000 111,892,000
----------- ----------- ----------- ------------ -------------
Gross profit .................................... 533,000 489,000 2,664,000 11,758,000 20,287,000
Selling, general and administrative
expenses ...................................... 1,032,000 1,349,000 4,159,000 8,154,000 13,774,000
----------- ----------- ----------- ------------ -------------
Operating income (loss) before
depreciation and amortization and
impairment loss ............................... (499,000) (860,000) (1,495,000) 3,604,000 6,513,000
Depreciation and amortization ................... 36,000 49,000 264,000 622,000 3,316,000
----------- ----------- ----------- ------------ -------------
Operating income (loss) before
impairment loss ............................... (535,000) (909,000) (1,759,000) 2,982,000 3,197,000
Impairment loss on long-lived assets ............ -- -- -- -- 1,026,000
----------- ----------- ----------- ------------ -------------
Operating income (loss) ......................... (535,000) (909,000) (1,759,000) 2,982,000 2,171,000
Other income (expense), net ..................... 5,000 229,000 114,000 (232,000) (2,413,000)
----------- ----------- ----------- ------------ -------------
Income (loss) before income
taxes and minority interests ................. (530,000) (680,000) (1,645,000) 2,750,000 (242,000)
Income tax benefit (expense) .................... -- -- 53,000 (84,000) (822,000)
----------- ----------- ----------- ------------ -------------
Income (loss) before minority interests ......... (530,000) (680,000) (1,592,000) 2,666,000 (1,064,000)
Minority interests .............................. (19,000) 7,000 (6,000) 6,000 34,000
----------- ----------- ----------- ------------ -------------
=========== =========== =========== ============ =============
Net income (loss) ............................... $ (549,000) $ (673,000) $(1,598,000) $ 2,672,000 $ (1,030,000)
=========== =========== =========== ============ =============
Net income (loss) per share-Basic ................ $ (0.44) $ (0.36) $ (0.52) $ 0.68 $ (0.20)
Weighted average shares
outstanding .................................. 1,254,689 1,890,442 3,046,594 3,903,470 5,052,096
Net income (loss) per share- .....................
Diluted (1) .................................. n/a n/a n/a $ 0.53 n/a
Diluted weighted average shares
outstanding (1) .............................. n/a n/a n/a 5,152,211 n/a
<CAPTION>
At December 31,
1994 1995 1996 1997 1998
----------- ----------- ----------- ------------ -------------
BALANCE SHEET DATA
Cash, cash equivalents and short
term investments ............................... $ 4,509,000 $ 3,645,000 $ 495,000 $ 4,734,000 $ 9,631,000
Current assets ..................................... 5,179,000 4,294,000 4,665,000 18,506,000 32,746,000
Property and equipment, net ........................ 156,000 154,000 983,000 2,679,000 14,576,000
Goodwill and other intangibles, net ................ -- -- 3,246,000 17,674,000 31,416,000
Total assets ....................................... 5,335,000 4,498,000 9,371,000 39,635,000 80,331,000
Notes payable and capital lease
obligations .................................... -- -- -- 3,184,000 13,133,000
Stockholders' equity ................................ $ 4,446,000 $ 3,590,000 $ 5,764,000 $ 22,088,000 $ 34,926,000
</TABLE>
(1) Inclusion of additional shares under a dilutive analysis is
inappropriate due to the anti-dilutive effect.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Telscape International, Inc., is an emerging, fully integrated
telecommunications company. The Company, based in the U.S., supplies
international voice, video and data services, via switched and dedicated
networks, principally to and from Latin America. In addition, the Company
provides a full range of systems integration and value-added telecommunications
services in Mexico to major public and private sector customers. Telereunion, a
Telscape subsidiary, is one of only sixteen companies that has been granted a
facilities-based long distance concession by the Mexican government. In
addition, the Company provides satellite teleport services to customers in the
U.S. and Latin America.
Telscape intends to significantly expand its facilities-based
telecommunications and to broaden its service offerings in markets where it has
established, or expects to establish, a significant presence. In June 1998,
Telereunion S.A., a Mexican corporation and an affiliate of the Company, was
granted the Mexican Concession from the Mexican government. The Mexican
Concession is a 30-year, facilities-based carrier license which allows it to
construct and operate a network over which the Company can carry long distance
traffic in Mexico. The Company, through Telereunion S.A., intends to construct
the Mexican Network, a combined fiber-optic and microwave long distance network,
connecting the United States, the Gulf region of Mexico and targeted Mexican
cities.
In May 1996, Telscape began to focus on providing telecommunication
services to and in Latin America. The Company acquired all of the stock of
Telereunion, Inc., the owner of 97.0% of Vextro de Mexico S.A. de C.V.
("Vextro"). Vextro is a Mexico-based systems integration company, with an
emphasis on voice solutions. In September 1996, the Company expanded its
operations to include international long distance by acquiring Orion
Communications, Inc., a U.S.-based reseller of long distance services ("Orion").
In 1997, the Company expanded its systems integration service offerings by
acquiring Integracion de Redes, S.A. de C.V. ("Integracion") and N.S.I., S.A. de
C.V. ("N.S.I."), both focused on data services and based in Mexico City, Mexico.
In 1998, Integracion was renamed as Telscape de Mexico, S.A. de C.V.
In January 1998, Telscape acquired MSN, a leading provider of Prepaid
Cards that are marketed under the TELEFIESTA(R) brand name to Hispanic consumers
residing in the United States. The MSN acquisition enhances Telscape's
international long distance business by providing a retail platform, enhancing
its ability to market additional products and services to Hispanic customers and
increasing its ability to generate significant returns of U.S.-outbound traffic
to Latin America. The Company plans to leverage the TELEFIESTA(R) brand
recognition in other Latin American countries after obtaining the required
licenses.
Effective June 1, 1998, the Company through its newly-formed subsidiary
INTERLINK Communications, Inc. ("INTERLINK") acquired California Microwave
Services Division, Inc. for $8.8 million in cash. INTERLINK provides the Company
with a teleport facility in California, thereby enhancing the Company's position
as an integrated telecommunications provider and contributing to the Company's
ability to provide satellite capacity to its targeted markets in Latin America.
Telscape intends to capitalize on the deregulating markets of Latin
America by providing international long distance services to and from targeted
Latin American countries. The Company also intends to position itself as an
integrated telecommunications provider in Mexico through the construction of the
Mexican Network under its recently granted Mexican Concession. The Company
believes that owning a long distance network in Mexico, combined with an
expanding international telecommunications network, will increase the percentage
of minutes of traffic it carries on-net, enable it to increase margins and
profitability and ensure quality of service on both international and domestic
long distance traffic.
The Company believes that the Mexican Network, when complete, will link 47
cities and towns and cover, including interconnection agreements, approximately
90% of the population in Mexico. The Mexican Network will provide the Company
with the backbone for its strategy to be a complete telecommunications service
provider for the Latin American market, beginning with Mexico. The Mexican
Network will provide the Company with significant, carrier-class, cost-effective
capacity from which it can grow its existing retail and wholesale international
long distance and value-added services businesses on both sides of the
U.S.-Mexico border. The Company expects to begin the construction of the Mexican
Network in the second quarter of 1999. The Company believes that the Mexican
Network can be fully operational by the end of 1999.
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The Company has selected Lucent to engineer, furnish and install the
Mexican Network. In addition, the Company received a commitment from Lucent to
provide the Company with up to $40 million of long term financing, which
includes $34 million towards the purchase of Lucent products and services
(including construction of the Mexican Network) and $6 million for repayment of
the Company's current obligations.
REVENUES
During 1997, the Company derived its revenues principally from the
provision of value-added and systems integration services in Mexico and from the
sale of U.S. outbound international long distance services to Latin America. In
1998, with the addition of Prepaid Card revenues generated by MSN, the Company's
revenue mix changed. The Company expects that these products will contribute an
increasing proportion of its revenues.
The Company provides value-added and systems integration services to
private and public sector customers in Mexico. Revenues are derived from
providing value-added services and the sale of equipment. Revenues from this
business have grown significantly through both internal growth and strategic
acquisitions in 1996, 1997 and 1998. The revenues in this line of business are
subject to economic conditions in Mexico. Revenues in 1999 are expected to
soften as a result of weakening economic conditions in Mexico and due to the
Company's decision to reduce sales of lower margin equipment sales to other
distributors and increase efforts on higher margin value-added services.
The Company provides international long distance services on both a
wholesale and retail basis. Wholesale long distance services are provided mainly
to other carriers. Revenues are derived from the number of minutes of use (or
fraction thereof) billed by the Company and are recorded upon completion of
calls.
Retail domestic and international long distance services are provided
through the sale of Prepaid Cards. The Company has in the past entered into
arrangements with third parties whereby these parties provided, at a fixed cost
to the Company, the long distance telecommunications services for the Prepaid
Cards that the Company sells. The Company recognized revenues from the sale of
Prepaid Cards under these agreements at the time of shipment. In other cases,
the Company has entered into arrangements whereby third parties provide certain
telecommunications services for the Prepaid Cards and bills the Company for such
services based on customer usage. The Company recognizes revenues from the sale
of Prepaid Cards under these agreements at the time of customer usage.
The Company discontinued the fixed cost arrangement with third parties. As
a result, revenues were recognized in the second half of 1998 on the Prepaid
Cards at the time of customer usage.
With its acquisition of INTERLINK in the second quarter of 1998, the
Company also provides satellite teleport services including voice, video and
data transport services including fractional and full T-1 data broadcast,
dedicated circuits and private line up-link and down-link services
Bandwidth-on-Demand, ISDN videoconferencing and Internet-through-satellite
services to the U.S. and Latin America.
GROSS PROFIT
During 1998, the Company's gross profit as a percentage of revenues
declined. This decline was due largely to the incremental revenues associated
with the Prepaid Cards, a decline in price per minute in the wholesale long
distance business and certain one time events in the second and fourth quarters.
In May 1998, one of the Company's wholesale long distance customers filed
a petition for relief under Chapter 11 of the U.S. Bankruptcy Code.
Additionally, an affiliate of this customer provided switching services and the
Prepaid Card platform and arranged for other carriers to provide
telecommunications services for the Prepaid Cards. The Company had paid the
affiliate of this customer for these services at the time the Prepaid Cards were
activated. Because the Company continued to provide services to its Prepaid Card
customers by working directly with the underlying service providers, this
resulted in the Company paying for certain of the telecommunications services on
the Prepaid Cards a second time. The overall impact of the bankruptcy filing to
the Company's earnings, including additional Prepaid Card services costs, the
write-off of uncollectible receivables and the lost margin contribution from the
loss of a wholesale customer, resulted in a reduction of operating income of
approximately $2.0 million in the second quarter of 1998.
In the fourth quarter of 1998, the Company was negatively affected by the
disconnection of certain microwave links, which were owned and operated by other
carriers with which the Company had operating agreements to terminate traffic in
Mexico. These microwave links were alleged to not be in compliance with Mexican
telecommunications regulations. The Company determined that it was best to
ensure that these microwave links were in complete compliance before continuing
to provide services through these microwave links. This resulted in
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the Company having reduced cost effective capacity for the telecommunication
services it provides to Mexico in the fourth quarter and negatively impacted the
Company's revenues and cost of sales for the fourth quarter.
The Company's strategy to improve gross margins in the international long
distance business segment is to (i) increase its efforts in the retail market
where it can provide product identification and differentiation as the wholesale
market has become increasingly competitive, (ii) decrease its dependency on
third party service providers and (iii) increase the amount of traffic it
processes over its own network, under direct operating agreements it establishes
with other carriers, and eventually, over the Mexican Network.
In the fourth quarter of 1998, the Company began selling Prepaid Cards
which utilize the switching and processing platforms the Company owns. The
origination and termination telecommunication services for these Prepaid Cards
are provided under operating agreements the Company has negotiated directly with
other carriers in each of the United States, Mexico and other international
destinations. The Company expects that the vast majority of the Prepaid Cards it
sells in 1999 will be under this structure and it will be less dependent on
third parties to provide switching and processing facilities and to arrange for
origination and termination services. Consequently, the Company expects
significant improvement in the gross profit as a percentage of revenues derived
from its sale of Prepaid Cards in 1999.
During 1998, the Company expended substantial capital resources in
switching and processing facilities. During the first quarter of 1999, the
Company has continued these efforts and expended additional capital resources in
an effort to increase its switching and processing platforms to provide the
capacity necessary for the Prepaid Card and wholesale international long
distance services the Company provides. The Company has also entered into new
operating agreements with carriers in Mexico and in the U.S. to provide it with
additional, cost effective origination and termination capacity for its Prepaid
Cards beginning in fiscal year 1999. In addition, as the Mexican Network is
constructed, the Company intends to terminate an increasing amount of traffic
over its own network and further reduce the reliance on other carriers and the
cost to provide these services.
The Company expects that gross profits from equipment sales to decline
over time as the market becomes more competitive. The Company's strategy to
maintain the gross profits it has enjoyed from this business line in the past is
to enter into additional outsourcing contracts and other value-added services
which have historically provided higher gross profits as a percentage of
revenues. In addition, the Company's call center operations have historically
provided higher gross profits as a percentage of revenues. The Company is
evolving the value-added services business in Mexico to have a greater
proportion of higher margin services and a lesser proportion of lower margin
equipment sales.
The Company expects that gross profits as a percentage of revenues as well
as actual gross profit will increase in 1999.
RESULTS OF OPERATIONS
The following tables sets forth for the periods indicated certain
financial data as a percentage of revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenues .............................................. 100.0 % 100.0 % 100.0 %
Cost of revenues ...................................... 53.3 67.5 84.7
------ ------ ------
Gross profit .......................................... 46.7 32.5 15.3
Selling, general and administrative expense ........... 72.9 22.6 10.4
Depreciation and amortization ......................... 4.6 1.7 2.5
------ ------ ------
Operating income (loss) before impairment loss ........ (30.8) 8.2 2.4
Impairment loss on fixed assets ....................... -- -- 0.8
------ ------ ------
Operating income (loss) ............................... (30.8) 8.2 1.6
Other income (expense) ................................ 2.0 (0.6) (1.8)
------ ------ ------
Income (loss) before income taxes and minority interest (28.8) 7.6 (0.2)
Income tax benefit (expense) .......................... 0.9 (0.2) (0.6)
------ ------ ------
Income (loss) before minority interests ............... (27.9) 7.4 (0.8)
Minority interest in subsidiaries ..................... (0.1) 0.0 0.0
====== ====== ======
Net income (loss) ..................................... (28.0) 7.4 (0.8)
====== ====== ======
</TABLE>
24
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES increased from $36.2 million in 1997 to $132.2 million in 1998.
This increase of $96.0 million, or 266%, was due principally to the acquisition
of MSN completed in the first quarter of 1998, which provided revenues of $60.1
million for the year ended December 31, 1998. Wholesale international long
distance revenues increased $15.7 million from $17.4 million for 1997 to $33.1
million for 1998. In addition, revenues from value-added services increased
$14.2 million from $18.8 million for 1997 to $33.0 million for 1998. This
increase in value-added services revenues is due to the acquisitions of
Integracion de Redes, S.A. de C.V. ("Integracion") and N.S.I., S.A. de C.V.
("NSI"), the overall growth in demand for these services and the growth in
revenues from the call center operations. Services provided by INTERLINK,
following the Company's acquisition of INTERLINK, generated an additional $6.0
million in revenues.
COST OF REVENUES increased from $24.4 million in 1997 to $111.9 million in
1998, or $87.5 million. The 359% increase in cost of revenues was due
principally to the incremental cost of revenues associated with the acquisition
of MSN, the increase in the sale of wholesale international long distance
services and value-added services and, to a lesser extent, the incremental cost
of revenues attributable to the acquisition of INTERLINK. The cost of revenues
as a percentage of revenues increased from 67.5% to 84.7%, or 17.2%, due
principally to the higher cost of revenues as a percentage of revenues
associated with the sale of Prepaid Cards and the higher cost of revenues on
wholesale international long distance services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from $8.2
million in 1997 to $13.8 million in 1998, or $5.6 million. The 69% increase in
SG&A was due principally to the incremental SG&A related to the operations of
the acquisitions of MSN and INTERLINK and increased staffing at existing
operations of the value-added services business and the wholesale international
long distance business to meet the additional resource requirements associated
with the growth of these operations.
In addition, SG&A was negatively impacted by the write off of receivables,
of approximately $541,000, due from a customer who filed for bankruptcy as
discussed above. Included in SG&A are approximately $115,000 associated with
pre-operating costs on Telereunion S.A., the Company's subsidiary which has been
granted the long distance concession in Mexico.
Overall SG&A as a percentage of revenues decreased from 22.6% to 10.4%, or
12.2%. This decrease was due principally to the lower SG&A expenses as a
percentage of revenues associated with MSN and to the growth in overall revenues
rapidly outpacing the growth in SG&A expenses. This improvement was partially
offset by the write off of receivables from the customer, which filed for
bankruptcy as discussed above, and the pre-operating expenses with the Mexican
Network.
DEPRECIATION AND AMORTIZATION increased from $622,000 in 1997 to $3.3
million in 1998, or $2.7 million. This increase is due to an increase in
goodwill amortization primarily due to the vesting of performance based warrants
issued in connection with the Telereunion acquisition, which resulted in
additional goodwill being recognized on December 31, 1997 and in the fourth
quarter of 1998 and goodwill recognized on the MSN and INTERLINK acquisitions.
In addition, depreciation increased as a result of the Company's continuing
expansion of its international wholesale long distance network which includes
purchases of switches and other telecommunications equipment and facilities. The
Company expects depreciation expense to increase as it continues to expand its
telecommunications network.
IMPAIRMENT LOSS ON LONG-LIVED ASSETS. During the year ended December 31,
1998, the Company determined that the carrying value of certain equipment and
other long-lived assets deployed under certain operating arrangements in Latin
America were impaired, resulting in a charge to operating costs of approximately
$1.0 million.
INTEREST INCOME (EXPENSE), NET increased from ($95,000) in 1997 to ($1.6)
million in 1998, or ($1.5) million. This increase was mainly due to an increase
in the Company's level of borrowings, including notes issued in connection with
the Integracion and MSN acquisitions, and the Deere Park Convertible Debentures
and Gordon Brothers Convertible Debentures issued in connection with the
INTERLINK acquisition.
The Gordon Brothers Convertible Debentures provide for an "exit fee" which
is payable if the obligation is settled in a cash payment rather than converted
into Common Stock. Included in interest expense for the year ended December 31,
1998, is an accrual of approximately $470,000 related to exit fees the Company
expects to pay once the Gordon Brothers Convertible Debentures are paid in
fiscal year 1999.
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<PAGE>
OTHER INCOME (EXPENSE) increased from ($137,000) in 1997 to ($812,000) in
1998, or ($675,000). This increase is primarily due to foreign exchange
translation losses of $639,000 resulting from the translation of financial
statements of the Company's Mexican operations. The Mexican peso experienced a
22.1% devaluation in the exchange rate to the U.S. dollar during 1998.
INCOME TAX BENEFIT (EXPENSE) increased from ($84,000) in 1997 to
($822,000) in 1998. Income tax expense in 1997 was lower than income tax expense
in 1998 as a result of the Company's utilization of its loss carryforwards to
offset taxable income and the recognition of a portion of the deferred tax
benefits related to the Company's tax loss carryforward. The effective tax rate
for 1998 is higher than the U.S. and Mexico statutory rate of 34% due to
permanent differences, the most significant of which is the nondeductible nature
of goodwill amortization.
NET INCOME. The Company experienced net income of $2.7 million in 1997 as
compared to a net loss of ($1.0) million in 1998 due to a combination of the
factors discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES increased from $5.7 million in 1996 to $36.2 million in 1997.
This increase of $30.5 million, or 535%, was due principally to the significant
growth in the Company's international long distance business and, to a lesser
extent, the acquisitions of Telereunion, Integracion and NSI. The Company's
revenues from international long distance services grew $16.8 million from
$640,000 in 1996 to $17.4 million in 1997, or 2,625%. Revenues from value-added
services increased $13.7 million from $5.1 million to $18.8 million in 1997, or
269%. Although some of the growth is attributable to the effect of including
Telereunion for a full year in 1997, Telereunion also experienced growth in
revenues in 1997.
COST OF REVENUES increased from $3.0 million in 1996 to $24.4 million in
1997, or $21.4 million. The increase in cost of revenues was due principally to
the incremental cost of revenues associated with the significant growth in the
international long distance business and, to a lesser extent, the incremental
cost of revenues associated with the acquisitions of Telereunion, Integracion
and NSI. The cost of revenues as a percentage of revenues increased from 53.3%
to 67.5%, or 14.2%. The increase in cost of revenues as a percentage of revenues
was due principally to a significant change in the Company's product mix. During
1997, the Company's decline in the margins earned in the value-added services
businesses in Mexico and Poland were offset by higher margins earned in the
international long distance services business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from $4.2
million in 1996 to $8.2 million in 1997. The increase in SG&A was due
principally to the incremental SG&A associated with the acquisitions of
Telereunion, Integracion and NSI and to a lesser extent, the additional
administrative staff added to handle the significant growth in the international
long distance business. In 1996, the Company also incurred certain non-recurring
expenses of approximately $350,000 relating to non-cash compensation expense
that was recorded in 1996 in compliance with "FAS 123: Accounting for
Stock-Based Compensation," approximately $100,000 in fees associated with the
Company's merger with Orion (which, upon consummation of the merger, was renamed
Telscape USA) (the "Telscape USA Acquisition"), and approximately $146,000 in
consulting fees. These consulting fees were paid under agreements which have
been terminated.
Overall SG&A as a percentage of revenues decreased from 72.9% to 22.6%, or
50.3%. This decrease was due principally to the significant growth in revenues
in each of the Company's core businesses while containing costs.
DEPRECIATION AND AMORTIZATION increased from $264,000 in 1996 to $622,000
in 1997, or $358,000. This increase was due to an increase in goodwill
amortization primarily due to the Integracion and NSI acquisitions completed
during 1997 and a full year's amortization of goodwill in 1997 associated with
the Telereunion acquisition.
INTEREST INCOME (EXPENSE),NET dEcreased from $15,000 in 1996 to ($95,000)
in 1997, or ($110,000). This decrease was mainly attributable to interest
expense relating to notes issued in connection with the Integracion acquisition.
OTHER INCOME (EXPENSE),NET decreased from $99,000 in 1996 to ($137,000) in
1997, or ($236,000). The decrease in other income was due principally to the
Company recognizing a foreign exchange loss of ($126,000), primarily as a result
of translation of the financial statements of the Polish operations as compared
to a foreign exchange gain of $161,000, primarily as a result of translation of
the financial statements of the Mexican operations,
26
<PAGE>
in 1996. The Company also wrote off its investment in a joint venture in Poland,
realizing a loss of $196,000 and incurring certain litigation settlement
expenses of $128,000.
INCOME TAX BENEFIT (EXPENSE) decreased from a benefit of $53,000 in 1996
to ($84,000) in 1997. This decrease is primarily due to tax expense from the
Company's Mexican operations offset by a benefit realized from a reversal of
valuation allowances on U.S. Federal net operating losses.
NET INCOME (LOSS) increased from ($1.6) million in 1996 to $2.7 million in
1997. The change in net income was due to a combination of the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $4.6 million and $6.6
million for the years ended December 31, 1997 and December 31, 1998,
respectively. The increase in net cash provided by operations in 1998 as
compared to 1997 was due primarily to increased level of revenues and the
resulting increased gross profits and earnings before depreciation and
amortization. In addition, the Company's working capital position was impacted
by an increase in accounts payable of $6.3 million and an increase in accrued
liabilities of $3.6 million, offset by an increase in accounts receivable of
$6.4 million.
Net cash used in investing activities was ($1.8) million and ($17.7)
million for the years ended December 31, 1997 and December 31, 1998,
respectively. In 1998, the Company acquired MSN for $2.4 million, net of cash
acquired, and INTERLINK for $8.8 million, net of cash acquired. In addition, the
Company expended approximately $6.2 million in the year ended December 31, 1998,
in expanding its switching, transmission and processing platforms required to
provide its international wholesale and retail long distance services.
Net cash provided by financing activities was $1.5 million and $16.0
million for the years ended December 31, 1997 and December 31, 1998,
respectively. In December 1997, the Company announced its intention to redeem
publicly traded warrants to purchase an aggregate of 525,000 shares of Common
Stock with a 30 day notice requirement. This announcement resulted in 475,535
warrants being exercised prior to the redemption date. The Company realized net
proceeds from these exercises of $3.7 million, of which $2.7 million was
received subsequent to year-end. The Company also raised $10.0 million from the
issuance of the Deere Park Convertible Debentures and the Gordon Brothers
Convertible Debentures and subsequently paid down $1.0 million of the Deere Park
Convertible Debentures. The Company also drew a net $1.7 million from its
Revolving Credit Facility (defined below). In addition, the Company realized
approximately $1.3 million (net of commissions and other offering costs) from
the sale of Common Stock under the Stock Purchase Commitment agreement (defined
below). Finally, the Company realized $2.3 million in proceeds from the exercise
of options and warrants.
As of December 31, 1998, the Company had cash and cash equivalents of $9.6
million and negative working capital of $7.2 million. Included in working
capital is approximately $5.5 million in principal amount and accrued interest
related to the Gordon Brothers Convertible Debentures which mature on May 29,
1999 and approximately $3.5 million in accounts payable related to purchases of
equipment for the Company's network expansion which the Company has financed or
has commitments to finance through long term loans or lease financing
agreements.
In 1998, the Company continued its strategic plans to significantly expand
the Company's switching, transmission and processing facilities related to its
wholesale and retail international long distance services. In 1998, the
Company's network related capital expenditures were approximately $6.2 million.
In addition, the Company also pursued its strategy of identifying and acquiring
strategic partners, including the acquisition of MSN in the first quarter of
1998 and INTERLINK in the second quarter of 1998. The Company's cash flows from
operations historically has not been sufficient to fund these network expansions
and strategic acquisitions resulting in the Company being required to raise
additional capital.
On May 1, 1998, the Company issued $3,000,000 in 8% Convertible
Subordinated Debentures (the "Deere Park Convertible Debentures") maturing three
years from closing (the "First Draw") to Deere Park Capital Management, LLC, an
Illinois limited liability company ("Deere Park"). On May 28, 1998, the Company
issued an additional $1,000,000 of the Deere Park Convertible Debentures (the
"Second Draw"). On June 30, 1998, the Company issued an additional $1,000,000 of
the Deere Park Convertible Debentures (the "Third Draw"). The Deere Park
Convertible Debentures were initially convertible by the holder into shares of
Common Stock at a price equal to $26 per share for the First Draw, $29 per share
for the Second Draw and $26 per share for the Third Draw, until November 1,
1998, and thereafter, at the lesser of (i) $26 per share for the First Draw, $29
per share for the Second Draw and $26 per share for the Third Draw or (ii) a
price equal to the average of the three highest of the five lowest closing
prices of the Common Stock for the 20 trading days preceding the conversion
date. If the Common Stock
27
<PAGE>
trades below $15 per share for the First Draw, $16.66 per shares for the Second
Draw and $15 for the Third Draw for three consecutive trading days, the Company
may redeem all or part of such Deere Park Convertible Debentures at 107% of face
value plus any accrued interest in the event the holder elects to convert. The
Company's obligation to make interest payments on the Deere Park Convertible
Debentures terminates if the price of Common Stock closes for twenty consecutive
trading days at or above $30 per shares for the First Draw, at or above $33.50
per share for the Second draw and at or above $30 per share for the Third Draw,
adjusted, without limitation, for any stock splits or combinations. In
connection with the Deere Park Convertible Debentures, Deere Park also received
warrants to purchase an aggregate of 8,952 shares of Common Stock at an exercise
price of $16.76 per share (subject to adjustment for stock splits and other
share adjustments) for the First Draw, warrants to purchase an aggregate of
2,427 shares of Common Stock at $20.60 per share (subject to adjustment for
stock splits and other share adjustments) for the Second Draw and warrants to
purchase an aggregate of 6,382 shares of Common Stock at $15.67 per share
(subject to adjustment for stock splits and other share adjustments) for the
Third Draw. The warrants have a term of three years from the effectiveness of a
registration statement covering the shares of Common Stock issuable upon the
conversion of such warrants.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Deere Park Convertible Debentures
(the "Deere Park Exit Fee"). The Deere Park Exit Fee varies depending upon the
date of payment, and is equal to (i) 6.6% if the payment is made within 90 days
after the closing of each respective draw, (ii) 7.2% if payment is made after 90
days and up to 180 days after the closing of each respective draw, (iii) 8.8 %
if payment is made after 180 days and up to 270 days after the closing of each
respective draw and (iv) 10.0% if payment is made after 270 days after the
closing of each respective draw. The Deere Park Exit Fee is adjusted on a pro
rata basis to the extent that the prepayment is made between periods except that
a minimum Deere Park Exit Fee of 6.6% is required if the prepayment is made
prior to 90 days after closing.
On May 29, 1998, the Company issued $5,000,000 in 8% Convertible
Debentures (the "Gordon Brothers Convertible Debentures") maturing one year from
closing to Gordon Brothers Capital, LLC a Delaware limited liability company
("Gordon Brothers"). The Gordon Brothers Convertible Debentures are convertible
by Gordon Brothers into shares of Common Stock at a price equal to $29.00 per
share until November 1, 1998, and thereafter, at the lesser of (i) $29.00 per
share or (ii) a price equal to the average of the three highest of the five
lowest closing prices of the Common Stock for the 20 trading days preceding the
conversion date. If the Common Stock trades below $16.66 for three consecutive
trading days, the Company may redeem all or part of such Gordon Brothers
Convertible Debentures at 107% of face value plus any accrued interest in the
event the holder elects to convert. The Company's obligation to make interest
payments on the Gordon Brothers Convertible Debentures terminates (i) in the
event the Common Stock closes, for twenty consecutive trading days, at or above
$33.50 per share, adjusted, without limitation, for any stock splits or
combinations, (ii) when a registration statement covering the share of common
stock that are issuable upon the conversion of the Gordon Brothers Convertible
Debentures is effective and (iii) if there exists no event of default under the
Gordon Brothers Convertible Debentures. The Gordon Brothers Convertible
Debentures are secured by a pledge of theCompany's stock in Telereunion and the
Company's preferred stock in INTERLINK. In addition, the Gordon Brothers
Convertible Debentures are guaranteed by INTERLINK and such guaranty is
collateralized by a security agreement covering all of INTERLINK's assets. In
connection with the Gordon Brothers Convertible Debentures, Gordon Brothers also
received warrants to purchase an aggregate of 12,136 shares of Common Stock at
an exercise price of $15.00 per share. The warrants have a term of three years
from the effectiveness of the registration statement covering the shares of
Common Stock that are issuable upon the conversion of such warrants. The Gordon
Brothers Convertible Debentures are senior secured indebtedness of the Company
to the extent of the assets securing such indebtedness.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Gordon Brothers Convertible
Debentures (the "Gordon Brothers Exit Fee"). The Gordon Brothers Exit Fee varies
depending upon the date of payment, and is equal to (i) 6.5% if the payment is
made within 90 days after May 29, 1998, (ii) 13.0% if payment is made after 90
days and up to 180 days after May 29, 1998, (iii) 19.0% if payment is made after
180 days and up to 270 days after May 29, 1998 and (iv) 25.0% if payment is made
after 270 days and up to 365 days after May 29, 1998. The Gordon Brothers Exit
Fee with respect to any payment made after May 28, 1999 shall be equal to (a)
25.0% plus (b) 25.0% multiplied by the number of days elapsed from May 28, 1999
divided by 365. The Gordon Brothers Exit Fee is adjusted on a pro rata basis to
the extent that a prepayment is made between periods during the first twelve
months except that a minimum Gordon Brothers Exit Fee of 6.5% is required if the
prepayment is made prior to 90 days after closing.
The proceeds from the Deere Park Convertible Debentures and the Gordon
Brothers Convertible Debentures were used to primarily to finance the
acquisition of INTERLINK and the remainder was utilized for capital investments
and general working capital purposes.
28
<PAGE>
On October 26, 1998, the Company entered into agreements with the holders
of the Gordon Brothers Convertible Debentures and the Deere Park Convertible
Debentures to restructure these debentures. Under the terms of the
restructuring, Gordon Brothers agreed to fix the conversion price at $15 per
share for the term of the debenture. In return, the Company agreed to reduce the
strike price on 12,136 warrants issued in connection with the original funding
from $20.60 to $15 per share. Deere Park agreed to fix the conversion price at
$15 per share until May 1, 1999. Beyond this date, the conversion price will
revert to a "floating" price for the term of the debentures unless it is further
restructured. In return, the Company agreed to issue an additional 8,000
warrants to Deere Park at an exercise price of $8.50. In addition, the Company
repaid $1,000,000 of the Deere Park Convertible Debentures at 107% plus accrued
interest.
On March 12, 1998, the Company entered into a revolving credit facility
with a commercial bank ("Revolving Credit Facility"), which provided for
borrowings up to $1.3 million subject to adequate levels of eligible accounts
receivable. Borrowings accrue interest at floating rates of prime plus 1%. On
May 19, 1998, the Company renegotiated the terms of the Revolving Credit
Facility to provide for borrowings of up to $2.5 million and extended the terms
of the facility to June 30, 1999. As of March 15, 1999, the Company had drawn
$1.4 million on this facility.
Telscape USA, Inc. and MSN have obtained a waiver under the Revolving
Credit Facility to waive the defaults under the minimum current ratio, minimum
tangible net worth and prohibition on quarterly loss covenants.
In June 1998, the Company financed the purchase of $1.4 million of
equipment by entering into an equipment lease arrangement with a financing
company, which provides for monthly lease payments of $27,500, including
principal and interest, through May 31, 2003. The lease obligation is secured by
the financed equipment.
On July 6, 1998, the Company financed the purchase of $972,000 of
equipment by entering into two equipment lease arrangements with a financing
company, which provide for monthly lease payments of $22,100, including
principal and interest through July 6, 2003. The lease obligations are secured
by the financed equipment.
On July 4, 1998, the Company financed the purchase of $243,000 of
equipment by entering into an equipment lease arrangement with a financing
company, which provides for monthly lease payments of $6,600 including principal
and interest through July 14, 2002. The lease obligation is secured by the
financed equipment.
In 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 quarter 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 dollars through December 31, 1999. The financing is structured as loans
maturing four years from funding at interest rates 500 basis points above the 5
year Federal Reserve Treasury Constant Maturity Rate. The Company has not drawn
any fundings under this facility.
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.
The Company has selected Lucent to engineer, furnish and install the
Mexican Network. In addition, the Company received a commitment from Lucent to
provide the Company with up to $40 million of long term financing, which
includes $34 million towards the purchase of Lucent products and services
(including construction of the Mexican Network) and $6 million for repayment of
the Company's current obligations.
The Company's debt at December 31, 1998 totaled $13.1 million resulting in
a debt to capital ratio of 38% as compared to $3.2 million and 14%,
respectively, as of December 31, 1997. The new commitment from Lucent will
result in long term financing arrangements, which will significantly increase
the Company's already highly
29
<PAGE>
leveraged capital structure. The Company will need to continue to generate
substantial cash flow from operations to satisfy its principal and interest
obligations under these financing arrangements. If the Company does not generate
the cash flow from operations to meet its principal and interest obligations
under these financing arrangements, then the Company's business and results of
operations could be materially adversely affected.
The Company estimates that there are an additional $4.5 million in
expenditures related to the Mexican Network which will not be funded through the
Lucent Facility and are expected to be funded over the course of the
installation of the Mexican Network. The Company also anticipates an additional
$11.5 million in capital expenditures to expand its network facilities during
the fiscal 1999 year. In addition, the Gordon Brothers Convertible Debentures
mature on May 29, 1999, requiring a payment of $5.0 million in principal and
approximately $1.25 million in exit fees. The Lucent Facility provides for
funding of up to $6 million for repayment of debt obligations. The Company will
incur commissions, commitment fees and other costs in connection with this
facility. The Company does not expect that cash flow from operations will be
sufficient to meet these capital expenditure and debt repayment requirements
when they are due.
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 cash flow from operations,
vendor financing and the sale of debt or equity securities (or a combination of
both). There can be no assurance that the cash generated from operations will be
sufficient to fund such expenditures or that the Company will be able to obtain
additional financing on commercially reasonable terms, if at all. If necessary
funds are not available, the Company's business and results of operations and
the future expansion of its business could be materially adversely affected.
FOREIGN CURRENCY RISK
The general economic conditions of Mexico are greatly affected by the
fluctuations in exchange rates and inflation. The Company's foreign currency
risk is mitigated in Mexico due to the fact that many of the Company's customers
are multinational firms that pay in United States dollars. In addition, most of
the Company's customers that 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 United
States dollar because the majority of its transactions are in such currency.
However, from time to time the Company transacts in local currency and thus
faces foreign currency risk with respect to these transactions. United
States-originated calls will be paid in United States dollars; however, the
Company also expects to derive a certain portion of its revenues from calls
originated outside of the United States, thus exposing the Company to additional
exchange rate risk. The Company may choose to limit its exposure to foreign
currency risk through the purchase of forward foreign exchange contracts or
similar hedging strategies. There can be no assurance that any foreign currency
hedging strategy would be successful in avoiding exchange-related losses.
The Company does not currently hedge against the risk of foreign exchange
rate fluctuations. See further discussion in Item 7A - Quantitative and
Qualitative Disclosures about Market Risk - Foreign Currency Exchange Risk.
YEAR 2000 COMPLIANCE
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
Telscape 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
Telscape's business, financial position and results of operation as a result of
the century change. Telscape has empowered a "Y2K Committee" to manage the Year
2000 Readiness Program. The Y2K Committee shall also review the Year 2000
compliance efforts of Telscape's key vendors and customers and shall regularly
report to and be controlled by the Board of Directors.
30
<PAGE>
Each of the information technology software programs that Telscape
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
September 1, 1999. Telscape 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 Telscape's non-information technology systems, its
telecommunications switches, however, may not currently be Year 2000 compliant.
The respective vendors of Telscape'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 Telscape 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 Telscape's switches. Telscape does not
believe that its other non-information technology systems will be affected by
the Year 2000, but will not know definitively until Telscape tests and evaluates
such equipment during the first half of 1999. The Company believes that all Year
2000 compliance initial testing and any necessary conversions will be completed
by July 1999.
Telscape'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. Telscape 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 part of its Year 2000
Readiness Program, Telscape intends to contact its key vendors and customers to
ascertain whether the systems used by such third parties are Year 2000
compliant.
COSTS
Telscape has not incurred any costs to date to reprogram, replace and test
its Systems for Year 2000 compliance. Telscape believes that the costs
associated with its Year 2000 compliance efforts will be incurred during 1999.
Telscape is still estimating the costs of the efforts but doesn't expect that
these costs will be significant over the life of the project; 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. Costs incurred in connection with Telscape'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 principals.
Telscape currently anticipates that its Systems will be Year 2000
compliant before January 1, 2000, though no assurances can be given that
Telscape's compliance testing will not detect unanticipated Year 2000 compliance
problems that prevent such Year 2000 compliance. Furthermore, a system failure
by any of Telscape's significant customers or vendors could have a material
adverse effect on Telscape's operations. Because Telscape 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 Telscape of third party system failures.
RISKS
Telscape 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 Telscape 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 Telscape'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.
31
<PAGE>
CONTINGENCY PLAN
At this time, Telscape does not have a contingency plan. Telscape 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. This plan is expected to
be completed by September 1, 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, 1999.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to have a material effect
on its financial statements.
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 Company believes that the adoption of SOP
98-5 will 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to financial market risks, including interest rate
risk and foreign currency exchange risk.
INTEREST RATE RISK
As of December 31, 1998, the Company's debt obligations were mainly fixed
or non-interest bearing. All of the Company's debt obligations are denominated
in U.S. dollars. The Company's variable rate debt are as follows:
The Company has a Revolving Credit Facility with a commercial bank which
allows for borrowings up to $2,500,000 and bears interest at prime plus 1%.
Borrowings outstanding under this revolving credit facility as of December 31,
1998 were $1,688,000.
The Company had signed a equipment financing arrangement with a financing
company which provides for borrowings up to $6,000,000 through May, 1999. The
financing provides for interest at 550 basis points above the Federal Reserve
Treasury Constant Maturity Rate at the date of each funding. There were no
advances as of December 31, 1998. The Company has drawn approximately $2.0
million in the first quarter of 1999 under this facility.
In addition, the Company had signed a equipment financing arrangement with
a financing company which provides for borrowings up to $7,000,000 through
December, 1999. The financing provides for interest at 450 basis points above
the Federal Reserve Treasury Constant Maturity Rate at the date of each funding.
There were no advances as of December 31, 1998.
The table set forth below summarizes the fair values and payment terms of
financial instruments subject to interest rate risk maintained by us as of
December 31, 1998.
32
<PAGE>
<TABLE>
<CAPTION>
FAIR VALUE AT
DEBT ..... 1999 2000 2001 2002 2003 TOTAL 12/31/98
- - ------------------ --------- ------- --------- ------ ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Interest
Bearing or Fixed
Rate ............. 151,000 107,000 65,000 38,000 10,000 371,000 371,000
Wtd. Avg. Interest
Rate ............. 8.00% 9.00% 12.00% 11.00% 9.00% 9.00% --
Variable ......... 1,688,000 -- -- -- -- 1,688,000 1,688,000
Wtd. Avg. Interest
Rate ............. 8.75% -- -- -- -- 8.75% --
Convertible
Notes ............ 4,996,000 -- 3,935,000 -- -- 8,931,000 8,931,000
Wtd. Avg. Interest
Rate ............. 8.00% -- 8.00% -- -- 8.00% --
--------- ------- --------- ------ ------ ---------- ----------
Total ............ 6,835,000 107,000 4,000,000 38,000 10,000 10,990,000 10,990,000
========= ======= ========= ====== ====== ========== ==========
</TABLE>
Due to the short term nature of this obligation, the Company utilized the
interest rate payable for this obligation for the month of March to estimate the
interest rate payable at maturity.
As the Company does not have a significant amount of variable interest rate
obligations, it has not entered into derivative transactions to hedge their
risk.
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 value-added 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 which are collected in pesos and costs which are paid in pesos.
In the satellite teleport services business segment, the Company generally
collects its revenues 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 which 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. As a consequence, the Company's policy has been to no hedge 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.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements:
PAGE
Report of Independent Certified Public Accountants 35
Consolidated Balance Sheets - As of December 31, 1997 and 1998 36
Consolidated Statements of Operations - For the years ended
December 31, 1996, 1997 and 1998 37
Consolidated Statements of Stockholders' Equity - For the years ended
December 31, 1996, 1997 and 1998 38
Consolidated Statements of Cash Flows - For the years ended
December 31, 1996, 1997 and 1998 39
Notes to Consolidated Financial Statements 41
34
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Telscape International, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Telscape
International, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the three year period ended December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telscape
International, Inc. and subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the three year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
BDO SEIDMAN, LLP
Houston, Texas
February 22, 1999
35
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................................................... $ 4,734,000 $ 9,631,000
Accounts receivable, less allowance for doubtful accounts of
$200,000 and $275,000, respectively ........................................................ 6,276,000 14,387,000
Inventories .................................................................................. 4,305,000 4,581,000
Prepaid expenses and other ................................................................... 2,674,000 3,519,000
Deferred income taxes ........................................................................ 517,000 628,000
------------ ------------
Total current assets ..................................................................... 18,506,000 32,746,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation ........................................ 2,679,000 14,576,000
GOODWILL AND OTHER INTANGIBLES, net of accumulated amortization ................................ 17,674,000 31,416,000
OTHER ASSETS ................................................................................... 776,000 1,593,000
------------ ------------
============ ============
Total assets ..................................................................... $ 39,635,000 $ 80,331,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................................. $ 10,756,000 $ 22,090,000
Accrued expenses ............................................................................. 3,303,000 10,182,000
Current portion of notes payable and capital lease obligations ............................... 508,000 2,714,000
Convertible debentures ....................................................................... -- 4,996,000
Deferred income taxes ........................................................................ 270,000 --
------------ ------------
Total current liabilities ................................................................ 14,837,000 39,982,000
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of current portion ............................ 2,676,000 1,488,000
CONVERTIBLE SUBORDINATED DEBENTURES ............................................................ -- 3,935,000
MINORITY INTERESTS ............................................................................. 34,000 --
COMMITMENTS AND CONTINGENCIES .................................................................. -- --
SERIES B NON-VOTING PREFERRED STOCK, $.001 par value, 380,000 and 0 shares, respectively, authorized
issued and outstanding, mandatorily redeemed as certain performance measures were achieved .... -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares authorized; without defined
preference rights ............................................................................ -- --
Series A preferred stock, $.001 par value, 1,000,000 shares authorized ....................... -- --
Common stock, $.001 par value, 25,000,000 shares authorized;
4,104,027 and 6,048,909 issued, respectively ................................................ 4,000 6,000
Additional paid-in capital ................................................................... 25,232,000 39,398,000
Accumulated deficit .......................................................................... (2,851,000) (3,881,000)
Treasury stock ............................................................................... (297,000) (480,000)
Capital subscriptions receivable ............................................................. -- (117,000)
------------ ------------
Total stockholders' equity ....................................................... 22,088,000 34,926,000
------------ ------------
Total liabilities and stockholders' equity ....................................... $ 39,635,000 $ 80,331,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
36
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
----------- ------------ -------------
<S> <C> <C> <C>
REVENUES .......................................................... $ 5,705,000 $ 36,154,000 $ 132,179,000
COST OF REVENUES .................................................. 3,041,000 24,396,000 111,892,000
----------- ------------ -------------
GROSS PROFIT ...................................................... 2,664,000 11,758,000 20,287,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...................... 4,159,000 8,154,000 13,774,000
DEPRECIATION AND AMORTIZATION ..................................... 264,000 622,000 3,316,000
----------- ------------ -------------
OPERATING INCOME (LOSS) BEFORE IMPAIRMENT LOSS .................... (1,759,000) 2,982,000 3,197,000
IMPAIRMENT LOSS ON LONG-LIVED ASSETS .............................. -- -- (1,026,000)
----------- ------------ -------------
OPERATING INCOME (LOSS) ........................................... (1,759,000) 2,982,000 2,171,000
OTHER INCOME (EXPENSE):
Interest income ................................................. 143,000 171,000 195,000
Interest expense ................................................ (128,000) (266,000) (1,796,000)
Foreign exchange gain (loss) .................................... 161,000 (126,000) (639,000)
Other, net ...................................................... (62,000) (11,000) (173,000)
----------- ------------ -------------
Total other income (expense), net ..................... 114,000 (232,000) (2,413,000)
----------- ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS ......... (1,645,000) 2,750,000 (242,000)
INCOME TAX BENEFIT (EXPENSE) ...................................... 53,000 (84,000) (822,000)
----------- ------------ -------------
INCOME (LOSS) BEFORE MINORITY INTERESTS .......................... (1,592,000) 2,666,000 (1,064,000)
MINORITY INTERESTS IN SUBSIDIARIES ................................ (6,000) 6,000 34,000
=========== ============ =============
NET INCOME (LOSS) ................................................. $(1,598,000) $ 2,672,000 $ (1,030,000)
=========== ============ =============
EARNINGS (LOSS) PER SHARE:
Basic ............................................................ $ (0.52) $ 0.68 $ (0.20)
Diluted (1) ...................................................... $ N/A $ 0.53 $ N/A
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ............................................................ 3,046,594 3,903,470 5,052,096
Diluted (1) ...................................................... N/A 5,152,211 N/A
</TABLE>
(1) Inclusion of additional shares under a diluted analysis is
inappropriate due to the anti-dilutive effect
The accompanying notes are an integral part of these
financial statements.
37
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL
------------------ ADDITIONAL SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT PAID-IN-CAPITAL RECEIVABLE DEFICIT
--------- ------ ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 ...................... 1,890,442 $2,000 $ 8,113,000 $(600,000) $(3,925,000)
Issuance of stock in acquisition of subsidiary . 1,605,000 1,000 2,856,000 -- --
Issuance of stock in connection with merger ..... 400,000 1,000 525,000 -- --
Issuance of stock in connection with stock
options exercised ............................ 40,527 -- 38,000 -- --
Compensation related to warrants granted ........ -- -- 352,000 -- --
Net loss ........................................ -- -- -- -- (1,598,000)
--------- ------ ----------- --------- -----------
Balance, December 31, 1996 ...................... 3,935,969 4,000 11,884,000 (600,000) (5,523,000)
Issuance of stock in connection with warrants
and options exercised ........................ 148,058 -- 1,004,000 -- --
Compensation related to common stock and
warrants granted ............................. 20,000 -- 188,000 -- --
Repurchase of treasury shares ................... -- -- -- -- --
Release of stock in escrow ...................... -- -- -- 600,000 --
Additional consideration recognized upon
vesting of warrants .......................... -- -- 12,156,000 -- --
Net income ...................................... -- -- -- -- 2,672,000
--------- ------ ----------- --------- -----------
Balance, December 31, 1997 ...................... 4,104,027 4,000 25,232,000 -- (2,851,000)
Issuance of stock in connection with warrants
and options exercised ........................ 1,242,151 2,000 5,052,000 -- --
Issuance of stock and warrants in connection
with acquisition ............................. 100,000 -- 980,000 -- --
Issuance of stock in connection with debt
conversion ................................... 333,000 -- 888,000 -- --
Additional consideration recognized upon
vesting of warrants ......................... -- -- 5,479,000 -- --
Issuance of warrants with convertible debt
placement .................................... -- -- 479,000 -- --
Sale of common stock ............................ 269,731 -- 1,288,000 (117,000) --
Repurchase of treasury shares ................... -- -- -- -- --
Net loss ........................................ -- -- -- -- (1,030,000)
--------- ------ ----------- --------- -----------
Balance, December 31, 1998 ...................... 6,048,909 $6,000 $39,398,000 $(117,000) $(3,881,000)
========= ====== =========== ========= ===========
<CAPTION>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
--------- ------------
Balance, December 31, 1995 ...................... -- $ 3,590,000
Issuance of stock in acquisition of subsidiary . -- 2,857,000
Issuance of stock in connection with merger ..... -- 526,000
Issuance of stock in connection with stock
options exercised ............................ -- 38,000
Compensation related to warrants granted ........ -- 352,000
Net loss ........................................ -- (1,598,000)
--------- ------------
Balance, December 31, 1996 ...................... -- 5,765,000
Issuance of stock in connection with warrants
and options exercised ........................ -- 1,004,000
Compensation related to common stock and
warrants granted ............................. -- 188,000
Repurchase of treasury shares ................... (297,000) (297,000)
Release of stock in escrow ...................... -- 600,000
Additional consideration recognized upon
vesting of warrants .......................... -- 12,156,000
Net income ...................................... -- 2,672,000
--------- ------------
Balance, December 31, 1997 ...................... (297,000) 22,088,000
Issuance of stock in connection with warrants
and options exercised ........................ -- 5,054,000
Issuance of stock and warrants in connection
with acquisition ............................. -- 980,000
Issuance of stock in connection with debt
conversion ................................... -- 888,000
Additional consideration recognized upon
vesting of warrants ......................... -- 5,479,000
Issuance of warrants with convertible debt
placement .................................... -- 479,000
Sale of common stock ............................ 107,000 1,278,000
Repurchase of treasury shares ................... (290,000) (290,000)
Net loss ........................................ -- (1,030,000)
--------- ------------
Balance, December 31, 1998 ...................... $(480,000) $ 34,926,000
========= ============
</TABLE>
The accompanying notes are integral part of these financial statements.
38
<PAGE>
40
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................................... $(1,598,000) $ 2,672,000 $ (1,030,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts ....................................... 9,000 277,000 560,000
Depreciation and amortization ......................................... 264,000 622,000 3,316,000
Write-off of investment in operating venture .......................... -- 196,000 --
Deferred income tax benefit ........................................... (112,000) (1,566,000) (339,000)
Impairment loss on long-lived assets .................................. -- -- 1,026,000
Interest accrued on non-interest bearing notes and amortization of debt
offering costs .................................................... -- 136,000 270,000
Minority interest in subsidiaries' income (loss) ...................... 6,000 (6,000) (34,000)
Equity in income from unconsolidated subsidiary ....................... -- -- 198,000
Decrease in minority interests for credits utilized ................... 53,000 -- --
Changes in assets and liabilities:
Accounts receivable ................................................. (952,000) (1,623,000) (6,404,000)
Inventories ......................................................... (665,000) (2,306,000) 515,000
Prepaid and other assets ............................................ 27,000 (2,634,000) (1,345,000)
Accounts payable .................................................... (124,000) 6,954,000 6,296,000
Accrued liabilities ................................................. 361,000 1,866,000 3,582,000
----------- ----------- ------------
Net cash provided by (used in) operating activities ..................... (2,731,000) 4,588,000 6,611,000
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments .................................... (4,899,000) -- --
Redemption of short-term investments .................................. 8,378,000 -- --
Purchases of property and equipment ................................... (441,000) (1,682,000) (6,159,000)
Acquisition of Telereunion, net of cash acquired ...................... (353,000) -- --
Acquisition of Integracion, net of cash acquired ...................... -- 117,000 --
Mandatory redemption of preferred stock ............................... -- -- (380,000)
Acquisition of N.S.I., net of cash acquired ........................... -- (49,000) --
Acquisition of MSN, net of cash acquired .............................. -- -- (2,353,000)
Acquisition of INTERLINK, net of cash acquired ........................ -- -- (8,805,000)
Investment in BCH Holdings ............................................ -- (185,000) --
Investment in joint venture ........................................... (196,000) -- --
----------- ----------- ------------
Net cash provided by (used in) investing activities ..................... 2,489,000 (1,799,000) (17,697,000)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations ................................. -- (104,000) (66,000)
Payments on notes payable ............................................. -- (50,000) (681,000)
Proceeds from capital subscriptions ................................... -- 600,000 --
Purchase of treasury shares ........................................... -- -- (290,000)
Issuance of common stock .............................................. 564,000 -- --
Borrowings on line of credit .......................................... -- -- 1,948,000
Payments on line of credit ............................................ -- -- (260,000)
Proceeds from warrants and options exercised .......................... -- 1,004,000 5,054,000
Proceeds from issuance of convertible debts ........................... -- -- 10,000,000
Payments on convertible debts ......................................... -- -- (1,000,000)
Proceeds from sale of common stock .................................... -- -- 1,278,000
----------- ----------- ------------
Net cash provided by financing activities ............................... 564,000 1,450,000 15,983,000
----------- ----------- ------------
Net increase in cash and cash equivalents ............................... 322,000 4,239,000 4,897,000
----------- ----------- ------------
Cash and cash equivalents at beginning of period ........................ 173,000 495,000 4,734,000
----------- ----------- ------------
Cash and cash equivalents at end of period .............................. $ 495,000 $ 4,734,000 $ 9,631,000
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1997 1998
----------- ------------ ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid .................................................................. $ 176,000 $ 121,000 $ 855,000
Income taxes paid .............................................................. 80,000 505,000 1,657,000
NON-CASH TRANSACTIONS:
Property and equipment acquired by execution of capital lease obligation ......... -- 329,000 45,000
Issuance of common stock, warrants and promissory notes in connection with
acquisition of MSN:
Promissory notes ........................................................... -- -- 672,000
Common stock and warrants .................................................. -- -- 980,000
Issuance of notes and acquisition of treasury shares in litigation
settlement :
Litigation settlement ..................................................... -- (3,000) --
Treasury stock ............................................................ -- (297,000) --
Notes payable ............................................................. -- 300,000 --
Issuance common stock in exchange for shares of common stock in connection
with reverse triangle merger:
Excess of cost over net assets acquired ................................... 2,857,000 -- --
Common stock .............................................................. (2,000) -- --
Additional paid-in capital ................................................ (2,855,000) -- --
Issuance of common stock and warrants in exchange for services provided in
connection with severance agreement .............................................. 352,000 188,000 --
Issuance of promissory notes in connection with the acquisition of Integracion ... -- 2,555,000 --
Reduction of subsidiary stock subscription receivable in exchange for credits on
equipment ........................................................................ 53,000 -- --
Additional contingent consideration recorded:
2,175,000 in 1997 and 500,000 in 1998 warrants issued in connection with
Telereunion and Integracion acquisitions vesting upon achievement of
certain operating performance
measures ......................................................................... -- 12,156,000 5,479,000
Accrual of redemption of 380,000 shares of Series B preferred stock to be redeemed based
upon achievement of certain operating performance measures ....................... -- 380,000 --
Issuance of warrants in connection with issuance of convertible debentures ....... -- -- 479,000
Issuance of common stock in connection with conversion of notes .................. -- -- 888,000
Equipment purchases during 1998 which are to be financed through long term loans
or lease finance arrangements in 1999 ............................................ -- -- 3,500,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE>
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Telscape International, Inc. (collectively with its subsidiaries, the
"Company") is an emerging, fully-integrated telecommunications company. The
Company supplies U.S.-originated international long distance services on a
wholesale and retail basis, via switched and dedicated networks, with an
emphasis on Latin America. In addition, the Company provides a full range of
value-added services and systems integration services in Mexico to major public
and private sector customers.
Through its Telscape USA, Inc. ("Telscape USA") and TSCP International
subsidiaries, the Company is a facilities-based long distance telecommunications
services company providing international long distance services for calls
originating in the United States and terminating in other countries, primarily
in Latin America. Through its newly-acquired subsidiary, MSN Communications,
Inc. ("MSN"), the Company is engaged in the distribution and sale of prepaid
phone cards across the United States, targeted mainly at the Hispanic community.
Through its Mexican subsidiaries, Vextro de Mexico, S.A. de C.V.
("Vextro"), Integracion de Redes, S.A. de C.V. ("Integracion") and N.S.I. de
S.A. de C.V. ("N.S.I."), the Company is engaged in the distribution and sale of
voice, data and networking equipment and provides value-added services in
network integration. Each of these Mexican entities is owned principally by
Telereunion, Inc. ("Telereunion"), a wholly-owned subsidiary of the Company.
Through its newly-acquired subsidiary, INTERLINK Communications, Inc.
("INTERLINK"), the Company provides satellite teleport services including voice,
video and data transport services to customers in the U.S., Latin American and
other parts of the world.
In June 1998, Telereunion S.A. de C.V. ("Telereunion S.A."), an affiliate
of the Company, received a 30-year, facilities-based carrier license from the
Mexican government allowing it to construct and operate a network over which the
Company plans to carry long distance traffic in Mexico (the "Mexican
Concession"). The Company owns approximately 65% of the economic interests and
49% of the voting interests of Telereunion S.A. In addition, three directors of
the Company own an additional 18% of the voting interests and 2% of the economic
interests of Telereunion S.A., resulting in the Company and such directors
together controlling 67% of the economic interests and voting interests of
Telereunion S.A. Under Mexican law, foreign investors may own more than a
majority of the economic interests in a concessionaire but may not own more than
49% of the voting ownership of any concessionaire. The Company did not have
significant operations from Telereunion, S.A. in 1998.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
all wholly and majority owned subsidiaries, as well as entities over which it
exercises voting control. The Company records minority interests expense, which
represents the portion of majority owned subsidiaries attributable to minority
owners. Investments in affiliates in which the Company owns a 20% to 50%
ownership interest, and in which the Company exercises significant influence
over operating and financial policies, are accounted for by the equity method.
Investments of less than 20% ownership are recorded at cost, which does not
exceed the estimated net realizable value of such investments. All significant
intercompany transactions and balances have been eliminated in consolidation.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The accompanying financial statements are prepared in conformity with
generally accepted accounting principles which requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The Company reviews all significant
41
<PAGE>
estimates affecting the financial statements on a recurring basis and records
the effect of any necessary adjustments prior to their issuance. The actual
results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue from long distance telecommunications
services at the time of customer usage. Revenue from sales of equipment are
recognized at time of shipment. Revenue from data and network integration
value-added services are recognized when services are performed. In certain
cases, the Company had entered into arrangements with third parties whereby
these parties provide long distance telecommunication services for prepaid phone
cards sold at a fixed cost. As the earnings process is complete at time of
shipment under those arrangements, the Company recognized revenues (and cost of
revenues) from the sale of cards at the time of shipment of its cards. The
Company discontinued these types of arrangements in the second quarter of 1998.
In other cases, the Company has entered into arrangements with third parties
whereby these parties provide certain of the long distance telecommunications
services for prepaid phone cards and bills the Company for these services as the
cards are utilized. As the earnings process is complete when the cards are
utilized under these arrangements, the Company defers revenues at time of
shipment and recognizes revenues (and cost of revenues) from the sale of cards
at the time the cards are utilized and the costs measured. Under both
arrangements, there are no rights of return once cards are sold.
RECEIVABLES
The Company maintains an allowance for doubtful accounts based on the
expected collectibility of all consolidated trade accounts receivable. The
allowance for doubtful accounts as of December 31, 1997 and December 31, 1998
was $200,000 and $275,000, respectively. The Company historically has not had
significant writeoffs of receivables with the exception of 1998 when it wrote
off $541,000 in receivables from a customer which filed for bankruptcy.
CASH AND CASH EQUIVALENTS
The Company considers cash in banks and short-term investments with
original maturities of three months or less as cash and cash equivalents.
FINANCIAL INSTRUMENTS
The Company assesses and discloses the fair value of its financial
instruments; however, this information does not represent the aggregate net fair
value of the Company. Some of the information used to determine fair value is
subjective and judgmental in nature; therefore, fair value estimates, especially
for less marketable securities may vary. The amounts actually realized or paid
upon settlement or maturity could be significantly different.
Unless quoted market price indicates otherwise, the fair values of cash
and cash equivalents, short-term investments, escrowed deposits and investments
(certificates of deposit) generally approximate market value because of the
short maturity of these instruments. The Company's notes payable and capital
lease obligations also approximate market value as the underlying borrowing
rates are similar to other financial instruments with similar maturities and
terms.
INVENTORIES
Inventories consist principally of telecommunications equipment acquired
from manufacturers for distribution and are stated at the lower of cost
(first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of major renewals and
betterments is capitalized; repairs and maintenance costs are expensed when
incurred. Upon retirement or sale, the cost of the assets disposed of and the
related accumulated depreciation are removed from the accounts, with any
resultant gain or loss being reflected in the Consolidated Statement of
Operations. In 1998, the Company recognized an impairment loss of $1.0 million
as it determined that the carrying value of certain equipment and long-lived
assets deployed under certain operating arrangements in Latin America were
impaired. Depreciation of property and equipment for financial reporting
purposes is computed using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements and capital leases are amortized
over the lesser of the life of the lease or the useful life of the asset.
42
<PAGE>
For income tax purposes, accelerated methods of depreciation are used. The
following is a summary of the Company's property and equipment and their
estimated useful lives:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, ESTIMATED
----------------------------- USEFUL LIVES
1997 1998 (YEARS)
------------ ------------ ---------------
<S> <C> <C> <C>
Computer equipment and software ...............$ 569,000 $ 2,419,000 3
Telecommunications equipment .................. 1,184,000 9,918,000 5-10
Furniture and Fixtures ........................ 380,000 932,000 5-10
Leasehold improvements ........................ 230,000 1,085,000 3-20
Transportation equipment ...................... 295,000 371,000 4
Teleport equipment ............................ -- 3,947,000 5-15
Call center equipment ......................... 705,000 47,000 3
------------ ------------
Subtotal property and equipment .........$ 3,363,000 $ 18,719,000
Less, accumulated depreciation ................ (684,000) (4,143,000)
============ ============
$ 2,679,000 $ 14,576,000
============ ============
<CAPTION>
GOODWILL AND INTANGIBLES
The major classes of intangible assets are summarized below:
As of December 31, Amortization
---------------------------- Period
1997 1998 (Years)
------------ ------------ -----------
Goodwill ................................. $ 18,037,000 $ 33,760,000 15
Organization costs ....................... 73,000 73,000 5
Less, accumulated amortization ........... (436,000) (2,417,000)
=========== ==============
$17,674,000 $ 31,416,000
</TABLE>
Intangible assets are amortized using the straight-line method for periods
noted above.
Goodwill is recognized for the excess of the purchase price of the various
business combinations over the estimated fair value of the identifiable net
tangible and intangible assets acquired. In connection with certain of the
Company's acquisitions, the Company issued performance-based warrants. The
Company records such contingent consideration at the time the contingency is
resolved and the consideration becomes issuable or when the outcome of the
contingency is determinable beyond a reasonable doubt. During the year ended
December 31, 1997, 2,095,000 warrants, issued in connection with the Telereunion
acquisition, vested as a result of certain operating performance measures being
achieved. In addition, 380,000 shares of preferred stock were mandatorily
redeemable at December 31, 1997 at $1.00 per share based upon the Company
meeting certain operating performance measures. The preferred shares were
redeemed in the first quarter of 1998. As a result, the Company recorded
$12,114,000 in additional consideration in connection with the Telereunion
acquisition during 1997. During the year ended December 31, 1998, the remaining
500,000 warrants issued in connection with the Telereunion acquisition vested
resulting in the Company recording $5,479,000 in additional consideration with
this acquisition. During the year ended December 31, 1997, 80,000 warrants,
issued in connection with the Integracion acquisition, vested as a result of
certain operating performance measures being achieved. As a result, the Company
recorded $422,000 in additional consideration in connection with the Integracion
acquisition. See Note 2 for further discussion regarding the Company's
acquisitions. Realization of long-lived assets, including goodwill, is
periodically assessed by the management of the Company. Accordingly, in the
event that facts and circumstances indicate that property and equipment, and
intangible or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if a write-down to market value is necessary. In
management's opinion, there is no impairment of such assets at December 31,
1998.
WARRANTY RESERVES
The Company generally provides its systems integration customers a
warranty on each sale of equipment and related products and accrues warranty
expense at the time of sale based upon actual claims history. Actual warranty
costs incurred are charged against such accrual when paid.
43
<PAGE>
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Prepaid expenses and other current assets include the following:
AS OF DECEMBER 31,
-----------------------
1997 1998
---------- ----------
Value-added taxes receivable ....... $1,749,000 $1,748,000
Deposits ........................... 448,000 322,000
Prepaid insurance and other expenses 197,000 963,000
Other .............................. 280,000 486,000
========== ==========
$2,674,000 $3,519,000
========== ==========
ACCRUED EXPENSES:
Accrued expenses include the following:
AS OF DECEMBER 31,
-----------------------------
1997 1998
----------- -----------
Customer prepayments ....................... $ 799,000 $ 1,369,000
Deferred Revenues .......................... -- 5,497,000
Accrued carrier costs ...................... 560,000 --
Accrued wages .............................. 579,000 1,041,000
Taxes payable .............................. 509,000 745,000
Preferred stock redemption payable ......... 380,000 --
Other ...................................... 476,000 1,530,000
=========== ===========
$ 3,303,000 $10,182,000
=========== ===========
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The Company has determined that the U.S. dollar is the functional currency
for its operations outside the U.S. As such, gains and losses resulting from the
translation of financial statements of such operations are included in the
Consolidated Statements of Operations. The Company recognized a foreign exchange
gain (loss) of $161,000, ($126,000) and ($639,000) for the years ended December
31, 1996, 1997 and 1998, respectively.
INCOME TAXES
Income taxes are calculated using the liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when
differences are expected to reverse. A valuation allowance is used to reduce
deferred tax assets to the amount that is more likely than not to be realized.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated as follows:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998
----------- ---------- -----------
Basic
Net income (loss) as reported ....... $(1,598,000) $2,672,000 $(1,030,000)
Weighted average common shares
Outstanding .................. 3,046,594 3,903,470 5,052,096
Basic earnings (loss) per share ..... $ (0.52) $ 0.68 $ (0.20)
(TABLE CONTINUED ON FOLLOWING PAGE)
44
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1997 1998
----------- ---------- -----------
<S> <C> <C> <C>
Diluted
Net income (loss) as reported ............................ $(1,598,000) $2,672,000 $(1,030,000)
Interest expense on convertible debt ..................... -- 42,000 --
----------- ---------- -----------
Net income (loss) applicable to common stockholders ...... $(1,598,000) $2,714,000 $(1,030,000)
Weighted average common shares
Outstanding ........................................ 3,046,594 3,903,470 5,052,096
Options .................................................. 74,775 430,969 891,211
Warrants ................................................. 39,867 651,272 1,945,848
Convertible debt ......................................... -- 166,500 --
----------- ---------- -----------
Total weighted average dilutive potential common shares
outstanding ........................................ 114,642 1,248,741 2,837,059
Weighted average common and dilutive potential common
shares outstanding ................................. 3,161,236 5,152,211 7,889,155
Diluted net income (loss) per share ...................... $ (0.51) $ 0.53 $ (0.13)
</TABLE>
Diluted EPS for the years ended December 31, 1996 and 1998, was not
disclosed on the Consolidated Statement of Operations as the effect is
anti-dilutive. Certain performance based warrants vested at December 31, 1997
and during the year ended December 31, 1998 upon the achievement of certain
operating performance measures (See Note 2). These contingently issuable shares
were included in the calculation of diluted EPS when all the necessary
conditions were met. If all the necessary conditions have not been satisfied by
the end of the period, the number of contingently issuable shares that would
have been issued if the reporting period was the end of the contingency period
are included in the calculation as if those shares were issued at the beginning
of that period. For year to date calculations, contingent shares are weighted
for the interim periods in which they are included in the computation of diluted
EPS. Accordingly, 1,000,000 warrants were included in the calculation of diluted
EPS for the year ended December 31, 1997 as if those shares were issued on July
1, 1997 and 1,175,000 warrants were included as if those shares were issued on
October 1, 1997. In addition, 500,000 warrants are included in the calculation
of diluted EPS for the year ended December 31, 1998 as if those shares were
issued July 1, 1998. At December 31, 1996, 1997 and 1998, there were 2,695,000,
500,000 and 0 performance based warrants, respectively, which had not vested
which were not included in the calculation of diluted EPS. Additionally,
525,000, 666,270 and 95,619 options and warrants outstanding at December 31,
1996, 1997 and 1998, respectively, were not included in the calculation of
diluted EPS as their exercise prices were greater than the average market price
of the Company's Common Stock during the period and inclusion of these
securities in the calculation would result in an anti-dilutive effect.
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
requires companies to recognize all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income in
the period of change. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Historically, the Company has not
entered into derivatives contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption of the
new standard to have a material effect on its financial statements.
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 Company believes that the adoption of SOP
98-5 will 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
45
<PAGE>
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.
2. MERGERS AND ACQUISITIONS
TELEREUNION ACQUISITION
On May 17, 1996, the Company acquired all of the outstanding common stock
of Telereunion, which had previously acquired a 97% ownership of Vextro in a
triangular reverse acquisition, accounted for as a purchase. Vextro is engaged
in the distribution and sale of voice, data and networking equipment and
provides value-added telecommunications services and network integration
services in Mexico. In late 1994, Vextro was issued a license to provide
value-added telecommunications services by the Mexican Secretaria de
Comunicaciones y Transportes ("SCT"). The license grants Vextro the right for an
unspecified term to provide these services throughout Mexico involving the use
of data, facsimile and voice transmissions, and the resulting embedded
international and long distance traffic generated.
Under the terms of the acquisition, the Company issued to the shareholders
of Telereunion 1,605,000 shares of Common Stock of the Company, 380,000 shares
of non-voting, non-participatory Series B preferred stock and warrants to
purchase up to 2,595,000 additional shares of Common Stock at $2.19 per share.
The warrants vest and become exercisable upon Vextro meeting certain operating
performance measures and expire seven years after closing. The preferred stock
was mandatorily redeemable at $380,000 in the aggregate upon the Company meeting
certain operating performance measures. In addition, the Company converted and
amended certain non-qualified options outstanding under the Telereunion 1995
Stock Option and Appreciation Rights Plan to provide for the right to acquire an
aggregate of 216,618 shares of Common Stock of the Company at an exercise price
of $1.35 per share. The acquisition was accounted for under the purchase method
of accounting. The operations of Telereunion and Vextro have been included in
the Company's financial statements since the date of acquisition.
The consideration paid for Telereunion measured at the acquisition date
was $3,210,000, net of cash received of approximately $132,000, and consisted of
Common Stock valued at $2,722,000, 216,618 stock options valued at $135,000 and
transaction costs of $485,000. The purchase price was allocated to the acquired
company's assets and liabilities based upon an estimate of fair values at the
date of acquisition and resulted in $3,312,000 of goodwill, which is being
amortized over 15 years. During the year ended December 31, 1997, certain of the
operating performance measures were met resulting in 2,095,000 warrants vesting
and the 380,000 preferred shares being mandatorily redeemable at $1.00 per
share. The preferred shares were redeemed in the first quarter of 1998. As a
result, $12,114,000 in additional contingent consideration and the related
goodwill was recognized relating to the acquisition of Telereunion at December
31, 1997. During the year ended December 31, 1998, the remaining 500,000
warrants vested resulting in an additional $5,479,000 additional contingent
consideration and the related goodwill being recognized.
ORION MERGER
On July 26, 1996, the Company entered into an Agreement and Plan of
Merger, pursuant to which the Company acquired on September 5, 1996, all of the
outstanding common stock of Orion Communications, Inc. ("Orion"), a Texas
corporation, in exchange for 400,000 shares of its Common Stock. Orion was a
reseller of U.S. domestic long distance services. This transaction has been
accounted for under the pooling-of-interests method and, accordingly, the
accompanying consolidated statements of operations include the results of the
operations of Orion since its inception on April 10, 1996. At the time of the
merger, the name of Orion was changed to Telscape USA. Expenses of $102,500
related to the merger with Orion were charged to expense during 1996.
INTEGRACION ACQUISITION
Effective July 1, 1997, pursuant to a stock purchase agreement, the
Company acquired all of the outstanding shares of Integracion. Integracion is a
systems integrator engaged in the distribution and sale of data and network
equipment and also provides value-added services in network integration in
Mexico.
Under the terms of the transaction, the Company paid the following to the
selling shareholders of Integracion: i) the sum of $130,000 in cash, ii) an
aggregate of $2,201,000 in non-interest bearing promissory notes maturing at
various dates through January 1, 2001, iii) an aggregate of $999,000 in
non-interest bearing convertible notes maturing on September 1, 1999, which are
convertible into 333,000 shares of Common Stock of the Company at a price of
$3.00 per share, representing the quoted market price of the Company's Common
Stock on the date of the transaction, iv) warrants for the purchase of up to
100,000 shares of Common Stock of the Company based on
46
<PAGE>
Integracion meeting certain performance requirements and v) a covenant by the
Purchasers to pay $280,000 in the event that Integracion meets certain
performance requirements over the cumulative periods beginning January 1, 1997
and ending December 31, 2000. The acquisition was accounted for under the
purchase method of accounting. The financial position and results of operations
of Integracion have been included in the Company's consolidated financial
statements since the effective date of the acquisition.
The consideration paid for Integracion measured at the acquisition date
was $2,745,000 and consisted of cash of $130,000, promissory notes with a
discounted value of $2,555,000 and transaction costs of $60,000. The purchase
price was allocated to the acquired company's assets and liabilities based upon
an estimate of fair values at the date of acquisition and resulted in $1,756,000
of goodwill, which is being amortized over 15 years. The purchase price of the
acquisition has been allocated as follows:
FAIR
VALUE
-----------
Cash ...................................................... $ 130,000
Promissory Notes (discounted value) ...................... 1,759,000
Convertible Notes (discounted value) ..................... 796,000
Transaction Costs ......................................... 60,000
-----------
Total consideration ....................................... 2,745,000
Cash ...................................................... 307,000
Accounts receivable ....................................... 1,996,000
Inventories ............................................... 330,000
Other assets .............................................. 165,000
Accounts payable and accrued liabilities .................. (1,686,000)
Other liabilities ......................................... (123,000)
-----------
Fair value of net assets acquired ......................... 989,000
===========
Goodwill .................................................. $ 1,756,000
===========
During the year ended December 31, 1997, certain of the operating
performance measures were met resulting in 80,000 warrants vesting. The
remaining 20,000 warrants were forfeited. As a result, $422,000 in additional
contingent consideration and the related goodwill was recognized on the
acquisition of Integracion at December 31, 1997.
N.S.I. ACQUISITION
On October 1, 1997, pursuant to a stock purchase agreement, the Company
acquired all of the outstanding shares of N.S.I. N.S.I. is a systems integrator
engaged in the distribution and sale of data and network equipment and also
provides value-added services in network integration in Mexico.
Under the terms of the acquisition, the Company paid cash of $1,000 to the
shareholders of N.S.I. and agreed to guarantee the repayment of approximately
$260,000 of N.S.I. debt to one of the sellers. The purchase price was allocated
to the acquired company's assets and liabilities based upon an estimate of fair
values at the date of acquisition and resulted in $430,000 of goodwill, which is
being amortized over 15 years. The acquisition was accounted for under the
purchase method of accounting. The financial position and results of operations
of N.S.I. have been included in the Company's consolidated financial statements
since the effective date of the acquisition.
MSN ACQUISITION
Effective January 1, 1998, the Company acquired all of the outstanding
common stock of MSN. MSN, through its TELEFIESTA(R) brand, markets prepaid
telephone calling cards across the United States primarily to the Hispanic
community. Under the terms of the transaction, the Company paid the following to
the shareholders of MSN: i) the sum of $3,250,000 in cash, ii) $750,000 in
non-interest bearing promissory notes payable in eight equal quarterly
installments, and iii) 100,000 shares of the Company's Common Stock. In
addition, the two selling shareholders were each granted 50,000 options to
purchase the Company's Common Stock at $7.50 per share. The acquisition was
accounted for under the purchase method of accounting. The financial position
and results of operations of MSN are included in the Company's financial
statements from the effective date of the acquisition.
The consideration paid for MSN measured at the acquisition date was
$4,880,000 and consisted of cash of $3,250,000, non-interest bearing promissory
notes with a discounted value of $672,000, Common Stock and warrants valued at
$980,000 and transaction costs of $80,000. The purchase price was allocated to
the acquired company's assets and liabilities based upon an estimate of fair
values at the date of acquisition and resulted in
47
<PAGE>
$6,193,000 of goodwill, which is being amortized over 15 years. The purchase
price of the acquisition has been allocated as follows:
FAIR
VALUE
-----------
Cash ......................................................... $ 3,250,000
Promissory Notes (discounted value) .......................... 672,000
Common Stock ................................................. 980,000
Transaction Costs ............................................ 80,000
-----------
Purchase consideration ....................................... 4,982,000
Cash ......................................................... 977,000
Accounts receivable .......................................... 1,042,000
Other assets ................................................. 90,000
Accounts payable and accrued liabilities ..................... (1,323,000)
Deferred revenue ............................................. (1,997,000)
-----------
Excess of liabilities assumed over fair value of net
assets acquired ........................................ (1,211,000)
===========
Goodwill ..................................................... $ 6,193,000
===========
INTERLINK ACQUISITION
Effective June 1, 1998, pursuant to an asset purchase agreement, the
Company acquired substantially all of the assets and certain of the liabilities
of California Microwave Services Division, Inc. ("CMSD"), a subsidiary of
California Microwave, Inc., for approximately $8.8 million in cash. As part of
the acquisition, the Company formed INTERLINK Communications, Inc.
("INTERLINK"), to acquire CMSD. The primary asset of INTERLINK is a satellite
teleport facility in Mountain View, California.
The purchase price was allocated to the acquired assets and liabilities
based upon an estimate of fair values at the date of acquisition resulting in
$3.6 million in goodwill, which is being amortized over 15 years. In addition, a
covenant not to compete of $250,000 was recognized which is being amortized over
5 years. The acquisition was accounted for under the purchase method of
accounting. The financial results and operations of INTERLINK have been included
in the Company's consolidated financial statements since the effective date of
acquisition. The purchase price of the acquisition of the acquisition has been
allocated as follows:
FAIR
VALUE
-----------
Cash ...................................................... $ 8,612,000
Transaction Costs ......................................... 262,000
-----------
Purchase Consideration .................................... 8,874,000
Cash ...................................................... 69,000
Accounts Receivable ....................................... 1,438,000
Property and Equipment .................................... 4,542,000
Other assets .............................................. 896,000
Accounts payable and accrued liabilities .................. (1,423,000)
Deferred revenue .......................................... (471,000)
-----------
Fair value of net assets acquired ......................... 5,051,000
===========
Goodwill .................................................. $ 3,573,000
===========
Covenant not to compete ................................... $ 250,000
===========
The following presents the unaudited pro forma results of operations of
the Company for the year ended December 31, 1997 and 1998, as if the
acquisitions of Integracion, N.S.I., MSN and INTERLINK had occurred on January
1, 1997:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------
1997 1998
----------- --------------
(Unaudited)
<S> <C> <C>
Pro forma revenues .............................. $78,730,000 $ 135,415,000
Pro forma operating income ...................... 1,755,000 971,000
Pro forma net income (loss) ..................... 1,010,000 (2,407,000)
Pro forma basic net income (loss) per share .... $ 0.25 $ (0.48)
Pro forma diluted net income (loss) per share(1) $ 0.20 N/A
</TABLE>
48
<PAGE>
(1) Inclusion of additional shares under a diluted analysis for 1998 is
inappropriate due to the anti-dilutive effect.
The information is not necessarily indicative of the results of operations
and financial position of the Company as they may be in the future or as they
might have been had the business combinations been consummated as of January 1,
1997.
The balances included in the Consolidated Balance Sheets related to the
current year acquisitions are based on preliminary information and are subject
to change when additional information concerning final asset and liability
valuations are obtained. Management does not expect that such adjustments will
be material.
BCH
Digital Communications Systems/Zaklady Wytworcze Urzadzen Telefonicznych
("DTS/ZWUT"), a Polish limited liability company, was a 90%-owned subsidiary of
the Company. DTS/ZWUT manufactures and markets telephone switching equipment in
Poland. On December 12, 1997, the Company exchanged its 90% interest in DTS/ZWUT
for a 31% interest in BCH Holding Company, Inc. ("BCH"), a Nevada corporation
with a full service telecommunications operation based in Warsaw, Poland. As a
result of this transaction, the Company's investment in BCH will be accounted
for under the equity method. The Company recorded its investment in BCH at the
Company's estimate of its fair value at the time of the exchange with no gain or
loss recognized on the exchange.
During January 1999, BCH approved the issuance to an investor of 20% of
its outstanding shares for $1.2 million, and warrants for another 20% of its
common stock with an exercise price equal to the same price per share as the
stock issuance. In addition, BCH can borrow an additional $2.5 million under a
13% senior secured convertible note with the investor. Under the terms of the
senior secured convertible note, Telscape has pledged all of its common stock in
BCH to the investor. The Company's carrying amount of this investment at
December 31, 1998 is not material.
3. CONCENTRATION OF RISK
CONCENTRATION OF RISK - MEXICO
The devaluation of the Mexican peso in late 1994 caused Mexico to
experience an economic crisis characterized by exchange rate instability,
increased inflation, high domestic interest rates, reduced consumer purchasing
power and high unemployment. Consequently, the Mexican government has exercised,
and continues to exercise, significant influence over the Mexican economy.
Accordingly, Mexican governmental actions could have a significant effect on
Mexican companies, including the Company's customers, and overall market
conditions. For the years ended December 31, 1996, 1997 and 1998, the peso
experienced devaluations in exchange rates versus the dollar of 2.2%, 2.9% and
22.1%, respectively.
The Company's foreign currency risk is mitigated in Mexico due to the fact
that many of the Company's customers are multinational firms that pay in U.S.
dollars. In addition, most of the customers that do pay in pesos pay at the spot
exchange rate in effect at the time of payment as opposed to the exchange rate
at the time the receivable is created. Nevertheless, significant adverse effects
from any material devaluation in the Mexican peso could result in an adverse
effect on the Company's operations.
SIGNIFICANT CUSTOMERS AND RECEIVABLES
The Company's credit risks primarily consist of accounts receivable from
its customers, many of which are located in Mexico. Management performs ongoing
credit valuations of its customers and provides allowances for credit losses
when necessary. The Company maintains an allowance for doubtful accounts based
on the expected collectibility of all consolidated trade accounts receivable.
The allowance for doubtful accounts as of December 31, 1997 and December 31,
1998 was $200,000 and $275,000, respectively. The Company historically has not
had significant writeoffs of receivables with the exception of 1998 when it
wrote off $541,000 in receivables from a customer which filed for bankruptcy.
Major customers are those that individually account for more than 10% of
the Company's total revenues. For the year ended December 31, 1997, one customer
accounted for 28% of the Company's total revenues and 56% of the Company's long
distance services revenues. For the years ended December 31, 1998 and 1996, no
customer represented greater than 10% of revenues.
49
<PAGE>
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
The Company's notes payable and capital lease obligations consist of the
following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1997 1998
---------- -----------
<S> <C> <C>
Deere Park Convertible Subordinated Debentures, bearing interest at 8%,
unamortized discount of $65,000, convertible into Common Stock, maturing three
years from closing (see discussion below) ..................................... $ -- $ 3,935,000
Gordon Brothers Convertible Debentures, bearing interest at 8%, unamortized
discount of $4,000, convertible into Common Stock, maturing on May 29, 1999
(see discussion below) ........................................................ -- 4,996,000
Non-interest bearing promissory notes, imputed interest at 10%, unamortized
discount of $348,000 and $228,000, respectively, issued in connection with
Integracion acquisition, maturing at various dates through January 1, 2001 .... 1,853,000 1,713,000
Non-interest bearing promissory note, imputed interest at 10%, unamortized
discount of $141,000 and $ 0, respectively, issued in connection with
Integracion acquisition, converted into 333,000 shares of Common Stock
in July 1998 .................................................................. 839,000 --
Promissory note issued to repurchase Common Stock, payable in six semi-annual
installments through May 20,
2000, and bearing interest at 6% .............................................. 250,000 150,000
Capital lease obligation payable in monthly installments of $5,413 including
principal and interest maturing June 30, 2002 ................................. 242,000 177,000
Capital lease obligation payable in monthly installments of $867 including
principal and interest maturing December 1, 2003 .............................. -- 44,000
Non-interest bearing promissory note, imputed interest at 10%, unamortized
discount of $49,000, issued in connection with MSN acquisition, payable in
eight equal quarterly installments beginning April, 1998 ...................... -- 430,000
Revolving Credit Facility maturing July 31, 1999 bearing interest at prime plus
1%, secured by accounts
receivable .................................................................... -- 1,688,000
---------- -----------
Total notes payable and capital leases ........................................ $3,184,000 $13,133,000
Current portion ............................................................... 508,000 7,710,000
---------- -----------
Long term portion ............................................................. $2,676,000 $ 5,423,000
========== ===========
</TABLE>
The annual maturities of the debt indicated above for the five years
following December 31, 1998, are $7,710,000 in 1999, $619,000 in 2000,
$4,756,000 in 2001, $38,000 in 2002 and $10,000 in 2003.
In May 1998, the Company issued $3,000,000 in 8% Convertible Subordinated
Debentures (the "Deere Park Convertible Debentures") maturing three years from
closing (the "First Draw") to Deere Park Capital Management, LLC, an Illinois
limited liability company ("Deere Park"). On May 28, 1998, the Company issued an
additional $1,000,000 of the Deere Park Convertible Debentures (the "Second
Draw"). On June 30, 1998, the Company issued an additional $1,000,000 of the
Deere Park Convertible Debentures (the "Third Draw"). The Deere Park Convertible
Debentures are convertible by the holder into shares of Common Stock at a price
equal to $26 per share for the First Draw, $29 per share for the Second Draw and
$26 per share for the Third Draw, until November 1, 1998, and thereafter, at the
lesser of (i) $26 per share for the First Draw, $29 per share for the Second
Draw and $26 per share for the Third Draw or (ii) a price equal to the average
of the three highest of the five lowest closing prices of the Common Stock for
the 20 trading days preceding the conversion date. If the Common Stock trades
below $15 per share for the First Draw, $16.66 per share for the Second Draw and
$15 for the Third Draw for three consecutive trading days, the Company may
redeem all or part of such Deere Park Convertible Debentures at 107% of face
value plus any accrued interest. The Company's obligation to make interest
payments on the Deere Park Convertible Debentures terminates if the price of
Common Stock closes for twenty consecutive trading days at or above $30 per
share for the First Draw, at or above $33.50 per share for the Second Draw and
at or above $30 per share for the Third Draw, adjusted, without limitation, for
any stock splits or combinations. In connection with the Deere Park Convertible
Debentures, Deere Park also received warrants to purchase an aggregate of 8,952
shares of Common
50
<PAGE>
Stock at an exercise price of $16.76 per share (subject to adjustment for stock
splits and other share adjustments) for the First Draw, warrants to purchase an
aggregate of 2,427 shares of Common Stock at $20.60 per share (subject to
adjustment for stock splits and other share adjustments) for the Second Draw and
warrants to purchase an aggregate of 6,382 shares of Common Stock at $15.67 per
share (subject to adjustment for stock splits and other share adjustments) for
the Third Draw. The warrants have a term of three years from the effectiveness
of a registration statement covering such warrants.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Deere Park Convertible Debentures
(the "Deere Park Exit Fee"). The Deere Park Exit Fee varies depending upon the
date of payment, and is equal to (i) 6.6% if the payment is made within 90 days
after the closing of each respective draw, (ii) 7.2% if payment is made after 90
days and up to 180 days after the closing of each respective draw, (iii) 8.8% if
payment is made after 180 days and up to 270 days after the closing of each
respective draw and (iv) 10.0% if payment is made after 270 days after the
closing of each respective draw. The Deere Park Exit Fee is adjusted on a pro
rata basis to the extent that the prepayment is made between periods except that
a minimum Deere Park Exit Fee of 6.6% is required if the prepayment is made
prior to 90 days after closing.
In May 1998, the Company issued $5,000,000 in 8% Convertible Debentures
(the "Gordon Brothers Convertible Debentures") maturing one year from closing to
Gordon Brothers Capital, LLC, a Delaware limited liability company ("Gordon
Brothers"). The Gordon Brothers Convertible Debentures are convertible by Gordon
Brothers into shares of Common Stock at a price equal to $29.00 per share until
November 1, 1998, and thereafter, at the lesser of (i) $29.00 per share or (ii)
a price equal to the average of the three highest of the five lowest closing
prices of the Common Stock for the 20 trading days preceding the conversion
date. If the Common Stock trades below $16.66 for three consecutive trading
days, the Company may redeem all or part of such Gordon Brothers Convertible
Debentures at 107% of face value plus any accrued interest. The Company's
obligation to make interest payments on the Gordon Brothers Convertible
Debentures terminates (i) in the event the Common Stock closes, for twenty
consecutive trading days, at or above $33.50 per share, adjusted, without
limitation, for any stock splits or combinations, (ii) when a registration
statement covering the Gordon Brothers Convertible Debentures is effective and
(iii) if there exists no event of default under the Gordon Brothers Convertible
Debentures. The Gordon Brothers Convertible Debentures are secured by a pledge
of the Company's stock in Telereunion and the Company's preferred stock in
INTERLINK. In addition, the Gordon Brothers Convertible Debentures are
guaranteed by INTERLINK and such guaranty is collateralized by a security
agreement covering all of INTERLINK's assets. In connection with the Gordon
Brothers Convertible Debentures, Gordon Brothers also received warrants to
purchase an aggregate of 12,136 shares of Common Stock at an exercise price of
$15.00 per share. The warrants have a term of three years from the effectiveness
of the registration statement covering such warrants. The Gordon Brothers
Convertible Debentures are senior secured indebtedness of the Company to the
extent of the assets securing such indebtedness.
The Company is required to pay an exit fee in connection with any
prepayment of principal to be made under the Gordon Brothers Convertible
Debentures (the "Gordon Brothers Exit Fee"). The Gordon Brothers Exit Fee varies
depending upon the date of payment, and is equal to (i) 6.5% if the payment is
made within 90 days after May 29, 1998, (ii) 13.0% if payment is made after 90
days and up to 180 days after May 29, 1998, (iii) 19.0% if payment is made after
180 days and up to 270 days after May 29, 1998 and (iv) 25.0% if payment is made
after 270 days and up to 365 days after May 29, 1998. The Gordon Brothers Exit
Fee with respect to any payment made after May 28, 1999 shall be equal to (a)
25.0% plus (b) 25.0% multiplied by the number of days elapsed from May 28, 1999
divided by 365. The Gordon Brothers Exit Fee is adjusted on a pro rata basis to
the extent that a prepayment is made between periods during the first twelve
months except that a minimum Gordon Brothers Exit Fee of 6.5% is required if the
prepayment is made prior to 90 days after closing.
A portion of the proceeds from the Deere Park Convertible Debentures and
the Gordon Brothers Convertible Debentures were allocated to the warrants issued
to the holders of such debentures. The 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 50%, risk free
interest rate of 5%, and expected lives of an average of 2 years. The resulting
discount of approximately $180,000 for the Deere Park Convertible Debentures and
the Gordon Brothers Convertible Debentures will be amortized as interest expense
over the life of the debentures.
In connection with the issuance of the Deere Park Convertible Debentures
and the Gordon Brothers Convertible Debentures, the Company issued to the
placement agent warrants to purchase 59,340 shares of Common Stock with exercise
prices ranging from $16.76 to $20.60 per share, respectively. The warrants have
a term of two years.
The proceeds from the Deere Park Convertible Debentures and the Gordon
Brothers Convertible Debentures were used primarily to finance the INTERLINK
Acquisition and the remainder was utilized for capital investments and general
working capital purposes.
51
<PAGE>
On October 26, 1998, the Company entered into agreements with the holders
of the Gordon Brothers Convertible Debentures and the Deere Park Convertible
Debentures to restructure these debentures. Under the terms of the
restructuring, Gordon Brothers agreed to fix the conversion price at $15 per
share for the term of the debenture. In return, the Company agreed to reduce the
strike price on 12,136 warrants issued in connection with the original funding
from $20.60 to $15 per share. Deere Park agreed to fix the conversion price at
$15 per share until May 1, 1999. Beyond this date, the conversion price will
revert to a "floating" price for the term of the debentures unless it is further
restructured. In return, the Company agreed to issue an additional 8,000
warrants to Deere Park at current market prices. In addition, the Company repaid
$1,000,000 of the Deere Park Convertible Debentures at 107% plus accrued
interest.
The Company estimated the fair value of the warrants utilizing the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0%, expected volatility of 50%, risk free interest rate of 5%, and an
expected life of 2 years. The fair value of the warrants of approximately
$390,000 is being accounted for as deferred offering costs and amortized over
the life of the Notes.
The Company renegotiated the terms of the Revolving Credit Facility to
provide for borrowings of up to $2.5 million and extended the term of the
facility to July 31, 1999. As of December 31, 1998, the Company had drawn $1.7
million on this facility.
In July 1998, holders of the non-interest bearing convertible notes issued
in connection with the Integracion acquisition converted these notes into
333,000 shares of Common Stock.
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 quarter 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 dollars through December 31, 1999. The financing is structured as loans
maturing four years from funding at interest rates 500 basis points above the 5
year Federal Reserve Treasury Constant Maturity Rate. The Company has not drawn
any fundings under this facility.
The Company has selected Lucent to engineer, furnish and install the Mexican
Network. In addition, the Company received a commitment from Lucent to provide
the Company with up to $40 million of long term financing, which includes $34
million towards the purchase of Lucent products and services (including
construction of the Mexican Network) and $6 million for repayment of the
Company's current obligations. The Company will incur commissions, commitment
fees and other costs in connection with this facility.
5. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A significant difference
relates to the treatment of inventories under the Mexican Tax Law. Under this
law, the cost of sales for financial statement purposes is not deductible for
income tax purposes. Instead, inventory purchases are deductible for income tax
purposes in the year the purchases are made.
Significant components of the Company's deferred tax liabilities and
assets at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----------------------- -----------------------
Current: UNITED STATES FOREIGN UNITED STATES FOREIGN
----------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Operating loss carryforwards and tax
credits ...................... $ 189,000 $ 152,000 $ 417,000 $ 311,000
Accrued interest ................... -- -- 159,000 --
Accrued carrier costs .............. 191,000 -- -- --
Accrued wages ...................... 52,000 -- -- --
Other accrued liabilities .......... 34,000 -- -- --
Allowance for doubtful accounts .... 51,000 10,000 26,000 74,000
Inventories ........................ -- (704,000) 14,000 (812,000)
Customer prepayments ............... -- 272,000 -- 439,000
--------- --------- --------- ---------
Net current deferred tax asset
(liability) .................. $ 517,000 $(270,000) $ 616,000 $ 12,000
Long-term:
Basis differences in assets ........ $ 6,000 $ 58,000 $ 4,000 $ 14,000
Accrued employee benefits .......... -- 13,000 -- 17,000
--------- --------- --------- ---------
Net long term deferred tax asset ... $ 6,000 $ 71,000 $ 4,000 $ 31,000
--------- --------- --------- ---------
</TABLE>
52
<PAGE>
The Company records valuation allowances based upon judgments as to the
future realization of deferred tax benefits supported by demonstrated trends in
the Company's operating results. At December 31, 1997and 1998, no valuation
allowance was recorded.
Significant components of the provision (benefit) for income taxes are as
follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1997 1998
----------- ----------- -----------
Current:
Federal ........................ $ -- $ 1,146,000 $ --
Foreign ........................ 59,000 504,000 1,161,000
----------- ----------- -----------
Total current .................. $ 59,000 $ 1,650,000 $ 1,161,000
Deferred:
Federal ........................ -- (1,545,000) (97,000)
Foreign ........................ (112,000) (21,000) (242,000)
----------- ----------- -----------
Total deferred ................. $ (112,000) $(1,566,000) $ (339,000)
----------- ----------- -----------
Total provision (benefit) ...... $ (53,000) $ 84,000 $ 822,000
----------- ----------- -----------
The following is a reconciliation of income taxes calculated at the United
States federal statutory rate to the income tax provision (benefit):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Provision for income taxes at U.S. statutory rate ... (34)% 34% (34)%
Non-deductible amortization of intangible assets .... 3 7 252
Non-deductible litigation loss ...................... -- 2 --
Other items, net .................................... (3) 4 108
Effect of utilization of net operating loss
carryforwards, tax credits and reversal of
valuation allowance ........................... 31 (44) 14
---- ---- ----
Income tax provision (benefit) ...................... (3)% 3% 340%
---- ---- ----
</TABLE>
At December 31, 1998, the Company had available for US federal income tax
purposes unused net operating loss carryforwards of approximately $1,057,000
which may provide future tax benefits and which will expire in years 2005
through 2018. Additionally, as of December 31, 1998, the Company had
approximately $58,000 in alternative minimum tax credits which can be utilized
to offset future tax liabilities.
In accordance with Mexican Tax Law, companies may carryforward an income
tax loss for ten years. Also, in accordance with Mexican Tax Law, a company is
subject to income taxes based upon the greater of 34% of taxable income and 1.8%
of net assets, as defined in the tax law. Any tax on assets paid is recoverable
and can be carried forward for ten years in the event a company begins paying
taxes on income. At December 31, 1998, the Company had available for Mexican
income tax purposes operating loss carryforwards of approximately $772,000 which
expire in 2008 and net asset taxes credits of approximately $159,000 which
expire in 2008.
53
<PAGE>
6. STOCK OPTIONS AND WARRANTS
STOCK OPTIONS
1993 STOCK OPTION PLAN
Under the terms of its 1993 Stock Option Plan, the Company may grant
incentive and non-qualified stock options to purchase up to 218,145 shares of
its Common Stock to the Company's employees, directors or consultants. Options
must be granted at not less than the fair market value of the Company's Common
Stock at the date of grant as determined by the Company's Board of Directors
(110% of fair market value for stockholders owning 10% or more of the Company's
Common Stock) for incentive stock options, or not less than 85% of the fair
market value for non-qualified stock options. Options granted under this plan
may be for a term of up to 10 years (5 years for incentive stock options granted
to stockholders owning 10% or more of the Company's Common Stock) and are
exercisable as determined by the Board of Directors.
1994 DIRECTORS STOCK OPTION PLAN
Effective June 1, 1994, the Company adopted the 1994 Directors Stock
Option Plan, which provides that the Company may grant non-qualified options to
directors of the Company or any majority-owned subsidiary who are not salaried
employees to purchase up to 31,163 shares of its Common Stock. Options must be
granted by June 1, 2004, at prices not less than the fair market value of the
Company's Common Stock at the date of grant and must be exercised within ten
years of the date of grant. Upon a change of control of the Company, all granted
but unvested options under the plan will vest immediately.
TELEREUNION 1995 STOCK OPTION PLAN
As stated in Note 2, the Company assumed Telereunion's Stock Option Plan
in connection with the acquisition of Telereunion. Under the terms of this Plan,
the Company may grant non-qualified or incentive stock options to employees,
directors and consultants. Options must be granted at not less than the fair
market value of the Company's Common Stock at the date of grant as determined by
the Company's Board of Directors (110% of fair market value for stockholders
owning 10% or more of the Company's Common Stock) for incentive stock options,
or not less than 85% of the fair market value for non-qualified stock options.
The terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant (5 years
for incentive stock options granted to stockholders owning 10% or more of the
Company's Common Stock).
1996 STOCK OPTION AND APPRECIATION RIGHTS PLAN
During 1996, the Company adopted the 1996 Stock Option and Appreciation
Rights Plan, which provides that the Company may grant non-qualified or
incentive stock options to purchase up to 1,200,000 shares of its Common Stock
to the Company's employees, directors or consultants. The plan also provides for
grants of stock appreciation rights in connection with the grant of options
under the plan. Options must be granted at not less than the fair market value
of the Company's Common Stock at the date of grant as determined by the
Company's Board of Directors (110% of fair market value for stockholders owning
10% or more of the Company's Common Stock) for incentive stock options, or not
less than 85% of the fair market value for non-qualified stock options. The
terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant (5 years
for incentive stock options granted to stockholders owning 10% or more of the
Company's Common Stock).
1998 STOCK OPTION AND APPRECIATION PLAN
During June 1998, the Company adopted the "1998 Stock Option and
Appreciation Rights Plan." Pursuant to the Company's 1998 Stock Option and
Appreciation Rights Plan, the Company may grant the Company's employees,
directors and consultants non-qualified options to purchase up to 800,000 shares
of Common Stock. The maximum number of shares of Common Stock that may be
granted to any individual under this plan may not exceed 250,000 shares.
Incentive stock options must be granted at not less than the fair market value
of the Company's Common Stock at the date of grant as determined by the
Company's Board of Directors (110% of fair market value for stockholders owning
10% or more of the Company's Common Stock). The terms of the options are
determined by the Company's Board of Directors. Any options granted must be
exercised within ten years of the date of grant or within five years from the
date of grant for options granted to stockholders owning 10% or more of the
Company's
54
<PAGE>
Common Stock. Unexercised vested and unvested options terminate immediately if
the employment or service of an option holder is terminated for cause. Unvested
options terminate if the employment or service of an option holder is terminated
without cause or for disability. The Company may also grant SARs in connection
with any option, which permits cashless exercises of the options. SARs allow an
option holder to surrender an option and to receive the difference between the
exercise price of the option and the then fair market value of the Common Stock.
The Company may also make loans to any option holder in order in order to permit
the option holder to pay the purchase price upon exercise of the option.
1998 MSN STOCK OPTION AND APPRECIATION RIGHTS PLAN
During June 1998, the Company adopted the "1998 MSN Stock Option and
Appreciation Rights Plan." Pursuant to the Company's 1998 MSN Stock Option and
Appreciation Rights Plan, the Company may grant the Company's employees,
directors and consultants non-qualified options to purchase up to 100,000 shares
of Common Stock. The maximum number of shares of Common Stock that may be
granted to any individual under this plan may not exceed 50,000 shares. The
terms of the options are determined by the Company's Board of Directors. Any
options granted must be exercised within ten years of the date of grant or
within five years from the date of grant for options granted to stockholders
owning 10% or more of the Company's Common Stock. Unexercised vested and
unvested options terminate immediately if the employment or service of an option
holder is terminated for cause. Unvested options terminate if the employment or
service of an option holder is terminated without cause or for disability. The
Company may also grant SARs in connection with any option, which permits
cashless exercises of the options. SARs allow an option holder to surrender an
option and to receive the difference between the exercise price of the option
and the then fair market value of the Common Stock. The Company may also make
loans to any option holder in order to permit the option holder to pay the
purchase price upon exercise of the option.
A summary of the Company's fixed option plans as of December 31, 1996,
1997 and 1998 is presented below:
<TABLE>
<CAPTION>
MSN WTD. AVG.
1993 1994 1995 1996 1998 1998 TOTAL EXER.
PLAN PLAN PLAN PLAN PLAN PLAN ALL PLANS PRICE
--------- ---------- -------- ---------- --------- --------- ---------- --------
<S> <C> <C> <C> <C>
Options outstanding at December
31 ,1995 ...................... 118,440 30,000 -- -- -- -- 148,440 1.61
Max. shares exercisable .......... 118,440 30,000 -- -- -- -- 148,440 1.61
Options granted .................. -- 10,000 216,618 1,120,000 -- -- 1,346,618 3.96
Options exercised ................ -- -- -- -- -- -- -- --
Options cancelled ................ (32,408) (30,000) (70,809) -- -- -- (133,217) 1.40
--------- ---------- -------- ---------- --------- --------- ---------- --------
Options outstanding at December
31,1996 ....................... 86,032 10,000 145,809 1,120,000 -- -- 1,361,841 3.95
Max. shares exercisable .......... 86,032 10,000 145,809 225,000 -- -- 466,841 3.16
Options granted .................. 115,500 -- -- 440,000 -- -- 555,500 5.74
Options exercised ................ (15,828) -- -- (25,000) -- -- (40,828) 1.87
Options cancelled ................ (9,700) -- -- (420,000) -- -- (429,700) 4.50
--------- ---------- -------- ---------- --------- --------- ---------- --------
Options outstanding at December
31,1997 ....................... 176,004 10,000 145,809 1,115,000 -- -- 1,446,813 4.51
Max. shares exercisable .......... 70,204 10,000 145,809 393,333 -- -- 619,346 3.60
Options granted .................. -- 18,125 -- 60,000 100,000 1,045,140 1,223,265 11.49
Options exercised ................ (50,204) -- -- (140,554) -- -- (190,758) 2.57
Options cancelled ................ (20,000) -- -- (5,000) -- (527,250) (552,250) 16.48
--------- ---------- -------- ---------- --------- --------- ---------- --------
Options outstanding at December
31,1998 ....................... 105,800 28,125 145,809 1,029,446 100,000 517,890 1,927,070 5.67
========= ========== ======== ========== ========= ========= ========== ========
Max. shares exercisable .......... 35,267 10,000 145,809 725,988 27,77 5,000 949,840 4.43
</TABLE>
SFAS No. 123 requires the Company to provide pro forma information
regarding net income (loss) applicable to common stockholders and income (loss)
per share as if compensation cost for the Company's stock options granted had
been determined in accordance with the fair value based method prescribed in
that Statement. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 1996, 1997 and 1998: dividend
yield of 0% for all years; expected volatility ranging from 80% to 85%, 80% to
90% and 55% to 65%; risk-free interest rates ranging from 6.15% to 6.41%, 5.65%
to 5.80% and 5% to 5.15%; and expected lives averaging 8.5 years, 8.5 years and
5.0 years, respectively.
55
<PAGE>
Under the accounting provisions of SFAS No. 123, the Company's net income
(loss) applicable to common stockholders and income (loss) per share would have
been revised to the pro forma amounts indicated below:
For the Year Ended December 31,
-----------------------------------------------
1996 1997 1998
-------------- ------------- --------------
Net income (loss):
As reported ............. $ (1,598,000) $ 2,672,000 $ (1,030,000)
Pro Forma ............... $ (3,096,000) $ 1,955,000 $ (2,698,000)
Net income (loss) per share:
Basic
As reported ............. $ (0.52) $ 0.68 $ (0.20)
Pro Forma ............... $ (1.02) $ 0.50 $ (0.53)
Diluted
As reported ............. n/a $ 0.53 n/a
Pro Forma ............... n/a $ 0.38 n/a
-------------- ------------- --------------
WARRANTS
Following is a description of the Company's warrants outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
DESCRIPTION OF WARRANTS: # OUTSTANDING
------------------------ -------------
<S> <C> <C> <C> <C>
Series A Warrants (unregistered) issued in connection with the Company's
acquisition of Telereunion on May 17, 1996, exercisable at $2.19 at stated
percentages only upon the Company achieving certain operating performance
measures or fully vesting upon the Company maintaining a $12 share price for 90
consecutive trading days; expiration date of May 16, 2003, 2,000,000 of which
vested at December 31, 1997 and 500,000 of which vested during the year ended
December 31, 1998 (See Note 2) ......................................................... 2,086,943
Series B Warrants (unregistered) issued in connection with the Company's
acquisition of Telereunion on May 17, 1996, currently exercisable at $2.19 as
certain operating performance measures were achieved during the year ended
December 31, 1997, expiration date May 16, 2003 (See Note 2) ........................... 84,000
Warrants (unregistered) issued to IPO underwriters exercisable at any time at
$8.10 prior to expiration on August 10, 1999 ........................................... 25,000
Warrants (unregistered) issued on February 29, 1996, in connection with former
officer's severance agreement exercisable at any time at $2.94 prior to
expiration on February 28, 2001 ........................................................ 72,000
Warrants (unregistered) issued in connection with the Company's acquisition of
Telereunion on May 17, 1996, exercisable at any time at $2.19 prior to
expiration on May 16, 2001 ............................................................. 49,179
Registered warrants (NASDAQ) issued to debenture holders and placement agent in
connection with issuance of Deere Park Convertible Debentures and Gordon
Brothers Convertible Debentures exercisable at any time at $8.50 - $20.60 per
share, with two to three year terms (See Note 4) ...................................... 97,237
---------
Total warrants ................................................. 2,414,359
=========
</TABLE>
The IPO warrants were redeemable at the Company's option at any time with
30 days written notice at a redemption price of $0.20 per share. During the
fourth quarter 1997, the Company exercised its redemption privileges. As a
result, 475,535 warrants were exercised, including 131,230 warrants as of
December 31, 1997, resulting in net proceeds to the Company of approximately
$3,804,000, of which $989,000 was received prior to December 31, 1997.
56
<PAGE>
7. STOCK ISSUANCE
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.
8. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company is obligated under certain long-term non-cancelable lease
agreements for equipment purchases, office and warehouse space as follows:
AMOUNT
----------
1999 $2,418,000
2000 1,404,000
2001 1,328,000
2002 1,235,000
2003 559,000
==========
$6,944,000
==========
Total rent expense under leases was $131,000, $229,000 and $914,000,
respectively, for the years ended December 31, 1996, 1997 and 1998.
At December 31, 1998, the Company has employment agreements with twelve
officers, which expire in 2001. Future minimum commitments under these
agreements, excluding incentive bonuses or stock options, as of December 31,
1998, are as follows:
AMOUNT
----------
1999 $1,107,000
2000 557,000
2001 266,000
==========
$1,930,000
==========
Vextro is required to pay a license fee quarterly to the Mexican
government equal to five percent of its revenues from value-added
telecommunications services. Under the license, Vextro is free to set its
service rates without government approval; however, Vextro's rate schedule must
be filed with the SCT.
The Company has signed a contract with a third party for the third party
vendor to provide telecommunications services to the Company including the
origination of inbound 800 dialed phone calls for its prepaid phone cards, and
the termination of U.S. domestic long distance and international long distance.
The contract term is through June 1, 2001, and provides for a minimum monthly
purchase commitment of $360,000 and a total purchase commitment of $12,660,000.
The Company can cancel the minimum monthly purchase commitment with 30 days
notice upon meeting its total minimum purchase commitment. The Company estimates
that total purchases from this third party exceeded $6.5 million as of March 31,
1999.
In March 1999, the Company signed a purchase order for $3.25 million for
equipment purchases.
9. SEGMENT INFORMATION
The Company has three reportable segments: international long distance,
value-added services and satellite teleport services. The Company provides
international long distance services to customers in the United States.
Satellite teleport services are provided to customers in the United States and
Latin America. Value-added services are performed in Mexico and Poland. The
Company measures segment profit as earnings before interest, depreciation,
amortization of intangibles, other income and taxes (EBITDA).
57
<PAGE>
Revenues, operating information and identifiable assets by business
segment and location are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Long distance services ....................................... $ 1,213,000 $ 17,390,000 $ 93,156,000
Value-added services ......................................... 4,492,000 18,764,000 32,965,000
Satellite teleport services .................................. -- -- 6,058,000
------------- ------------- -------------
Total revenues .................................................... $ 5,705,000 $ 36,154,000 $ 132,179,000
------------- ------------- -------------
Operating income(loss) before interest, depreciation and
amortization
Long distance services, including impairment loss ............ $ (882,000) $ 4,828,000 $ 3,655,000
Value-added services ......................................... 297,000 (107,000) 3,232,000
Satellite teleport services .................................. -- -- 229,000
Corporate and other .......................................... (910,000) (1,117,000) (1,629,000)
------------- ------------- -------------
Total operating income (loss) before interest, depreciation and
amortization ................................................ $ (1,495,000) $ 3,604,000 $ 5,487,000
Depreciation ................................................. 126,000 321,000 1,329,000
Amortization of intangibles .................................. 138,000 301,000 1,987,000
------------- ------------- -------------
Operating income (loss) as reported on Statement of Operations .... $ (1,759,000) $ 2,982,000 $ 2,171,000
------------- ------------- -------------
Capital expenditures
Long distance services ....................................... $ 23,000 $ 383,000 $ 4,183,000
Value-added services ......................................... 418,000 1,299,000 1,664,000
Satellite teleport services .................................. -- -- 264,000
Corporate and other .......................................... -- -- 48,000
------------- ------------- -------------
Total capital expenditures ........................................ $ 441,000 $ 1,682,000 $ 6,159,000
------------- ------------- -------------
Identifiable assets
Long distance services ....................................... $ 3,003,000 $ 5,978,000 $ 21,819,000
Value-added services ......................................... 5,235,000 17,682,000 26,426,000
Satellite teleport services .................................. -- -- 10,617,000
Corporate and other .......................................... 1,133,000 15,975,000 21,469,000
------------- ------------- -------------
Total identifiable assets ......................................... $ 9,371,000 $ 39,635,000 $ 80,331,000
------------- ------------- -------------
<CAPTION>
Information concerning principal geographic areas is as follows:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
------------- ------------- -------------
Revenues
United States ................................................ $ 642,000 $ 17,390,000 $ 97,644,000
Mexico ....................................................... 3,921,000 18,031,000 32,965,000
Latin America ................................................ -- -- 1,570,000
Poland ....................................................... 1,142,000 733,000 --
------------- ------------- -------------
Total revenues .................................................... $ 5,705,000 $ 36,154,000 $ 132,179,000
------------- ------------- -------------
Fixed assets, net of accumulated depreciation
United States ................................................ $ 22,000 $ 692,000 $ 7,297,000
Mexico ....................................................... 830,000 1,987,000 5,174,000
Latin America ................................................ -- -- 2,105,000
Poland ....................................................... 131,000 -- --
------------- ------------- -------------
Total fixed assets ................................................ $ 983,000 $ 2,679,000 $ 14,576,000
------------- ------------- -------------
</TABLE>
58
<PAGE>
12. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ ----
1996
<S> <C> <C> <C> <C> <C>
Revenues ..................................... $ 509,000 $ 841,000 $ 1,474,000 $ 2,881,000 $ 5,705,000
Operating loss ............................... (210,000) (265,000) (362,000) (921,000) (1,759,000)
Income (loss) before taxes and minority
interests ................................. (174,000) (186,000) (287,000) (998,000) (1,645,000)
Net loss ..................................... (181,000) (207,000) (299,000) (911,000) (1,598,000)
Basic EPS .................................... $ (0.10) $ (0.07) $ (0.08) $ (0.23) $ (0.52)
FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ ----
1997
Revenues ..................................... $ 3,771,000 $ 6,170,000 $ 12,193,000 $ 14,020,000 $ 36,154,000
Operating income (loss) ...................... (386,000) 696,000 1,169,000 1,503,000 2,982,000
Income (loss) before taxes and minority
interests ................................. (359,000) 402,000 1,110,000 1,597,000 2,750,000
Net income (loss) ............................ (324,000) 538,000 1,202,000 1,256,000 2,672,000
Basic EPS .................................... $ (0.08) $ 0.14 $ 0.31 $ 0.32 $ 0.68
Diluted EPS (1) .............................. N/A $ 0.13 $ 0.22 $ 0.18 $ 0.53
FIRST SECOND THIRD FOURTH YEAR
----- ------ ----- ------ ----
1998
Revenues ..................................... $ 33,399,000 $ 32,378,000 $ 36,529,000 29,873,000 132,179,000
Operating income (loss) ...................... 2,219,000 (461,000) 2,182,000 (1,769,000) 2,171,000
Income (loss) before taxes and minority
interests ................................. 2,089,000 (672,000) 1,507,000 (3,166,000) (242,000)
Net income (loss) ............................ 1,114,000 (622,000) 869,000 (2,391,000) (1,030,000)
Basic EPS .................................... $ 0.25 $ (0.13) $ 0.16 $ (0.42) $ (0.20)
Diluted EPS (1) .............................. $ 0.15 N/A $ 0.11 N/A N/A
</TABLE>
(1) Inclusion of additional shares under a diluted analysis for loss period is
inappropriate due to the anti-dilutive effect.
59
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
Information required under Part III (Items 10,11,12 and 13) have been
omitted from this Report in that the Registrant will file its definitive Proxy
Statement for its Annual Meeting of Stockholders to be held on June 21, 1999,
pursuant to Regulation 14A of the Securities and Exchange Act of 1934 (the
"Proxy Statement"), not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included in the Proxy Statement
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits. See Index to Exhibits on page 63. Each of the following
exhibits described on the index to exhibits is a management contract
or compensatory plan or arrangement: 10.1, 10.2, 10.11, 10.12,
10.13, 10.15 and 10.16.
(b) Financial Statement Schedules: None.
(c) Reports on Form 8-K: None.
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TELSCAPE INTERNATIONAL, INC.
(Registrant)
March 31, 1999 /s/ E. SCOTT CRIST
------------------
E. Scott Crist
CEO and Principal Executive Officer
March 31 , 1999 /s/ TODD M. BINET
-----------------
Todd M. Binet
President, CFO and Principal Financial
and Accounting Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ E. SCOTT CRIST Director March 31, 1999
E. Scott Crist
/s/ MANUEL LANDA Director March 31, 1999
Manuel Landa
/s/ OSCAR GARCIA Director March 31, 1999
Oscar Garcia
/s/ RICARDO OREA Director March 31, 1999
Ricardo Orea
/s/ TODD M. BINET Director March 31, 1999
Todd M. Binet
/s/ DARREL O. KIRKLAND Director March 31, 1999
Darrel O. Kirkland
/s/ JACK M. FIELDS Director March 31, 1999
Jack M. Fields
61
<PAGE>
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
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)
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)
62
<PAGE>
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)
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)
63
<PAGE>
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)
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.
*10.27 Form of Financing Agreement by and between the Company and NTFC
Capital Corporation dated as of January 11, 1999.
*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.
*21.1 Subsidiaries of the registrant
*23.1 Consent of Independent Public Accountants
*27.1 Financial Data Schedule 1998
- - ----------------
* Filed herewith
67
EXHIBIT 10.26
LENDER: LOAN AND SECURITY AGREEMENT
NEWBRIDGE FINANCIAL SERVICES, A UNIT OF GE CAPITAL CORPORATION
BORROWER INFORMATION
BORROWER: TELSCAPE INTERNATIONAL, INC.,
PERSON TO CONTRACT/TITLE: TODD BINET, CHIEF FINANCIAL OFFICER
CO-BORROWERS: EACH SUBSIDIARY OF TELSCAPE LISTED ON THE SCHEDULE
OF BORROWING SUBSIDIARIES ATTACHED HERETO AND EACH
SUBSIDIARY WHICH SUBSEQUENTLY BECOMES A PARTY HERETO
PURSUANT TO SECTION 1(B) OF THIS AGREEMENT
Address: 2700 POST OAK BLVD, STE 1000
[X] Corporation
[ ] Partnership
City: HOUSTON County: State: TX Zip Code: 77056 [ ] Cooperative
Telephone Number: (713) 968-0968 Facsimile Number: (713) 968-0930
AGREEMENT TERMS AND CONDITIONS
- - --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Agreement Date Interest Rate Termination Date Purchase Agreement No.
DECEMBER 7, 1998 FOR EACH ADVANCE, THE MAY 30, 1999 N/A
3 YR. FED. RES. TREAS.
CONSTANT MATURITY RATE
AS OF THE DATE OF SUCH
ADVANCE + 550 BASIS
POINTS
Commitment Amount No. of Payments Supplier Purchase Agreement Date
(US)$6,000,000 36 NEWBRIDGE NETWORKS N/A
</TABLE>
1. COMMITMENT TO LEND: (a) Subject to the terms and conditions provided in
this Loan and Security Agreement ("Agreement") and so long as no Event of
Default (as defined in Section 14 hereof) or event or condition which with
notice or passage of time or both would constitute an Event of Default has
occurred and is continuing hereunder, Lender agrees to lend to Telscape
International, Inc., a Texas corporation ("Telscape"), and to Domestic and/or
Foreign Subsidiaries of Telscape which are signatories to the Schedule of
Borrowing Subsidiaries attached hereto and forming a part hereof, and to such
additional Domestic and/or Foreign Subsidiaries of Telscape which may become a
party hereto pursuant to Section 1(b) hereof (Domestic and/or Foreign
Subsidiaries of Telscape which are signatories to the Schedule of Borrowing
Subsidiaries attached hereto and such additional Domestic and/or Foreign
Subsidiaries of Telscape which may hereafter become a party hereto pursuant to
Section 1(b) of this Agreement are individually referred to as a "CO-BORROWER"
and collectively as the "CO-BORROWERS"), until the Termination Date set forth
above, an amount in the aggregate not to exceed the Commitment Amount set forth
above, which sum shall be used by such Co-Borrower solely to finance the
purchase by it of Newbridge Networks telecommunications equipment and associated
software sublicenses pursuant to one or more Purchase Agreements (individually
and collectively, the "Purchase Agreement") made by and between Newbridge
Networks (the "Supplier") and such Co-Borrower for installation in the United
States, Mexico and other Latin American jurisdictions. "SUBSIDIARY" means, as to
any person, a corporation, partnership, limited liability company or other
entity of which shares of stock or other ownership interests having ordinary
voting power (other than stock or other ownership interests having such power
only by reason of the happening of a contingency) to elect a majority of the
board of directors or other managers of such corporation, partnership, limited
liability company, or other entity, are at the time owned, or the management of
which is otherwise controlled, directly or indirectly, through one or more
intermediaries, or both, by such person. "DOMESTIC SUBSIDIARY" means a
Subsidiary incorporated under the laws of the United States, one of the states
of the United States, the District of Columbia, or any territory, possession or
protectorate of the United States. "FOREIGN SUBSIDIARY" means a Subsidiary
incorporated under the laws of any jurisdiction other than the laws of the
United States, one of the states of the United States, the District of Columbia,
or any territory, possession or protectorate of the United States. "DOMESTIC
CO-BORROWER" means a Co-Borrower which is a Domestic Subsidiary of Telscape, and
"FOREIGN CO-BORROWER" means a Co-Borrower which is a Foreign Subsidiary of
Telscape. Unless otherwise qualified, all references to a "Subsidiary" or to
"Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of
Telscape.
(b) Lender, Telscape and each Co-Borrower acknowledge and agree that
subject to compliance with the terms and conditions of this Agreement, Telscape
may, and subject to the terms hereof is required to, (without the consent of any
Co-Borrower) cause one or more additional Domestic and/or Foreign Subsidiaries
of Telscape to become a Co-Borrower hereunder by executing a form of the annex
to
THE TERMS AND CONDITIONS ON PAGES 2 THROUGH 11 ARE A PART
OF THIS LOAN AND SECURITY AGREEMENT.
<TABLE>
============================================== ===========================================
<S> <C>
LENDER: NEWBRIDGE FINANCIAL SERVICES, a unit TELSCAPE: TELSCAPE INTERNATIONAL, INC.
of GE CAPITAL CORPORATION
BY: BY:
PRINT NAME: PRINT NAME:
TITLE: DATE: TITLE: DATE:
============================================== ===========================================
</TABLE>
<PAGE>
the Schedule of Borrowing Subsidiaries set forth as EXHIBIT A, as the case
may be, and such additional Domestic Subsidiaries may thereafter borrow amounts
hereunder to finance the acquisition of equipment which is, or is to be placed,
in the United States, Mexico or other Latin American jurisdictions and such
additional Foreign Subsidiaries of Telscape may thereafter borrow amounts
hereunder to finance the acquisition of equipment which is, or is to be placed,
in Mexico or other Latin American jurisdictions. The obligations of each
Domestic Co-Borrower hereunder and under each Note evidencing amounts from time
to time advanced hereunder to a Co-Borrower shall be joint and several
obligations of Telscape and all Domestic Co-Borrowers. The obligations of each
Foreign Co-Borrower hereunder and under each Note evidencing amounts from time
to time advanced hereunder to a Foreign Co-Borrower shall be joint and several
obligations of Telscape and all Co-Borrowers. Telscape and the Co-Borrowers
agree that, prior to any additional Subsidiary of Telscape becoming a
Co-Borrower hereunder, such Subsidiary and Telscape shall execute and deliver to
Lender a form of the annex to the Schedule of Borrowing Subsidiaries, as the
case may be, and if required by Lender cause the delivery of an opinion of legal
counsel to Telscape and such additional Subsidiary dated the date of the
execution of the form of the annex to the Schedule of Borrowing Subsidiaries in
form and substance satisfactory to Lender and such other documents as the Lender
may request, including but not limited to a certificate of a responsible officer
of such additional Subsidiary as to the authority of such additional Subsidiary
to execute, deliver and perform this Agreement and all Notes and as to the
incumbency and signature of the officer or officers signing Borrowing
Certificates and Notes.
2. THE NOTES AND PAYMENT TERMS: Each advance of funds requested by a
Borrowing Certificate (an "ADVANCE") executed by a Domestic Co-Borrower shall be
evidenced by a Note in the form of EXHIBIT B, in each case satisfactory to the
Lender, executed by Telscape and all Domestic Co-Borrowers representing the
joint and several obligation of Telscape and all Domestic Co-Borrowers to pay
the aggregate unpaid principal amount of the Note (plus any accrued interest
thereon) until paid in full as provided below. Each Advance requested by a
Borrowing Certificate (an "ADVANCE") executed by a Foreign Co-Borrower shall be
evidenced by a Note in the form of EXHIBIT C, in each case satisfactory to the
Lender, executed by Telscape and each Co-Borrower representing the joint and
several obligation of Telscape and all Co-Borrowers to pay the aggregate unpaid
principal amount of the Note, plus any accrued interest thereon, until paid in
full as provided below. A Domestic Co-Borrower shall be jointly and severally
liable for each Note executed by Telscape and other Co-Borrowers under this
Agreement even if the Note is issued prior to the addition of such particular
Domestic Co-Borrower as a Co-Borrower hereunder and such Domestic Co-Borrower is
not a maker of the Note. A Foreign Co-Borrower shall be jointly and severally
liable for each Note executed by Telscape and other Foreign Co-Borrowers under
this Agreement even if the Note is issued prior to the addition of such
particular Foreign Co-Borrower as a Co-Borrower hereunder and such Foreign
Co-Borrower is not a maker of a Note. Each Co-Borrower acknowledges that an
Event of Default under any Note issued under this Agreement shall constitute an
Event of Default under all Notes issued hereunder. Each Note shall be dated the
borrowing date for that Note and be stated to mature on the maturity date set
forth in the Note (the "Maturity Date"). Except as otherwise provided herein,
each Note shall bear interest from the borrowing date on the outstanding unpaid
Principal Amount thereof at a fixed rate per annum (compounded monthly and
computed on the basis of a year of 360 days for the actual days elapsed) equal
to the applicable Interest Rate set forth above. In computing interest on any
Note, the borrowing date shall be included and the date of payment excluded.
Each Note shall be payable in the number of payments of principal and interest
set forth in that Note, commencing on the First Payment Date set forth in that
Note and continuing on each immediately successive Payment Date thereafter in an
amount equal to the Payment Amount set forth in that Note. A Payment Date shall
be the first day of each successive month following the First Payment Date and
continuing thereafter so long as any amounts are owed to the Lender under such
Note. If a Payment Date is not a business day, the Payment Date shall be on the
first business day following the nonbusiness day, and interest thereon shall be
payable at the rate in effect during such extension. Each payment shall be
credited first to accrued and unpaid interest and the balance to the Principal
Amount (provided that in any event the entire Principal Amount of the Note then
outstanding together with any accrued and unpaid interest shall be paid on the
final Payment Date, which shall be the Maturity Date). The Lender is authorized
to endorse the date and amount of each Advance and each payment of the Principal
Amount and interest with respect to the Note on the schedule annexed to and
constituting a part of the Note, which endorsement shall constitute prima facie
evidence of the accuracy of the information endorsed.
All payments shall be made in lawful money of the United States of America
in immediately available funds and without set off or counterclaim to the Lender
or any subsequent assignee of a Note.
Notwithstanding the foregoing, if Telscape or any Co-Borrower shall fail
to pay within ten (10) days after when due any part of the Principal Amount,
interest or any other amount payable hereunder or under the Note, such amount
shall bear interest at a rate per annum that is three percent (3%) higher than
the Interest Rate from the due date until such overdue Principal Amount,
interest, or other amounts are paid in full (before and after judgment) whether
or not any notice of default in the payment thereof has been delivered.
Notwithstanding any provision of this Agreement, it is the intent of the
Lender, Telscape and each Co-Borrower that the Lender, or any subsequent holder
of a Note, shall never be entitled to receive, collect, reserve or apply, as
interest, any amount in excess of the maximum lawful rate of interest permitted
to be charged by applicable law, as amended or enacted from time to time. In the
event the Lender, or any subsequent holder of a Note, ever receives, collects,
reserves or applies as interest, interest in excess of the then maximum lawful
rate of interest, such amount which would be excessive interest shall be deemed
a partial prepayment of the Principal Amount and treated hereunder as such, or,
if the principal Indebtedness, defined in Section 6 hereof, evidenced thereby,
and all other amounts due are paid in full, any remaining excess funds shall
immediately be paid to the appropriate Co-Borrower. In determining whether or
not the interest paid or payable, under any specific contingency, exceeds the
maximum lawful rate of interest, each Co-Borrower and the Lender shall, to the
maximum extent permitted under applicable law, (a) exclude voluntary prepayments
and the effects thereof as it may relate to any fees charged by the Lender, and
(b) amortize, prorate, allocate and spread, in equal parts, the total amount of
interest throughout the entire term of the Indebtedness; provided that if the
Indebtedness is paid in full prior to the end of the full contemplated term
hereof, and if the interest received over the actual period of existence hereof
exceeds the maximum lawful rate of interest, the Lender or any subsequent holder
of a Note shall refund to the appropriate Co-Borrower the amount of such excess,
and in such event shall not be subject to any penalties provided by any laws
-2-
<PAGE>
for contracting for, charging, reserving, collecting or receiving interest in
excess of the maximum lawful rate of interest.
3. PROCEDURES FOR BORROWING: Telscape and a Co-Borrower shall give Lender
at least five (5) business days notice of the intention to borrow amounts
hereunder to finance the acquisition by such Co-Borrower of equipment which is,
or is to be placed in, jurisdictions within the United States and at least
thirty (30) business days notice of the intention to borrow amounts hereunder to
finance equipment which is, or is to be placed, in Mexico or other Latin
American jurisdictions, by issuing and delivery to Lender a Borrowing
Certificate executed by Telscape and the Co-Borrower which is to acquire the
equipment to be financed with the proceeds of the Advance, in a form and
substance satisfactory to Lender, specifying the business day on which the
borrowing is to be made and the amount of the borrowing and attaching thereto
the applicable purchase order issued by such Co-Borrower and related invoice
from the Supplier which is to be paid by Lender with the proceeds of the loan.
On the borrowing date specified in the Borrowing Certificate, providing that all
conditions precedent have been satisfied, Lender shall transmit the borrowed
funds to an account maintained by and in the name of Supplier. The aggregate
principal amount of each borrowing shall be not less than $25,000. Lender shall
not be required to make Advances more than twice per calendar month.
4. PLACE OF PAYMENT: The Principal Amount, interest and fees, if any,
shall be payable at 501 Corporate Centre Drive, Suite 600, Franklin, Tennessee
37067, or such other place as may be designated, from time to time in writing,
by Lender or any subsequent holder.
5. PREPAYMENT: (a) Beginning thirty (30) business days after the date of
each Advance evidenced by a Note, a Co-Borrower may, at its option but subject
to the satisfaction of the requirements of the next sentence, at any time and
from time to time, prepay such Advance, in whole or in part, upon at least (30)
business days prior written notice to Lender specifying the date and amount of
prepayment in a minimum amount of $50,000 (unless the outstanding balance of the
Note is less than $50,000 then the payment shall be the balance). Any such
prepayment occurring during the first, second and third years following the date
of such Advance shall be subject to a prepayment premium equal to a percentage
of the amount being prepaid as follows: three percent (3%) if the prepayment is
made during the first year following the date of such Advance; two percent (2%)
if the prepayment is made during the second year following the date of such
Advance; and one percent (1%) if the prepayment is made during the third year
following the date of such Advance.
(b) If (i) a Co-Borrower is unable to satisfy the conditions of Section
11(l)(ii) or (iii) due to the intended movement of Collateral to or within a
jurisdiction in Latin America other than Mexico and (ii) no Event of Default, or
condition or event which with the passage of time and/or giving of notice would
constitute an Event of Default, under this Agreement has occurred and is
continuing, then such Co-Borrower may, upon at least (30) business days prior
written notice to Lender specifying the date and amount of prepayment, prepay
without prepayment premium principal amounts owed hereunder in an amount equal
to the principal amount advanced hereunder by Lender to finance the acquisition
of such Collateral, and obtain a release, at the sole expense of such
Co-Borrower, of any lien, security, trust or other ownership interest of the
Lender on such Collateral, provided that (x) the amount of prepayments under
this Section 5(b) by all Co-Borrowers may not to exceed $150,000 in the
aggregate within any twelve month period, and (y) as a condition to the exercise
by a Co-Borrower of this right of prepayment, the Lender may require such
Co-Borrower, at the sole expense of such Co-Borrower, to execute and deliver (or
cause the execution and delivery of) such certificates and modifications or
amendments to existing agreements or the execution of replacement agreements as
Lender may reasonably request to assure the compliance by such Co-Borrower with
the conditions to this right of prepayment and to assure that the release of any
lien or security interest does not adversely affect Lender's rights on all
remaining Collateral. The payment made under this Section shall be in lieu of,
and not in addition to, the payment made under paragraph (a).
6. SECURITY INTEREST: OBLIGATIONS SECURED: Each Domestic Co-Borrower (as
debtor) hereby assigns as collateral and grants to Lender (as secured party), as
security for all of the Indebtedness, and each Foreign Co-Borrower (as debtor)
hereby assigns as collateral and grants to Lender (as secured party), as
security for the Foreign Co-Borrower Indebtedness, a continuing security
interest in and to, all of such Co-Borrower's right, title and interest in and
to the property and the property rights described in Section 7 hereof, whether
now owned or hereafter acquired or arising, wherever located, together with all
substitutions therefor and all accessions, replacements and renewals thereof,
and in all proceeds and products thereof (collectively, the "COLLATERAL") .
"INDEBTEDNESS" means all Domestic Co-Borrower Indebtedness and Foreign
Co-Borrower Indebtedness. "FOREIGN CO-BORROWER INDEBTEDNESS" means all
indebtedness, liabilities and obligations to Lender of all Foreign Co-Borrowers,
of any class or nature, whether arising under or in connection with this
Agreement, and/or the other Loan Documents or otherwise, whether now existing or
hereafter incurred, direct or indirect, absolute or contingent, secured or
unsecured, matured or unmatured, joint or several, whether for principal,
interest, fees, expenses, lease obligations, indemnities or otherwise,
including, without limitation, future advances of any sort, including all future
advances made by Lender for taxes, levies, insurance and/or repairs to or
maintenance of the Collateral, the unpaid principal amount of, and accrued
interest owed by the Foreign Co-Borrowers on the Notes, and any expenses of
collection or protection of Lender's rights, including reasonable attorneys'
fees. "DOMESTIC CO-BORROWER INDEBTEDNESS" means all indebtedness, liabilities
and obligations to Lender of Telscape or any Domestic Co-Borrower, of any class
or nature, whether arising under or in connection with this Agreement and/or all
other documents, instruments, agreements and certificates evidencing or securing
any advance hereunder or any obligation for the payment or performance thereof
and/or executed and delivered in connection with any of the foregoing (the "LOAN
DOCUMENTS") or otherwise, whether now existing or hereafter incurred, direct or
indirect, absolute or contingent, secured or unsecured, matured or unmatured,
joint or several, whether for principal, interest, fees, expenses, lease
obligations, indemnities or otherwise, including, without limitation, future
advances of any sort, all future advances made by Lender for taxes, levies,
insurance and/or repairs to or maintenance of the Collateral, the unpaid
principal amount of, and accrued interest owed by the Domestic Co-Borrowers on
the Notes, and any expenses of collection or protection of Lender's rights,
including reasonable attorneys' fees.
7. DESCRIPTION OF COLLATERAL: The Collateral includes, and each
Co-Borrower hereby grants Lender a security interest in, all such Co-Borrower's
presently existing or hereafter acquired right, title and interest in, and to
(a) the equipment, fixtures, and other property identified in a Borrowing
Certificate pursuant to which Lender advances funds hereunder (such collateral
description in Borrowing Certificates are collectively referred to as the
"Collateral Schedule") or otherwise acquired or financed directly or indirectly
with loan proceeds from Lender (including, without limitation, hardware and
software, components, parts, wiring, cabling and associated electronics) and any
and all replacements of or substitutions for any of the foregoing, together with
all additions, attachments, components, parts, accessions, improvements, and
upgrades forming an integral part thereof, and all accessories installed thereon
or affixed thereto; and (b) to the extent not otherwise included, all proceeds
of the foregoing, including without limitation, (i) any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to Co-Borrower from time to
time with respect to any of the Collateral; (ii) any and all payments (in any
form whatsoever) made or due and payable to any Co-Borrower from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any governmental body,
authority, bureau or agency (or any person acting under color of governmental
authority); (iii) any and all other amounts from time to time paid or payable
under or in connection with any of the Collateral; and (iv) any and all cash
proceeds and non-cash proceeds in the form of equipment, inventory, accounts,
general intangibles, chattel paper or other proceeds with respect to any of the
Collateral (collectively, "Proceeds"). The Collateral Schedule is incorporated
in and made a part of this Agreement. Collateral may be released from the
Collateral Schedule and the
-3-
<PAGE>
security interests described herein only pursuant to Section 10 hereof.
8. REPRESENTATIONS AND WARRANTIES: In order to induce the Lender to enter
into this Agreement and to make the loans contemplated herein, each of Telscape
and each Co-Borrower represents and warrants that on the date of each Note's
execution and until payment in full of the indebtedness:
(a) Each of Telscape and each Co-Borrower (i) is duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it was
formed; (ii) has the power and legal authority to own or lease and operate its
property and to carry on its business as now being conducted; (iii) is properly
licensed, in good standing and duly qualified to do business in every
jurisdiction where necessary; (iv) has the power and authority and the legal
right to make, deliver and perform this Agreement and each Note to which it is a
party and to borrow hereunder and has received all necessary authorization from
its directors or partners, as applicable, to execute, deliver and perform this
Agreement, the Notes to which it is a party and any related documents to be
delivered pursuant to this Agreement, and (v) the Co-Borrowers are, and will
remain, Subsidiaries of Telscape for so long as such Subsidiary remains
obligated to Lender hereunder.
(b) The person executing this Agreement and each Note on behalf of each
Co-Borrower has been given the authority to bind Telscape and each Co-Borrower,
and this Agreement and all Notes executed by or on behalf of a Co-Borrower
constitute legally binding and enforceable obligations of such Co-Borrower and,
with respect to the Agreement, Telscape.
(c) The execution, delivery and performance of this Agreement and any Note
will not violate Telscape's or any Co-Borrower's charter, bylaws, partnership
agreement or other organizational papers, or any law, agreement or undertaking
to which Telscape or any Co-Borrower is a party, or by which Telscape or any
Co-Borrower is bound or affected.
(d) All required consents relative to the execution, delivery, and
performance of this Agreement and the Notes have been obtained, including any
required of the Federal Communications Commission, the Commerce Commission for
any state or other jurisdiction in which Telscape or any Co-Borrower is
operating ("PC") or any other governmental authority.
(e) All information, reports and other papers and data with respect to
Telscape and each Co-Borrower (other than projections) furnished to the Lender
by Telscape or a Co-Borrower at any time prior to the date hereof, were, to the
best knowledge of Telscape and such Co-Borrower at the time the same were
furnished, true and correct in all material respects, or have been subsequently
supplemented by other information, reports or other papers or data, to the
extent necessary to give the Lender a true and accurate knowledge of the subject
matter thereof in all material respects; and all projections with respect to
Telscape and any Co-Borrower furnished by Telscape or a Co-Borrower, as
supplemented, were prepared or presented in good faith by Telscape or a
Co-Borrower and had a reasonable basis. No fact is known to Telscape or any
Co-Borrower which materially and adversely affects the business, operations,
assets (taken as a whole), or financial condition of Telscape or any Co-Borrower
which has not been set forth in the financial statements provided to Lender in
connection with this Agreement or in such information, reports, papers and data,
or otherwise disclosed in writing to the Lender prior to the first borrowing
date relative to the initial loan made hereunder. All financial statements have
been prepared in accordance with GAAP applied consistently throughout the period
involved.
(f) There have been no material adverse changes in Telscape's consolidated
financial position since the date of the financial statements provided to Lender
in connection with the credit approval of Telscape relative to this Agreement.
(g) There is no litigation, investigation or proceeding threatened or
pending against Telscape or any Co-Borrower or against any of its assets or
revenues which, if decided adversely, would have a material adverse effect upon
Telscape's consolidated financial condition or its business, operations or
assets (taken as a whole).
(h) Each Co-Borrower is the sole owner of and has good and marketable
title to each item of Collateral (or will have at the time such Co-Borrower
acquires rights in the Collateral hereafter arising), free and clear of all
security interests, claims, liens, and encumbrances except as granted to Lender.
Lender has a fully-perfected first priority lien on, and security interest in,
all right, title and interest of each Co-Borrower in the US Collateral
enforceable against such Co-Borrower and third parties.
(i) Neither Telscape nor any Co-Borrower is in default under any
agreement, mortgage, note, security agreement or other documents to which it is
a party or by which it, or any of its property, is bound in any respect which
could be materially adverse to the business, operations, assets or financial
condition of Telscape on a consolidated basis, or which could materially
adversely affect the ability of Telscape or any Co-Borrower to perform its
obligations under this Agreement.
(j) Telscape and each Co-Borrower have paid all taxes due, except such
taxes as are being contested in good faith and against which Telscape has set up
reserves satisfactory to the Lender.
(k) Neither Telscape nor any Co-Borrower is engaged nor will any engage
principally, or as one of its important activities, in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin stock" within
the respective meaning of each of the quoted terms under Regulation U of the
Board of Governors of the Federal Reserve System as now, and from time to time,
hereafter in effect. No part of the proceeds of any loan will be used for
"purchasing" or "carrying" "margin stock" as so defined or for any purpose which
violates, or which would be inconsistent with, the provisions of the regulations
of such Board of Governors.
(l) Neither Telscape nor any Co-Borrower is an "investment company" or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940 as amended.
(m) Neither Telscape nor any Co-Borrower is in violation of any federal or
state law, rule or regulation or determination of an arbitrator, court or other
governmental authority, in each case applicable or binding upon Telscape or such
Co-Borrower or any of its properties or to which Telscape or such Co-Borrower or
any of its properties are subject, in each case which individually or in the
aggregate would have a material adverse effect on the rights of the Co-Borrower
or Lender in the Collateral or Telscape's consolidated financial condition or
operations or assets taken as a whole.
(n) There is no event which is, or with notice or lapse of time, or both,
would be an Event of Default as defined in Section 14 of this Agreement.
(o) A Purchase Agreement has been duly executed and delivered by the
Co-Borrower and the Supplier with respect to the Collateral for which proceeds
of an Advance are being requested by such Co-Borrower and will be in full force
and effect on the date of such Note.
(p) Telscape is reviewing its operations and those of its Subsidiaries
with a view to assessing whether its business (together with the businesses of
its Subsidiaries on a consolidated basis), will be vulnerable to a Year 2000
Problem or will be vulnerable to the effects of a Year 2000 Problem suffered by
any major commercial customers of Telscape or of any of its Subsidiaries, and
based upon this preliminary review has a reasonable basis to believe that no
Year 2000 Problem will cause a material adverse effect to Telscape on a
consolidated basis. For purposes of this Agreement, "Year 2000 Problem" means
any significant risk that computer hardware, software or equipment containing
embedded microchips essential to the business or operations of Telscape or any
other Co-Borrower will not, in the case of dates or time periods occurring after
December 31, 1999, function at least as effectively and reliably as in the case
of
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times or time periods occurring before January 1, 2000, including the making of
leap year calculations.
(q) Each Subsidiary of Telscape (other than Telereunion, Inc. and
Interlink Communications, Inc.) is a signatory to the Schedule of Borrowing
Subsidiaries attached hereto and forming a part hereof, and a Co-Borrower
hereunder.
9. CONDITIONS PRECEDENT:
(a) INITIAL LOAN. The obligation of the Lender to make the initial loan on
the first borrowing date shall be subject to the fulfillment prior to or
contemporaneously with the making of such loan of the following conditions
precedent:
(i) The Lender shall have received an opinion of legal counsel to
Telscape and each Co-Borrower as of such date, dated the first borrowing date,
in a form and substance satisfactory to Lender.
(ii) Lender shall have received a certificate of a responsible
officer of Telscape and each Co-Borrower as of such date, dated the first
borrowing date, as to the authority of such Co-Borrower(s) to execute, deliver
and perform this Agreement and all Notes.
(iii) The Lender shall have received a certificate of a responsible
officer of Telscape and each Co-Borrower as of such date, dated the first
borrowing date, as to the incumbency and signature of the officer or officers
signing the Agreement, the Notes and any other certificate or other documents to
be delivered pursuant thereto, together with evidence of the incumbency of such
responsible officer.
(iv) The Lender shall have received copies of all consolidated
financial statements of Telscape as required by Lender.
(B) ALL LOANS. The obligation of the Lender to make any loan (including
the initial loan) to be made by it on any borrowing date is subject to the
satisfaction of the following conditions precedent:
(i) The Lender shall have received a Note conforming to the
requirements hereof, and fully executed by the Co-Borrower which is requesting
the Advance evidenced thereby.
(ii) The representations and warranties made by Telscape and each
Co-Borrower in this Agreement and in each Borrowing Certificate shall be correct
in all material respects on and as of such borrowing date and after giving
effect to the loan to be made on such borrowing date.
(iii) No Event of Default or event or condition which with notice or
passage of time or both would constitute an Event of Default shall have occurred
and be continuing on such borrowing date or after giving effect to the loan to
be made on such borrowing date.
(iv) The Lender shall have received a Borrowing Certificate, dated
such borrowing date for such loan, satisfying the requirements of Section 3.
(v) Except where waived by Lender in the exercise of its reasonable
discretion, the Lender shall have received the waiver of liens and consent of
the real estate lessors of the Co-Borrower, and of such other persons as the
Lender shall deem desirable, to facilitate the removal by the Lender, upon the
occurrence of an Event of Default, of all items of US Collateral which are or
were personalty where first located on any real property that is subject to any
real estate leases and/or mortgages, such waivers of liens and consents to be in
form and substance satisfactory to the Lender and its counsel.
(vi) Telscape and all existing the Co-Borrowers shall have (1)
executed and delivered to Lender all documents (including, without limitation,
financing statements) necessary to create in favor of Lender a first-priority
perfected security interest in, and lien on, Collateral located in the United
States ("US Collateral") with evidence of any necessary filing, registration or
recordation of such documents, the payment of recording, stamp or other taxes
measured by indebtedness or otherwise required as a result of filing,
registration or recordation of such documents and searches confirming the
absence of any other liens or security interests thereon, and (2) with respect
to jurisdictions in the United States for which Lender has not previously
received an opinion of counsel covering its security interests in the US
Collateral, delivered an opinion of counsel to the applicable Co-Borrower(s),
dated the date of such Advance, in form and substance satisfactory to Lender to
the effect that the lien and security interest of Lender on such US Collateral
constitutes a perfected security interest in favor of Lender.
(vii) The Co-Borrowers shall have (1) executed and delivered to
Lender, if requested to do so by Lender, all trust documents requested by
Lender, together with such ancillary documents reasonably requested by Lender,
for Collateral located in Mexico which is enforceable against such Co-Borrower
and third parties ("Mexican Collateral"), together with evidence of (x) any
necessary filing, registration or recordation of such documents, (y) the payment
of any recording, stamp or other taxes measured by indebtedness or otherwise
required as a result of any filing, registration or recordation of such
documents and (z) to the extent available, the absence of any other liens or
security interests on such Mexican Collateral, and (2) delivered an opinion of
counsel to the applicable Co-Borrower(s), dated the date of such Advance, in
form and substance satisfactory to Lender to the effect that the documents have
been validly executed and delivered by, and are binding and enforceable upon,
the applicable Co-Borrower(s) and do not conflict with the applicable
Co-Borrower's organizational documents, material contracts or applicable law.
(viii) All proceedings and all other documents and legal matters in
connection with the transactions contemplated by the Agreement shall be
satisfactory in form and substance to the Lender and its counsel.
(C) ALL LOANS FINANCING COLLATERAL IN LATIN AMERICAN JURISDICTIONS OTHER
THAN MEXICO. The obligation of the Lender to make any loan (including the
initial loan) to be made by it on any borrowing date financing Collateral in, or
to be placed in, Latin American jurisdictions other than Mexico is subject to
the satisfaction of the following conditions precedent, in addition to the
conditions for all loans and the initial loan set forth herein:
(i) For any Advance which is to finance Collateral in, or to be
placed in, a jurisdiction in Latin America other than Mexico and Advances
financing Collateral in such jurisdiction, when aggregated with the proposed
Advance, will exceed $150,000, Lender must be satisfied that a procedure or
mechanism is available under the law of such jurisdiction for creating in favor
of Lender a first-priority security interest in, lien on, or trust or comparable
security or ownership interest in, Collateral located in such jurisdiction which
is "perfected" or otherwise enforceable against such Co-Borrower and third
parties; and Co-Borrower shall have (A) (1) executed and delivered to Lender, if
requested to do so by Lender, all documents reasonably requested by Lender for
the purpose of creating in favor of Lender a first-priority security interest
in, lien on, or trust or comparable security or ownership interest in,
Collateral located in such jurisdiction which is "perfected" or otherwise
enforceable against such Co-Borrower and third parties, together with evidence
of (x) any necessary filing, registration or recordation of such documents, (y)
the payment of any recording, stamp or other taxes measured by indebtedness or
otherwise required as a result of the execution or any filing, registration or
recordation of such documents and (z) to the extent available, the absence of
any other liens on or security or other adverse ownership interests in such
Collateral, and (2) delivered an opinion of counsel to the applicable
Co-Borrower(s), dated the date of such Advance, in form and substance
satisfactory to Lender to the effect that the documents have been validly
executed and delivered by, and are binding and enforceable upon, the applicable
Co-Borrower(s) and do not conflict with the applicable Co-Borrower's
organizational documents, material contracts or
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applicable law, or (B) made other arrangements for securing such Advance
satisfactory to Lender in its sole discretion.
(ii) For any Advance which is to finance Collateral in, or to be
placed in, a jurisdiction in Latin America other than Mexico and Advances
financing Collateral in Latin America other than Mexico, when aggregated with
the proposed Advance, will exceed $450,000, Lender must be satisfied that a
procedure or mechanism is available under the law of such jurisdiction for
creating in favor of Lender a first-priority security interest in, lien on, or
trust or comparable security or ownership interest in, Collateral located in
such jurisdiction which is "perfected" or otherwise enforceable against such
Co-Borrower and third parties; and Co-Borrower shall have (A) (1) executed and
delivered to Lender, if requested to do so by Lender, all documents reasonably
requested by Lender for the purpose of creating in favor of Lender a
first-priority security interest in, lien on, or trust or comparable security or
ownership interest in, Collateral located in such jurisdiction which is
"perfected" or otherwise enforceable against such Co-Borrower and third parties,
together with evidence of (x) any necessary filing, registration or recordation
of such documents, (y) the payment of any recording, stamp or other taxes
measured by indebtedness or otherwise required as a result of the execution or
any filing, registration or recordation of such documents and (z) to the extent
available, the absence of any other liens on or security or other adverse
ownership interests in such Collateral, and (2) delivered an opinion of counsel
to the applicable Co-Borrower(s), dated the date of such Advance, in form and
substance satisfactory to Lender to the effect that the documents have been
validly executed and delivered by, and are binding and enforceable upon, the
applicable Co-Borrower(s) and do not conflict with the applicable Co-Borrower's
organizational documents, material contracts or applicable law or (B) made other
arrangements for securing such Advance satisfactory to Lender in its sole
discretion.
10. RELEASE OF COLLATERAL AND SALE OF SUBSIDIARY. (a) In the event a Note
is paid in full, no Indebtedness remains outstanding under the Note and no Event
of Default (or condition or event which with the passing of time or the giving
of notice or both would constitute an Event of Default) has occurred and is
continuing, Lender agrees to release, at the cost and expense (including
reasonable attorneys' fees) of the obligors under such Note, that portion of
Collateral acquired with the proceeds of the Note from the lien(s) and security
interest(s) of this Agreement and the other Loan Documents, upon Lender's
receipt from the obligors under such Note of a request and adequate
documentation (including an itemized invoice of the Supplier) confirming that
the Collateral to be released was acquired with the proceeds of the Note that
has been paid in full.
(b) For so long as no Event of Default (or condition or event which with
the passing of time or the giving of notice or both would constitute an Event of
Default) has occurred and is continuing, Telscape may with the prior written
consent of Lender, such consent not to be unreasonably withheld, sell one or
more Co-Borrowers and obtain a release, at Telscape's sole cost and expense
(including reasonable attorneys' fees), from Lender of such Co-Borrower(s) from
any liability under this Agreement. Telscape and the Co-Borrowers acknowledge
that Lender may condition its consent on the repayment of all amounts advanced
hereunder (together with any applicable prepayment premium) which have financed
Collateral held by such Co-Borrower and the satisfaction of terms and conditions
concluded appropriate by Lender in the exercise of its reasonable discretion to
ensure that the sale of the Co-Borrower and the release of the Co-Borrower from
liability hereunder will not adversely affect the Lender's rights hereunder or
under the other Loan Documents or the likelihood of repayment of all amounts
advanced hereunder. As a condition to the exercise of the right to sell a
Co-Borrower and obtain the release of such Co-Borrower from any further
liability under this Agreement, (i) Telscape must give prior written notice (the
"Disposition Notice") to Lender of a pending transaction pursuant to which the
Co-Borrower would cease to be a Subsidiary of Telscape (a "Divested
Subsidiary"), which notice shall provide all material information about the
terms and conditions of the transaction and the anticipated closing date, (ii)
Telscape shall provide such other information about the proposed transaction as
Lender may reasonably request, and (iii) in the event of any change to the terms
of the proposed transaction from that disclosed to Lender, Telscape shall
provide all material information about such new or changed terms to Lender.
Lender must notify Telscape in writing whether it consents to the consummation
of the transaction as described in the notice within thirty (30) business days
of receipt of such Disposition Notice, provided if Lender has not received such
additional information requested by it within such time to permit it to be duly
considered or in the event of any change to the terms of the proposed
transaction from that disclosed to Lender, Lender shall have an additional
reasonable amount of time to consider (or in the event it has already given its
response) to reconsider whether to consent to the proposed transaction based
upon the additional and/or updated information. Any consent of Lender to such
transaction may be subject to the absence of any material adverse change between
the date of the consent and the consummation of the transaction.
11. AFFIRMATIVE COVENANTS: Each of Telscape and each Co-Borrower (with
respect to itself and its business, property and Collateral) warrants, covenants
and agrees that from the Agreement date and until performance and payment in
full of the Indebtedness, it will:
(a) Furnish to Lender as soon as available, but in any event within one
hundred and twenty (120) days after the end of each fiscal year of Telscape, a
copy of the consolidated balance sheet of Telscape as of the end of such year
and the related statements of operations and cash flows for such year, setting
forth in each case in comparative form, the figures for the previous year
audited by independent certified public accountants. The financial statements
shall be complete and correct in all material respects, and be prepared in
reasonable detail and in accordance with GAAP applied consistently throughout
the periods reflected therein (except as approved by such accountants or a
responsible officer, as the case may be, and disclosed therein).
(b) Furnish to Lender, concurrently with the delivery of the financial
statements referred to in subsection (a) hereof, a certificate of a responsible
officer of Telscape and each Co-Borrower stating that, to the best of such
officer's knowledge, Telscape and each Co-Borrower, during such period, has
observed or performed all of its covenants and other agreements, and satisfied
every condition contained in this Agreement and in the Notes to be observed,
performed or satisfied by it, and that such officer has obtained no knowledge of
any Event of Default except as specified in such certificate.
(c) Promptly upon receipt thereof, furnish to Lender one copy of each
written financial audit report submitted to Telscape by independent accountants
resulting from any annual, interim or special audits made by them of Telscape's
books.
(d) Furnish to Lender copies of all financial statements and material
reports which Telscape or any Co-Borrower may make to, or file with, the
Securities and Exchange Commission or any successor.
(e) Pay promptly when due all taxes, assessments, governmental charges,
claims for labor, supplies, rent and other obligations, which, if unpaid, might
become a lien against the Collateral or Telscape's or any Co-Borrower's other
assets, except liabilities (i) being contested in good faith and by appropriate
proceedings, which proceedings do not involve any danger of the sale, forfeiture
or loss of the Collateral or any interest therein or a material part of
Telscape's or such Co-Borrower's other assets, and (ii) against which Telscape
has set up reserves satisfactory to the Lender.
(f) Comply with all applicable laws, statutes, orders, rules, regulations,
and directions applicable to Telscape and each Co-Borrower and the Collateral or
any part thereof or operation of Telscape's or such Co-Borrower's business,
except where the failure to comply will not have a material adverse effect on
the value of the Collateral or the operations of Telscape on a consolidated
basis; provided that Telscape or such Co-Borrower may contest any such statutes,
orders, rules, regulations, and directions in any reasonable manner which will
not, in Lender's opinion, adversely affect Lender's rights or Telscape's
financial condition, business or operations or the priority of any lien or
security interest in the Collateral.
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<PAGE>
(g) Maintain and preserve in full force and effect all rights, privileges,
licenses, and franchises applicable to Telscape and each Co-Borrower necessary
for the orderly and efficient conduct of Telscape and each Co-Borrower's
business as is now conducted including, without limitation, any licenses or
authorizations required by the FCC or any other public utility commission or
comparable regulatory agency (a "PUC") for the operation and maintenance of its
present operations.
(h) Perform and comply in all material respects with all obligations under
the contracts and all other agreements to which it is a party or by which it is
bound relating to the Collateral except where the failure to do so would not
materially and adversely affect the value of the Collateral taken as a whole.
(i) Advise Lender promptly, in reasonable detail (i) of any lien, security
interest, encumbrance or claim made or asserted against any of the Collateral,
(ii) of any material change in the composition of the Collateral, and (iii) of
the occurrence of any other event which would have a material adverse effect on
the aggregate value of the Collateral, the security interest created hereunder,
or on Telscape's or such Co-Borrower's financial condition, business, or
operations.
(j) (1) Maintain books, records and accounts which, in reasonable detail,
accurately and fairly reflect its transactions and dispositions of its assets
and maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (A) transactions are executed in accordance with
management's general or specific authorization, (B) transactions are recorded as
necessary (x) to permit preparation of financial statements in conformity with
GAAP and (y) to maintain accountability for assets, (C) access to assets is
permitted only in accordance with management's general or specific authorization
and (D) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences, and (2) prepare all financial statements required hereunder in
accordance with GAAP consistently applied and in compliance with the regulations
of any governmental regulatory body having jurisdiction over Co-Borrower or
Co-Borrower's business and keep such books and records pertaining to its
financial affairs and to the Collateral at Telscape's and the Co-Borrowers'
address set forth above.
(k) Permit Lender or its representatives, at all reasonable times, to
inspect and copy Telscape's and each Co-Borrower's books and records pertaining
to its financial affairs and to the Collateral;
(l) Keep the Collateral at the original location of such Collateral as set
forth in the Collateral Schedule and such principal place of business of each
Co-Borrower at the address set forth above and not move any of the Collateral
from such locations, or change the location of Co-Borrower's principal place of
business without giving Lender at least thirty (30) days advance written notice
of such change or move, and in connection with any change in location of
Collateral or the principal place of business of any Co-Borrower, at its cost
and expense, from time to time, at the written request of Lender, execute,
deliver, file or record documents, agreements, instruments, certificates and (in
connection with movements of Collateral or principal places of business between
locations in the United States, Mexico, and/or other jurisdictions in Latin
America) opinions to the effect that the documents, agreements or instruments
have been validly executed and delivered by, and are binding and enforceable
upon, the applicable Co-Borrower(s) and do not conflict with the applicable
Co-Borrower's organizational documents, material contracts or applicable law (in
such manner and form as Lender may reasonably require) in order to create,
preserve, perfect, validate, satisfy, evidence or confirm the first priority
perfected security interest in, lien on, or trust or comparable security or
ownership interest in the Collateral, PROVIDED THAT notwithstanding the
foregoing, Co-Borrower shall not be required to undertake execute, deliver, file
or record such documents, agreements, instruments, certificates or opinions in
connection with any such move of Collateral to or within any jurisdiction in
Latin America other than Mexico, unless:
(i) at the time of such change or move an Event of Default, or condition
or event which with the passage of time and/or giving of notice would
constitute an Event of Default, under this Agreement has occurred and is
continuing;
(ii) the Collateral is to be placed in a jurisdiction in Latin America
other than Mexico and Advances financing Collateral in such jurisdiction,
when aggregated with the Advance(s) made to finance the Collateral
proposed to be moved to such jurisdiction, exceed $150,000, in which case
as a condition precedent to such placement of Collateral in such
jurisdiction (A) (1) Lender must be satisfied that a procedure or
mechanism is available under the law of such jurisdiction for creating in
favor of Lender a first-priority security interest in, lien on, or trust
or comparable security or ownership interest in, Collateral located in
such jurisdiction which is "perfected" or otherwise enforceable against
such Co-Borrower and third parties; and (2) Co-Borrower shall have (I)
executed and delivered (or caused to be executed and delivered) to Lender,
if requested to do so by Lender, all documents reasonably requested by
Lender for the purpose of creating in favor of Lender a first-priority
security interest in, lien on, or trust or comparable security or
ownership interest in, Collateral located in such jurisdiction which is
"perfected" or otherwise enforceable against such Co-Borrower and third
parties, together with evidence of (x) any necessary filing, registration
or recordation of such documents, (y) the payment of any recording, stamp
or other taxes measured by indebtedness or otherwise required as a result
of the execution or any filing, registration or recordation of such
documents and (z) to the extent available, the absence of any other liens
on or security or other adverse ownership interests in such Collateral,
and (II) delivered an opinion of counsel to the applicable Co-Borrower(s),
dated the date of such Advance, in form and substance satisfactory to
Lender to the effect that the documents have been validly executed and
delivered by, and are binding and enforceable upon, the applicable
Co-Borrower(s) and do not conflict with the applicable Co-Borrower's
organizational documents, material contracts or applicable law, or (B)
made other arrangements for securing the Advance(s) financing such
Collateral satisfactory to Lender in its sole discretion; or
(iii) the Collateral is to be placed in a jurisdiction in Latin America
other than Mexico and Advances financing Collateral in jurisdictions in
Latin America other than Mexico, when aggregated with the Advance(s) made
to finance the Collateral proposed to be moved to such jurisdiction,
exceed $450,000, in which case as a condition precedent to such placement
of Collateral in such jurisdiction (A) (1) Lender must be satisfied that a
procedure or mechanism is available under the law of such jurisdiction for
creating in favor of Lender a first-priority security interest in, lien
on, or trust or comparable security or ownership interest in, Collateral
located in such jurisdiction which is "perfected" or otherwise enforceable
against such Co-Borrower and third parties; and (2) Co-Borrower shall have
(I) executed and delivered (or caused to be executed and delivered) to
Lender, if requested to do so by Lender, all documents reasonably
requested by Lender for the purpose of creating in favor of Lender a
first-priority security interest in, lien on, or trust or comparable
security or ownership interest in, Collateral located in such jurisdiction
which is "perfected" or otherwise enforceable against such Co-Borrower and
third parties, together with evidence of (x) any necessary filing,
registration or recordation of such documents, (y) the payment of any
recording, stamp or other taxes measured by indebtedness or otherwise
required as a result of the execution or any filing, registration or
recordation of such documents and (z) to the extent available, the absence
of any other liens on or security or other adverse ownership interests in
such Collateral, and (II) delivered an opinion of counsel to the
applicable Co-Borrower(s), dated the date of such Advance, in form and
substance satisfactory to Lender to the effect that the
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documents have been validly executed and delivered by, and are binding and
enforceable upon, the applicable Co-Borrower(s) and do not conflict with
the applicable Co-Borrower's organizational documents, material contracts
or applicable law) or (B) made other arrangements for securing the
Advance(s) financing such Collateral satisfactory to Lender in its sole
discretion.
(m) Keep the Collateral in good repair and operating condition, ordinary
wear and tear excepted and permit Lender or its representatives at all times,
upon reasonable notice, to enter into and upon any premises where any of the
Collateral is located for the purpose of inspecting it, observing its use or
otherwise protecting its interest therein.
(n) If any Collateral, in whole or in part, shall be lost, stolen or
destroyed or damaged, or is taken in any condemnation or similar proceeding by a
governmental authority (any such Collateral is referred to as the "Affected
Collateral"), promptly and fully notify Lender and (i) immediately place the
Affected Collateral in good condition and working order, or (ii) replace the
Affected Collateral with one of like value which is in good repair, condition,
and working order, and grant a first priority perfected security interest in,
lien on, or trust or comparable security ownership interest in such substitution
to the same extent that Lender had (or was required to have) in the Affected
Collateral, or (iii) prepay Lender, without prepayment premium, loans in an
amount equal to the value of such Affected Collateral.
(o) At its cost and expense, from time to time, at the written request of
Lender, execute, deliver, file or record documents, agreements and instruments
(in such manner and form as Lender may reasonably require) in compliance with or
to accomplish the covenants and agreements of Telscape and each Co-Borrower in
this Agreement; in order to create, preserve, perfect, validate or satisfy the
security interest in, lien on, or trust or comparable security ownership
interest in the Collateral granted or required hereby, but in each case subject
to the conditions to such requirements as set forth elsewhere herein; or to
enable Lender to exercise and enforce its rights hereunder. Each Co-Borrower
also hereby authorizes Lender to file any such financing statement or amendment
thereto, without the signature of the Co-Borrower, or with a copy or telecopy of
the Co-Borrower's signature, to the extent permitted by applicable law, or
during upon the occurrence and during the continuance of an Event of Default
hereunder to execute any financing statement or amendment thereof on behalf of
each Co-Borrower as each Co-Borrower's attorney-in-fact.
(p) Telscape shall take all actions necessary and commit adequate
resources to assure that computer-based and other systems of Telscape and its
Subsidiaries are able to process dates effectively, including dates before, on
and after January 1, 2000, without experiencing any Year 2000 Problem that could
cause a material adverse effect to the consolidated financial results of
Telscape. At the reasonable request of Lender, Telscape will provide Lender with
assurances and substantiations (including but not limited to the results of
internal and external audit reports prepared in the ordinary course of business)
reasonably acceptable to Lender that Telscape and its Subsidiaries is taking all
reasonable actions to assure the future conduct of its and their businesses and
operations before, on and after January 1, 2000 without experiencing a Year 2000
Problem causing a material adverse effect.
(q) Furnish to Lender such additional information or documents,
certificates, reports and agreements regarding Telscape or such Co-Borrower, its
financial condition or the Collateral, as Lender may reasonably request.
(r) Cause each Subsidiary of Telscape formed or acquired after the date
hereof to become a Co-Borrower hereunder in conformity with the requirements of
Section 1(b).
(s) Use its best efforts to cause Interlink Communications, Inc. to become
a Co-Borrower hereunder on or before June 1, 1999 in conformity with the
requirements of Section 1(b).
12. NEGATIVE COVENANTS: Until payment in full of the indebtedness, each of
Telscape and each Co-Borrower covenants that it will not directly or indirectly;
(a) Sell, lease, assign, transfer, pledge, create, or permit a security
interest in, or otherwise encumber any of the Collateral, or any of its rights
therein, or permit any levy, lien or encumbrance thereon in favor of anyone
other than Lender, provided that a Co-Borrower may remove any expansion,
modification or add-ons to Collateral if (i) such expansion, modification or
add-on is not a replacement of or substitution for Collateral, (ii) such
expansion, modification or add-on was not financed with an Advance, and (iii)
immediately after such removal, the Collateral at issue (including equipment,
software and operating systems) has a level of functionality equal to or better
than existing immediately prior to the initiation of the expansion, modification
or add-on and is in good repair and operating condition, ordinary wear and tear
excepted.
(b) Use, or permit the Collateral to be used, for any unlawful purpose or
in violation of any law, statue or ordinance if the effect of such use is to
materially and adversely affect the Collateral or the Lender's rights therein or
the operations of Telscape on a consolidated basis.
(c) Permit the Collateral to become part of, or be affixed to, any real
property without first assuring, to the reasonable satisfaction of Lender, that
Lender's security interest will be prior and senior to any interest or lien then
held, or thereafter acquired, by any mortgagee of such real property or the
owner or purchaser of any interest therein.
(d) Permit the Collateral to comprise a part of any Co-Borrower's
inventory.
(e) Permit anything to be done that may impair the value of any of the
Collateral or the security intended to be afforded by this Agreement, if the
effect of such impairment has a material adverse effect on the value of the
Collateral, either individually or in the aggregate, or the security intended to
be afforded by this Agreement.
(f) Dispose of any part of the Collateral without the express prior
written consent of Lender.
(g) Change its name or change its structure in any material way without
giving Lender at least thirty (30) days advance written notice thereof.
(h) Engage in any business activities or operations substantially
different from or unrelated to Telscape's or such Co-Borrower's present business
activities and operations.
(i) Permit any Change in Control of Telscape to take place without
Lender's prior written consent. A "Change in Control" of Telscape shall be
deemed to have occurred upon any change in the direct or indirect control of, or
the ability or right to control, a majority of the voting shares of any class of
securities or ownership rights in Telscape or in the right and/or the power to
control the election of the board of directors of Telscape.
(j) Permit any Co-Borrower to no longer be a Subsidiary of Telscape
without the prior written consent of Lender, such consent not to be unreasonably
withheld.
13. RISK OF LOSS AND INSURANCE: All risk of loss of, damage to, or
destruction of the Collateral shall, at all times, be with each Co-Borrower.
Each Co-Borrower shall procure and maintain with financially sound and reputable
companies, insurance policies (i) insuring the Collateral against loss by fire,
explosion, theft and such other casualties as are usually insured against by
companies engaged in the same or similar business, and (ii) insuring such
Co-Borrower and the Lender against liability for personal injury and property
damage relating to the Collateral. The policies shall be in such form and in
such amounts and coverage as may be reasonably satisfactory to the Lender, with
losses payable to such Co-Borrower and the Lender as their respective interest
may appear. Each Co-Borrower shall, if requested by Lender, deliver to the
Lender
-8-
<PAGE>
evidence that such insurance coverage is in effect. All insurance shall (i)
contain a breach of warranty clause in favor of the Lender, (ii) provide that no
cancellation, reduction in amount or change in coverage thereof shall be
effective until at least thirty (30) days after receipt by the Lender of written
notice thereof, and (iii) be reasonably satisfactory in all respects to the
Lender. If any Co-Borrower fails to furnish such insurance or fails to pay the
premiums therefor, Lender may do so or may obtain insurance of its interest only
and add the amount of any such premium thereof to the other amounts secured
hereby. Lender is under no obligation nor duty, however, to pay such premiums or
obtain such insurance.
14. DEFAULT: The occurrence of any one or more of the following will
constitute an "Event of Default" under this Agreement:
(a) Any Co-Borrower shall fail to pay when due any Payment Amount or
any other amounts payable under this Agreement or any Note and such failure
continues for five (5) business days after receipt by such Co-Borrower of
written notice from Lender of such failure;
(b) A breach or failure in the observance or performance by Telscape
or any Co-Borrower of any other material provision of this Agreement which is
not remedied within thirty (30) days after receipt by Telscape or such
Co-Borrower of notice of such breach or failure;
(c) Any material representation, warranty or covenant made herein,
or in any certificate, document, financial or other statement delivered in
connection with this Agreement, or hereafter made by Telscape or any Co-Borrower
proves to have been incorrect in any material adverse respect when made or
given;
(d) Telscape, any Co-Borrower, or any surety or guarantor of the
Indebtedness evidenced by this Agreement or a Note (i) files a petition or has a
petition filed against it under the bankruptcy code, or any proceeding for
relief of insolvent debtors; (ii) generally and materially fails to pay its
debts as such debts become due; (iii) shall admit in writing its inability to
pay its debts as they become due; (iv) has a custodian, trustee or receiver
appointed, voluntarily or otherwise, for it or its assets for relief of
insolvent or troubled debtors; (v) benefits from, or is subject to, the entry of
an order for relief by any court of insolvency; (vi) makes an assignment for the
benefit of creditors; (vii) becomes insolvent (however otherwise evidenced);
(viii) liquidates, winds-up, dissolves or suspends business; or (ix) has
commenced against it any case, proceeding or other action seeking the issuance
of a warrant of attachment, execution, distraint or similar process against all
or any substantial part of its assets, which results in the entry of an order
for any such relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within sixty (60) days from the entry thereof;
(e) Telscape or any Co-Borrower shall (i) default in any payment of
any other instrument or agreement (other than with Lender) with an aggregate
principal amount outstanding in excess of $200,000 beyond the period of grace,
if any, provided in the applicable instrument or agreement, or (ii) default in
the observance of any other provision of such other instrument or agreement as
to cause, or permit the holder of such instrument or agreement to cause, the
obligations thereunder to become due prior to its stated maturity;
(f) One or more judgments or decrees shall be entered against
Telscape or any Co-Borrower involving in the aggregate a liability (not paid or
fully covered by insurance) of $200,000 or more, and any of such judgments or
decrees shall not have been vacated, discharged, or stayed or bonded pending
appeal within sixty (60) days after the entry thereof; or
(g) Any guaranty or subordination agreement required pursuant to
this Agreement is breached or becomes ineffective, or any guaranty or
subordinating creditor disavows its obligations under the guaranty or
subordination agreement; or
(h) Telscape or any Co-Borrower fails to perform any of its
obligations under any other agreement or lease with Lender; or
(i) At any time a Co-Borrower ceases to be a Subsidiary of Telscape;
or
(j) If any Change in Control should occur without Lender's prior
written consent, which may be withheld in Lender's sole and absolute discretion.
15. RIGHTS AND REMEDIES ON DEFAULT: At Lender's option, upon the
occurrence of any such Event of Default under Section 14, and at any time
thereafter, at Lender's option, Lender's commitment to lend shall terminate
and/or all unmatured Indebtedness evidenced by the Notes will immediately become
due and payable without presentation, demand, protest, or notice of any kind,
all of which are expressly waived. Lender may exercise, from time to time, any
rights and remedies available to it under this Agreement, any Note, the Uniform
Commercial Code and other applicable law. Telscape and each Co-Borrower agree
that upon the occurrence and during the continuance of an Event of Default, to
the extent permitted by applicable law (i) any amounts payable under this
Agreement or under the Notes shall thereafter bear interest at a rate per annum
equal to the Interest Rate plus three percent (3%), or the maximum rate per
annum allowed by law, whichever is less, compounded monthly and payable on
demand (both before and after judgment), until the Indebtedness is paid in full
(which payment of Indebtedness in the event of acceleration shall not be subject
to any prepayment premium) or the Event of Default is cured, (ii) it will, at
Lender's request, assemble the Collateral and make it available to Lender at
places which Lender shall reasonably select, and (iii) Lender, by itself or its
agent, may, without notice to any person and without judicial process of any
kind, enter into any premises or upon any land owned, leased or otherwise under
the real or apparent control of Telscape or any Co-Borrower, or any agent of any
Co-Borrower, where the Collateral may be, or where Lender believes the
Collateral may be, and disassemble, render unusable, and/or repossess all or any
item of the Collateral, disconnecting and separating the Collateral from any
other property. Each Co-Borrower expressly waives all further rights to
possession of the Collateral after the occurrence and during the continuance of
an Event of Default and all claims for injuries suffered through, or loss caused
by, such entering and/or repossession.
Lender shall have the right to sell, lease or otherwise dispose of the
Collateral (or contract to do so), whether in its then condition or after
further preparation or processing, either at public or private sale, in lots or
in bulk, for cash or for credit, with or without warranties or representations,
and upon such terms and conditions as Lender, in its sole discretion, may deem
advisable. Lender shall have the right to purchase at any such sale. Lender will
give the applicable Co-Borrower reasonable notice of the time and place of any
public sale of the Collateral or of the time after which any private sale or
other intended disposition of the Collateral is to be made. Unless otherwise
provided by law, the requirement of reasonable notice shall be met if such
notice is delivered to the address of the Co-Borrowers and Telscape set forth
above at least ten (10) days before the time of the sale or disposition. Any
proceeds of any disposition by Lender of any of the Collateral may be first
applied by Lender to the payment of expenses, including reasonable attorneys'
fees and legal expenses, incurred in connection with the repossession, care,
safekeeping, sale or otherwise of any or all of the Collateral, or in any way
relating to the rights of Lender hereunder. Any balance of such proceeds may be
applied by Lender toward the payment of the Indebtedness in such order as
Lender, in its sole discretion, shall determine. The Co-Borrowers shall be
liable for, and shall pay to Lender on demand, any deficiency which may remain
after such sale, lease or other disposition, and Lender agrees to remit to the
Co-Borrowers any surplus resulting therefrom.
16. GENERAL AUTHORITY: Upon the occurrence and during the continuance of
an Event of Default hereunder, Lender shall have the full power to exercise at
any time and from time to time all or any of the following powers with respect
to all or any of the Collateral:
-9-
<PAGE>
(a) To demand, sue for collection, receive and give acquittance for
any and all monies due or to become due upon or by virtue thereof;
(b) To receive, take, endorse, assign and deliver any and all
checks, notes, drafts, documents and other property taken or received by Lender
in connection therewith;
(c) To settle, compromise, compound, prosecute or defend any action
or proceeding with respect thereof;
(d) To sell, transfer, assign or otherwise deal in or with the same
or the proceeds thereof, as fully and effectually as if Lender were the absolute
owner thereof; and
(e) In general, to do all things necessary to perform the terms of
this Agreement, including, without limitation, to take any action or proceedings
which Lender deems necessary or appropriate to protect and preserve the security
interest of Lender in the Collateral. In the case of failure of Telscape or any
Co-Borrower to comply with any provision of this Agreement which constitutes an
Event of Default and is continuing, Lender shall have the right, but shall not
be obligated, to so comply in whole or in part, and all moneys spent, and
expenses and obligations incurred or assumed by Lender in connection with such
performance or compliance, shall be payable on demand together with interest on
such amounts equal to the Interest Rate plus three percent (3%) from the date
and amount is expended or advanced by the Lender until paid. Such sums plus
interest shall constitute indebtedness secured hereby. Lender's effecting such
compliance shall not be a waiver of Telscape's or any Co-Borrower's default.
Lender shall be under no obligation or duty to exercise any of the powers hereby
conferred upon it.
17. EXPENSES: Telscape and each Co-Borrower will, upon demand, pay to
Lender all reasonable costs and expenses, including without limitation
attorneys' fees and expenses, incurred by Lender in the creation, satisfaction,
protection, defense or enforcement of Lender's rights hereunder, or in seeking
to collect the Indebtedness evidenced by this Agreement.
18. NOTICES: Notices, demands and other communications required to be
given hereunder to be effective shall be transmitted in writing by telex,
telecopy, or facsimile transmission and confirmed by a similar mailed writing,
by hand delivery, by first class, registered or certified mail, return receipt
requested, or an overnight courier service, addressed to Lender at 501 Corporate
Centre Drive, Suite 600, Franklin, TN 37067 (Attention: Director Operations &
Administration) or to the applicable as the case may be, at the address set
forth above or at such other address as any party may hereinafter substitute by
written notice. Notice shall be effective four (4) days after the date it was
mailed or upon receipt, whichever is earlier.
19. INDEMNIFICATION: Telscape and each Co-Borrower shall indemnify Lender
against and hold Lender harmless from any and all claims, actions, suits,
damages, allegations, liabilities, and liens and all costs and expenses,
including, without limitation, reasonable attorneys' fees incurred by Lender,
arising out of or in any way related to a Co-Borrower's ownership or use of the
Collateral, or in connection with the transactions contemplated by this
Agreement, including without limitation, the granting and perfection of the
security interest and lien described herein.
20. FCC AND PUC APPROVALS; NOTIFICATION: The exercise of any rights
hereunder by the Lender that may require FCC or PUC approval shall be subject to
obtaining such approval. Pending obtaining any such FCC or PUC approval, each
Co-Borrower will refrain from taking or permitting any action to be taken which
is contrary to the interest of the Lender. In accordance with the requirements
of 47 C.F.R. Section 22.917 (1984), or any successor provision, the Lender
agrees to notify the applicable Co-Borrower and the FCC (if required) in writing
at least ten (10) days prior to the repossession, in accordance with the
Agreement, of all or any part of the Collateral which is subject to the
regulation.
21. ASSIGNMENT: Lender may, in whole or in part, without notice to, or the
consent of Telscape or any Co-Borrower, sell, assign, grant a security interest
in or pledge its interest in the Collateral and/or a Note and any amounts due or
to become due hereunder to any third party ("Assignee"). Upon receiving written
notice from Lender, a Co-Borrower shall, if so directed, pay the amounts due
hereunder, directly to Assignee. Any Assignee shall be entitled to rely on
Telscape's and each Co-Borrower's agreements, representations, warranties, and
covenants contained herein, as applicable, and shall be considered a third-party
beneficiary thereof. Telscape and each Co-Borrower shall also execute and
deliver to Lender, or any Assignee, any additional documentation as Lender or
Assignee may reasonably request. Without Lender's prior written consent, neither
Telscape nor any Co-Borrower shall assign or transfer its obligations hereunder.
Any attempted transfer by Telscape or any Co-Borrower shall be void ab initio.
22. MISCELLANEOUS:
(a) No failure or delay by the Lender to exercise any right, power or
privilege hereunder shall operate as a waiver of any such right, power or
privilege, nor shall any single or partial exercise of any right, power or
privilege preclude any other or future exercise thereof. The Lender may waive
any default before or after the same has been declared and restore this
Agreement to full force without impairing any rights hereunder, such right of
waiver being a continuing one. The waiver of any provision hereunder will not be
effective unless in writing signed by the Lender.
(b) If any provision in this Agreement or a Note shall be prohibited or
unenforceable, such provision shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions.
(c) To the extent that the Indebtedness is now or hereafter secured by
property other than the Collateral, or by the guaranty, endorsement or property
of any other person, corporation or entity, then Lender shall have the right, in
its sole discretion, to determine which rights, security, liens, security
interest or remedies it shall, at any time, pursue, relinquish, subordinate,
modify, or take any other action with respect thereto without, in any way,
modifying or affecting any of them or any of its rights hereunder.
(d) Lender's duty of care (as imposed by law) with respect to the
Collateral in its possession shall be deemed fulfilled if Lender exercises
reasonable care in physically safekeeping such Collateral, or in the case of
Collateral in the custody or possession of a bailee or other third person,
exercises reasonable care in the selection of the bailee or other third person,
and Lender need not otherwise preserve, protect, insure, or care for any
Collateral.
(e) No right or remedy is exclusive of any other provided under this
Agreement or permitted by law or equity. All such rights and remedies shall be
cumulative and may be exercised singularly or concurrently at Lender's option.
The exercise or enforcement of any one such right or remedy shall neither be a
condition to, nor bar the exercise or enforcement of any other.
(f) All representations and warranties made herein or in any document,
certificate or statement delivered pursuant thereto, or in connection therewith,
shall survive the execution and delivery of this Agreement and the Notes.
(g) Subject to the notice requirement in Section 14, Telscape and each
Co-Borrower waives presentment, demand, protest and notice to the extent
permitted by applicable law.
(h) Time is of the essence with regard to each and every provision of this
Agreement and each Note.
(i) This Agreement may be executed in more than one counterpart, all of
which taken together, shall constitute one agreement.
23. SUCCESSORS AND ASSIGNS: This Agreement shall be binding on the parties
and inure to the benefit of Lender and each Co-Borrower and their successors and
permitted assigns.
-10-
<PAGE>
24. GOVERNING LAW: This Agreement and the Notes are being delivered to
Lender in the State of Tennessee and shall be construed in accordance with and
governed by the laws of such state, except to the extent the internal laws of
another jurisdiction are required to be applied in connection with the exercise
of rights pertaining to Collateral in that jurisdiction.
25. ENTIRE AGREEMENT: This Agreement constitutes the entire agreement
between Lender, Telscape and each Co-Borrower with respect to the subject matter
hereof and supersedes all previous negotiations, proposals, commitments,
writings, and understandings of any nature whatsoever.
-11-
<PAGE>
SCHEDULE OF BORROWING SUBSIDIARIES
By executing this Schedule of Borrowing Subsidiaries attached to and
forming a part of the Loan and Security Agreement dated as of December 7, 1998
(the "Loan Agreement"), between and among Telscape International, Inc. a Texas
corporation ("Telscape"), Newbridge Financial Services, a unit of GE Capital
Corporation (the "Lender"), (i) each of TELSCAPE USA, INC., a Texas corporation,
TSCP INTERNATIONAL, INC., a Texas corporation, and MSN COMMUNICATIONS, INC., a
California corporation, represents and warrants that it is a Domestic Subsidiary
of Telscape, joins as a party to the Loan Agreement, assumes the obligations of
a Domestic Co-Borrower under the Loan Agreement, and confirms that it is bound
by the terms and conditions of the Loan Agreement, including but not limited to
the grant to Lender of a security interest in all Collateral (the execution of
this instrument by the Co-Borrowers constitutes a grant of a security interest
in the Collateral) and (ii) each of TELSCAPE DE MEXICO, SA DE CV, a corporation
incorporated under the laws of Mexico D.F., N.S.I., SA DE CV, a corporation
incorporated under the laws of Mexico D.F., TELEREUNION INTERNATIONAL, SA DE CV,
a corporation incorporated under the laws of Mexico D.F., VEXTRO DE MEXICO, SA
DE CV, a corporation incorporated under the laws of Mexico D.F., LAN AND WAN, SA
DE CV, a corporation incorporated under the laws of Mexico D.F., SERVICIOS
CORPORATIVOS VEXTRO, SA DE CV, a corporation incorporated under the laws of
Mexico D.F., TELEREUNION, SA DE CV, a corporation incorporated under the laws of
Mexico D.F., and MS NOTICIAS, SA DE CV, a corporation incorporated under the
laws of Mexico D.F. represents and warrants that it is a Foreign Subsidiary of
Telscape, joins as a party to the Loan Agreement, assumes the obligations of a
Foreign Co-Borrower under the Loan Agreement, and confirms that it is bound by
the terms and conditions of the Loan Agreement, including but not limited to the
grant to Lender of a security interest in all Collateral (the execution of this
instrument by the Co-Borrowers constitutes a grant of a security interest in the
Collateral). The undersigned Co-Borrowers acknowledge and agree that (i) future
Subsidiaries of Telscape are required to become additional Co-Borrowers under
the Loan Agreement without the consent of any other Co-Borrower by execution of
a form of the Annex to this Schedule of Borrowing Subsidiaries by Telscape, the
Subsidiary and the Lender; (ii) the Lender is willing to extend certain credit
to the undersigned Co-Borrowers, subject to the terms and conditions set forth
in the Loan Agreement, including the condition that the undersigned Domestic
Co-Borrowers will be jointly and severally liable for the payment of all
Indebtedness owed by Telscape or any Co-Borrower to Lender under the Loan
Agreement and the condition that the undersigned Foreign Co-Borrowers will be
jointly and severally liable for the payment of all Indebtedness owed by any
Foreign Co-Borrower to Lender under the Loan Agreement; (iii) without this
condition of joint and several liability, Lender would not be willing to extend
credit to any Co-Borrower; and (iv) the undersigned Co-Borrowers and other
Subsidiaries of Telscape which may become additional Co-Borrowers under the Loan
Agreement are (or will be) related entities, and the undersigned Co-Borrowers
expect to increase their respective businesses, and to benefit directly and
indirectly, through the use of the equipment to be acquired by it and the other
Co-Borrowers with the proceeds of the loans to be made pursuant to the Loan
Agreement.
This Schedule of Borrowing Subsidiaries to the Loan Agreement is attached
to, and forms a part of, the Loan Agreement, is being delivered to Lender in the
State of Tennessee together with the Loan Agreement and shall be construed in
accordance with and governed by the laws of such state, except to the extent the
internal laws of another jurisdiction are required to be applied in connection
with the exercise of rights pertaining to Collateral in that jurisdiction.
Capitalized terms used in this Schedule of Borrowing Subsidiaries without
definition shall have the meanings set forth in the Loan Agreement to which this
Schedule is attached and forms a part.
This Schedule of Borrowing Subsidiaries may be executed in any number of
counterparts (by facsimile transmission or otherwise) and by the different
parties hereto on separate counterparts, each of which, when so executed, shall
be deemed an original, but all such counterparts shall constitute but one and
the same document.
IN WITNESS WHEREOF, the parties have executed this Schedule of Borrowing
Subsidiaries to the Loan and Security Agreement by their duly authorized
representatives:
TELSCAPE:
TELSCAPE INTERNATIONAL, INC.
BY:
TITLE:
CO-BORROWERS:
TELSCAPE USA, INC.
BY:
TITLE:
TSCP INTERNATIONAL, INC.
BY:
TITLE:
MSN COMMUNICATIONS, INC.
BY:
TITLE:
(SIGNATURES CONTINUED ON NEXT PAGE)
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<PAGE>
TELSCAPE DE MEXICO, SA DE CV
BY:
TITLE:
N.S.I., SA DE CV
BY:
TITLE:
TELEREUNION INTERNATIONAL,
SA DE CV
BY:
TITLE:
VEXTRO DE MEXICO, SA DE CV
BY:
TITLE:
LAN AND WAN, SA DE CV
BY:
TITLE:
SERVICIOS CORPORATIVOS
VEXTRO, SA DE CV
BY:
TITLE:
TELEREUNION, SA DE CV
BY:
TITLE:
MS NOTICIAS, SA DE CV
BY:
TITLE:
LENDER:
NEWBRIDGE FINANCIAL SERVICES,
A UNIT OF GE CAPITAL
CORPORATION
BY:
TITLE:
-13-
<PAGE>
EXHIBIT A
FORM OF ANNEX TO SCHEDULE OF BORROWING SUBSIDIARIES
By executing this Annex to the Schedule of Borrowing Subsidiaries attached
to and forming a part of the Loan and Security Agreement dated as of December 7,
1998, (the "Loan Agreement"), between and among Telscape International, Inc. a
Texas corporation ("Telscape"), Newbridge Financial Services, a unit of GE
Capital Corporation (the "Lender"), Domestic and/or Foreign Subsidiaries of
Telscape which are signatories to the Schedule of Borrowing Subsidiaries
attached to, and forming a part of, the Loan Agreement, and such additional
Domestic and/or Foreign Subsidiaries of Telscape which may become a party to the
Loan Agreement pursuant to Section 1(b) thereof, ____________________ represents
and warrants that it is a [FOREIGN OR DOMESTIC] Subsidiary of Telscape, joins as
a party to the Loan Agreement, assumes the obligations of a [FOREIGN/DOMESTIC]
Co-Borrower under the Loan Agreement, and confirms that it is bound by the terms
and conditions of the Loan Agreement, including but not limited to the grant by
_______________________ to Lender of a security interest in all its right, title
and interest in and to the Collateral as provided in the Loan Agreement. (The
execution of this instrument constitutes a grant by ___________________________
of a security interest in the Collateral). acknowledges and agrees that one or
more other Subsidiaries of Telscape may become additional [FOREIGN/DOMESTIC]
Co-Borrowers under the Loan Agreement without the consent of any other
[FOREIGN/DOMESTIC] Co-Borrower by execution of a form of the Annex to the
Schedule of Borrowing Subsidiaries by Telscape, the Subsidiary and the Lender.
______________________ acknowledges and agrees that (i) other Subsidiaries of
Telscape may become additional [FOREIGN/DOMESTIC] Co-Borrowers under the Loan
Agreement without the consent of any other Co-Borrower by execution of a form of
the Annex to this Schedule of Borrowing Subsidiaries by Telscape, the Subsidiary
and the Lender; (ii) the Lender is willing to extend certain credit to the
Co-Borrowers, subject to the terms and conditions set forth in the Loan
Agreement, including the condition that all Domestic Co-Borrowers will be
jointly and severally liable for the payment of all Indebtedness owed by
Telscape or any Co-Borrower to Lender under the Loan Agreement and the condition
that all Foreign Co-Borrowers will be jointly and severally liable for the
payment of all Indebtedness owed by any Foreign Co-Borrower to Lender under the
Loan Agreement; (iii) without this condition of joint and several liability,
Lender would not be willing to extend credit to any Co-Borrower; and (iv)
______________________ , the existing Co-Borrowers and Subsidiaries of Telscape
which may become additional Co-Borrowers under the Loan Agreement are (or will
be) related entities, and ______________________ expects to increase its
business, and to benefit directly and indirectly, through the use of the
equipment to be acquired by it and the other Co-Borrowers with the proceeds of
the loans to be made pursuant to the Loan Agreement.
_______________________ authorizes the Lender to attach this Annex to the
Schedule of Borrowing Subsidiaries to the Loan Agreement, which is attached to,
and forms a part of, the Loan Agreement. This Annex to the Schedule of Borrowing
Subsidiaries to the Loan Agreement is being delivered to Lender in the State of
Tennessee and shall be construed in accordance with and governed by the laws of
such state, except to the extent the internal laws of another jurisdiction are
required to be applied in connection with the exercise of rights pertaining to
Collateral in that jurisdiction. Capitalized terms used in this Annex to the
Schedule of Borrowing Subsidiaries without definition shall have the meanings
set forth in the Loan Agreement to which this Annex and the Schedule of
Borrowing Subsidiaries are attached and form a part.
This Annex may be executed in any number of counterparts (by facsimile
transmission or otherwise) and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same document.
IN WITNESS WHEREOF, the parties have executed this Annex to Schedule of
Borrowing Subsidiaries by their duly authorized representatives:
TELSCAPE:
TELSCAPE INTERNATIONAL, INC.
BY:
TITLE:
CO-BORROWER:
BY:
TITLE:
LENDER:
NEWBRIDGE FINANCIAL SERVICES,
A UNIT OF GE CAPITAL
CORPORATION
BY:
TITLE:
-14-
LENDER: NTFC CAPITAL CORPORATION
LOAN AND SECURITY AGREEMENT
BORROWER INFORMATION
BORROWER: TELSCAPE INTERNATIONAL, INC.,
PERSON TO CONTRACT/TITLE: TODD BINET, CHIEF FINANCIAL OFFICER
CO-BORROWERS: EACH SUBSIDIARY OF TELSCAPE LISTED ON THE SCHEDULE
OF BORROWING SUBSIDIARIES ATTACHED HERETO AND EACH
SUBSIDIARY WHICH SUBSEQUENTLY BECOMES A PARTY HERETO
PURSUANT TO SECTION 1(B) OF THIS AGREEMENT
Address: 2700 POST OAK BLVD, STE 1000
[X] Corporation
[ ] Partnership
City: HOUSTON County: State: TX Zip Code: 77056 [ ] Cooperative
Telephone Number: (713) 968-0968 Facsimile Number: (713) 968-0930
AGREEMENT TERMS AND CONDITIONS
<TABLE>
<S> <C> <C> <C>
Agreement Date Interest Rate DURING THE Termination Date Purchase Agreement No.
JANUARY 11, 1999 INTEREST ONLY PERIOD, THE JANUARY 1, 2000 N/A
90 DAY COMMERCIAL PAPER
RATE PUBLISHED IN THE WALL
STREET JOURNAL AS OF THE
DATE OF SUCH ADVANCE + 425
BASIS POINTS, AND ADJUSTED
THEREAFTER QUARTERLY (THE
"FLOATING INTEREST RATE")
FROM AND AFTER THE
CONVERSION DATE, THE 5
YR. FED. RES. TREAS.
CONSTANT MATURITY RATE
AS OF THE CONVERSION
DATE + 500 BASIS
POINTS (THE "FIXED
INTEREST RATE")
Commitment Amount No. of Payments Supplier Purchase Agreement Date
(US)$7,000,000 24 (4 INTEREST ONLY, NORTEL NETWORKS N/A
AND 20 PRINCIPAL AND
INTEREST)
</TABLE>
1. COMMITMENT TO LEND: (a) Subject to the terms and conditions provided in
this Loan and Security Agreement ("Agreement") and so long as no Event of
Default (as defined in Section 14 hereof) or event or condition which with
notice or passage of time or both would constitute an Event of Default has
occurred and is continuing hereunder, Lender agrees to lend to Telscape
International, Inc., a Texas corporation ("Telscape"), Domestic and/or Foreign
Subsidiaries of Telscape which are signatories to the Schedule of Borrowing
Subsidiaries attached hereto and forming a part hereof, and such additional
Domestic and/or Foreign Subsidiaries of Telscape which may hereafter become a
party hereto pursuant to Section 1(b) hereof (Domestic and/or Foreign
Subsidiaries of Telscape which are signatories to the Schedule of Borrowing
Subsidiaries attached hereto and such additional Domestic and/or Foreign
Subsidiaries of Telscape which may hereafter become a party hereto pursuant to
Section 1(b) of this Agreement are individually referred to as a "CO-BORROWER"
and collectively as the "CO-BORROWERS"), until the Termination Date set forth
above, an amount in the aggregate not to exceed the Commitment Amount set forth
above, which sum shall be used solely to finance the (i) purchase by such
Co-Borrower of NORTEL DMS 250/300 switching systems and other equipment and
related hardware, software, installation services, and associated software
sublicenses supplied by NORTEL pursuant to one or more Purchase Agreements
(individually and collectively, the "Purchase Agreement") made by and between
NORTEL Networks (the "Supplier") and such Co-Borrower for installation, if such
Co-Borrower is a Domestic Co-Borrower, in the United States, Mexico and other
Latin American jurisdictions, and if such Co-Borrower is a Foreign Co-Borrower,
in Mexico and other Latin American jurisdictions, and
(ii) the fees and expenses of Lender's counsel incurred in the creation of the
Loan Documents. "SUBSIDIARY" means, as to any person, a corporation,
partnership, limited liability company or other entity of which shares of stock
or other ownership interests having ordinary voting power (other than stock or
other ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the board of directors or other managers of
such corporation, partnership, limited liability company, or other entity, are
at the time owned, or the management of which is otherwise controlled, directly
or indirectly, through one or more intermediaries, or both, by such person.
"DOMESTIC SUBSIDIARY" means a Subsidiary incorporated under the laws of the
United States, one of the states of the United States, the District of Columbia,
or any territory, possession or protectorate of the United States. "FOREIGN
SUBSIDIARY" means a Subsidiary incorporated under the laws of any jurisdiction
other than the laws of the United States, one of the states of the United
States, the District of Columbia, or any territory, possession or protectorate
of the United States. "DOMESTIC CO-BORROWER" means a Co-Borrower which is a
Domestic Subsidiary of Telscape, and "FOREIGN CO-BORROWER" means a Co-Borrower
which is a Foreign Subsidiary of Telscape. Unless otherwise qualified, all
references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer
to a Subsidiary or Subsidiaries of Telscape.
(b) Lender, Telscape and each Co-Borrower acknowledge and agree that
subject to compliance with the terms and conditions of this Agreement, Telscape
may, and subject to the terms hereof is required to, (without the consent of any
Co-Borrower) cause one or more additional Domestic and/or Foreign Subsidiaries
of
THE TERMS AND CONDITIONS ON PAGES 2 THROUGH 14 ARE A PART OF
THIS LOAN AND SECURITY AGREEMENT
<TABLE>
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<S> <C>
LENDER: NTFC CAPITAL CORPORATION TELSCAPE: TELSCAPE INTERNATIONAL, INC.
BY: BY:
PRINT NAME: PRINT NAME:
TITLE: DATE: TITLE: DATE:
============================================== ===========================================
</TABLE>
<PAGE>
Telscape to become a Co-Borrower hereunder by executing a form of the annex to
the Schedule of Borrowing Subsidiaries set forth as EXHIBIT A, as the case may
be, and such additional Domestic Subsidiaries may thereafter borrow amounts
hereunder to finance the acquisition of equipment which is, or is to be placed,
in the United States, Mexico or other Latin American jurisdictions and such
additional Foreign Subsidiaries of Telscape may thereafter borrow amounts
hereunder to finance the acquisition of equipment which is, or is to be placed,
in Mexico or other Latin American jurisdictions. The obligations of each
Domestic Co-Borrower hereunder and under each Note evidencing amounts from time
to time advanced hereunder to a Co-Borrower shall be joint and several
obligations of Telscape and all Domestic Co-Borrowers. The obligations of each
Foreign Co-Borrower hereunder and under each Note evidencing amounts from time
to time advanced hereunder to a Foreign Co-Borrower shall be joint and several
obligations of Telscape and all Co-Borrowers. Telscape and the Co-Borrowers
agree that, prior to any additional Subsidiary of Telscape becoming a
Co-Borrower hereunder, such Subsidiary and Telscape shall execute and deliver to
Lender a form of the annex to the Schedule of Borrowing Subsidiaries, as the
case may be, and if required by Lender cause the delivery of an opinion of legal
counsel to Telscape and such additional Subsidiary dated the date of the
execution of the form of the annex to the Schedule of Borrowing Subsidiaries in
form and substance satisfactory to Lender and such other documents as the Lender
may request, including but not limited to a certificate of a responsible officer
of such additional Subsidiary as to the authority of such additional Subsidiary
to execute, deliver and perform this Agreement and all Notes and as to the
incumbency and signature of the officer or officers signing Borrowing
Certificates and Notes.
2. THE NOTES AND PAYMENT TERMS: Each advance of funds requested by a
Borrowing Certificate (an "ADVANCE") executed by a Domestic Co-Borrower shall be
evidenced by a Note in the form of EXHIBIT B, in each case satisfactory to the
Lender, executed by Telscape and all Domestic Co-Borrowers representing the
joint and several obligation of Telscape and all Domestic Co-Borrowers to pay
the aggregate unpaid principal amount of the Note (plus any accrued interest
thereon) until paid in full as provided below. Each Advance requested by a
Borrowing Certificate (an "ADVANCE") executed by a Foreign Co-Borrower shall be
evidenced by a Note in the form of EXHIBIT C, in each case satisfactory to the
Lender, executed by Telscape and each Co-Borrower representing the joint and
several obligation of Telscape and all Co-Borrowers to pay the aggregate unpaid
principal amount of the Note, plus any accrued interest thereon, until paid in
full as provided below. A Domestic Co-Borrower shall be jointly and severally
liable for each Note executed by Telscape and other Co-Borrowers under this
Agreement even if the Note is issued prior to the addition of such particular
Domestic Co-Borrower as a Co-Borrower hereunder and such Domestic Co-Borrower is
not a maker of the Note. A Foreign Co-Borrower shall be jointly and severally
liable for each Note executed by Telscape and other Foreign Co-Borrowers under
this Agreement even if the Note is issued prior to the addition of such
particular Foreign Co-Borrower as a Co-Borrower hereunder and such Foreign
Co-Borrower is not a maker of a Note. Each Co-Borrower acknowledges that an
Event of Default under any Note issued under this Agreement shall constitute an
Event of Default under all Notes issued hereunder. Each Note shall be dated the
borrowing date for that Note and be stated to mature on the maturity date set
forth in the Note (the "Maturity Date"). From the date of this Agreement to, but
not including, January 1, 2000 (the "Interest Only Period") and except as
otherwise provided herein, amounts owed hereunder and under each Note shall bear
interest on the outstanding unpaid Principal Amount thereof at a floating rate
per annum equal to the Floating Interest Rate. The Floating Interest Rate shall
be automatically adjusted prospectively on the second business day of each
Calendar Quarter based upon the 90 Day Commercial Paper Rate quoted in THE WALL
STREET JOURNAL on the immediately preceding Business Day. If The Wall Street
Journal should cease publication or fails to publish the 90 Day Commercial Paper
Rate, the Lender shall designate a comparable reference rate for use in
determining the Floating Interest Rate hereunder. Commencing January 1, 2000
(the "Conversion Date") and except as otherwise provided herein, amounts owed
hereunder and under each Note shall bear interest on the outstanding unpaid
Principal Amount thereof at the Fixed Interest Rate (the Fixed Interest Rate and
the Floating Interest Rate are collectively referred to as the "Interest Rate").
Interest shall be compounded monthly and computed on the basis of a year of 360
days for the actual days elapsed. In computing interest on any Note, the
borrowing date shall be included and the date of payment excluded. Interest
shall accrue on the principal amount outstanding on each Note at the Interest
Rate and shall be payable, in arrears, on each Payment Date as provided below.
For Payment Dates after the date hereof through and including January 1, 2000, a
Payment Amount of interest only shall be payable, in arrears, on each Payment
Date. Commencing with the first Payment Date after the expiration of the
Interest Only Period and continuing on each immediately successive Payment Date
thereafter through and including the Maturity Date and except as otherwise
provided herein, a Payment Amount of principal and interest under each Note
shall be payable in twenty equal payments of principal and interest, as set
forth in that Note. The Payment Amount of principal and interest shall be
calculated as twenty equal consecutive quarterly installments of principal and
interest sufficient to pay the Note in full with the final payment on the
Maturity Date, provided, however, the final (twentieth (20th)) payment shall be
in an amount equal to all outstanding principal hereunder, plus all accrued and
unpaid interest and all other unpaid charges hereunder. Each Borrower and Lender
understand that this payment schedule is intended to amortize fully the
principal amount of the Note and any other principal and interest amounts
outstanding will be added to the final payment on the Maturity Date. In any
event, the entire outstanding principal amount of the Note and all accrued but
unpaid interest and all other outstanding amounts due thereunder shall be paid
on the Maturity Date. A Payment Date shall be the first day of each Calendar
Quarter, commencing on April 1, 1999) and continuing thereafter so long as any
amounts are owed to the Lender under such Note. If a Payment Date is not a
business day, the Payment Date shall be on the first business day following the
nonbusiness day, and interest thereon shall be payable at the rate in effect
during such extension. Each payment shall be credited first to accrued and
unpaid interest and the balance to the Principal Amount (provided that in any
event the entire Principal Amount of the Note then outstanding together with any
accrued and unpaid interest shall be paid on the final Payment Date, which shall
be the Maturity Date). The Lender is authorized to endorse the date and amount
of each Advance and each payment of the Principal Amount and interest with
respect to the Note on the schedule annexed to and constituting a part of the
Note, which endorsement shall constitute prima facie evidence of the accuracy of
the information endorsed.
All payments shall be made in lawful money of the United States of America
in immediately available funds and without set off or counterclaim to the Lender
or any subsequent assignee of a Note.
Notwithstanding the foregoing, if Telscape or any Co-Borrower shall fail
to pay within ten (10) days after when due any part of the Principal Amount,
interest or any other amount payable hereunder or under the Note, such amount
shall bear interest at a rate per annum that is three percent (3%) higher than
the Interest Rate from the due date until such overdue Principal Amount,
interest, or other amounts are paid in full (before and after judgment) whether
or not any notice of default in the payment thereof has been delivered.
Notwithstanding any provision of this Agreement, it is the intent of the
Lender, Telscape and each Co-Borrower that the Lender, or any subsequent holder
of a Note, shall never be entitled to receive, collect, reserve or apply, as
interest, any amount in excess of the maximum lawful rate of interest permitted
to be charged by applicable law, as amended or enacted from time to time. In the
event the Lender, or any subsequent holder of a Note, ever receives, collects,
reserves or applies as interest, interest in excess of the then maximum lawful
rate of interest, such amount which would be excessive interest shall be deemed
a partial prepayment of the Principal Amount and treated hereunder as such, or,
if the principal Indebtedness, defined in Section 6 hereof, evidenced thereby,
and all other amounts due are paid in full, any remaining excess funds shall
immediately be paid to the appropriate Co-Borrower. In determining whether or
not the interest paid or payable, under any specific contingency, exceeds the
maximum lawful rate of interest, each Co-Borrower and the Lender shall, to the
maximum extent permitted under applicable law, (a) exclude voluntary prepayments
and the effects thereof as it may relate to any fees charged by the Lender, and
(b) amortize, prorate, allocate and spread, in equal parts, the total amount of
interest throughout the entire term of the Indebtedness; provided that if the
Indebtedness is paid in full prior to the end of the full contemplated term
hereof, and if the interest received over the actual period of existence hereof
exceeds the maximum lawful rate of interest, the Lender or any subsequent holder
of a Note shall refund to the appropriate Co-Borrower the amount of such excess,
and in such event shall not be subject to any penalties provided by any laws for
contracting for, charging, reserving, collecting or receiving interest in excess
of the maximum lawful rate of interest.
3. PROCEDURES FOR BORROWING: Telscape and a Co-Borrower shall give Lender
at least five (5) business days notice of the intention to borrow amounts
hereunder to finance the acquisition by such Co-Borrower of equipment which is,
or is to be placed in, jurisdictions within the United States and at least
thirty (30) business days notice of the intention to borrow amounts hereunder to
finance equipment which is, or is to be placed, in Mexico or other Latin
American jurisdictions, by issuing and delivery to Lender a Borrowing
Certificate executed by Telscape and the Co-Borrower which is to acquire the
equipment to be financed with the proceeds of the Advance, in a form and
substance satisfactory to Lender, specifying the business day on which the
borrowing is to be made and the amount of the borrowing and attaching thereto
the applicable purchase order issued by such Co-Borrower and related invoice
from the Supplier which is to be paid by Lender with the proceeds of the loan.
On the borrowing date specified in the Borrowing Certificate, providing that all
conditions precedent have been satisfied, Lender shall transmit the borrowed
funds to an account maintained by and in the name of Supplier. The aggregate
principal amount of each borrowing shall be not less than $25,000. Lender shall
not be required to make Advances more than twice per calendar month.
4. PLACE OF PAYMENT: The Principal Amount, interest and fees, if any,
shall be payable at 501 Corporate Centre Drive, Suite 600, Franklin, Tennessee
37067, or such other place as may be designated, from time to time in writing,
by Lender or any subsequent holder.
5. PREPAYMENT: (a) Beginning thirty (30) business days after the date of
each Advance evidenced by a Note, a Co-Borrower may, at its option
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but subject to the satisfaction of the requirements of the next sentence, at any
time and from time to time, prepay such Advance, in whole or in part, upon at
least (30) business days prior written notice to Lender specifying the date and
amount of prepayment in a minimum amount of $50,000 (unless the outstanding
balance of the Note is less than $50,000 then the payment shall be the balance).
Any such prepayment occurring during the first, second and third years after the
date of such Advance shall be subject to a prepayment premium equal to a
percentage of the amount being prepaid as follows: three percent (3%) if the
prepayment is made during the first year following the date of such Advance; two
percent (2%) if the prepayment is made during the second year following the date
of such Advance; one percent (1%) if the prepayment is made during the third
year following the date of such Advance; and zero percent (0%) if the prepayment
is made after the third year following the date of such Advance.
(b) If (i) a Co-Borrower is unable to satisfy the conditions of Section
11(l)(ii) or (iii) due to the intended movement of Collateral to or within a
jurisdiction in Latin America other than Mexico and (ii) no Event of Default, or
condition or event which with the passage of time and/or giving of notice would
constitute an Event of Default, under this Agreement has occurred and is
continuing, then such Co-Borrower may, upon at least (30) business days prior
written notice to Lender specifying the date and amount of prepayment, prepay
without prepayment premium principal amounts owed hereunder in an amount equal
to the principal amount advanced hereunder by Lender to finance the acquisition
of such Collateral, and obtain a release, at the sole expense of such
Co-Borrower, of any lien, security, trust or other ownership interest of the
Lender on such Collateral, provided that (x) the amount of prepayments under
this Section 5(b) by all Co-Borrowers may not to exceed $150,000 in the
aggregate within any twelve month period, and (y) as a condition to the exercise
by a Co-Borrower of this right of prepayment, the Lender may require such
Co-Borrower, at the sole expense of such Co-Borrower, to execute and deliver (or
cause the execution and delivery of) such certificates and modifications or
amendments to existing agreements or the execution of replacement agreements as
Lender may reasonably request to assure the compliance by such Co-Borrower with
the conditions to this right of prepayment and to assure that the release of any
lien or security interest does not adversely affect Lender's rights on all
remaining Collateral. The payment made under this Section shall be in lieu of,
and not in addition to, the payment made under paragraph (a).
6. SECURITY INTEREST: OBLIGATIONS SECURED: Each Domestic Co-Borrower (as
debtor) hereby assigns as collateral and grants to Lender (as secured party), as
security for all of the Indebtedness, and each Foreign Co-Borrower (as debtor)
hereby assigns as collateral and grants to Lender (as secured party), as
security for the Foreign Co-Borrower Indebtedness, a continuing security
interest in and to, all of such Co-Borrower's right, title and interest in and
to the property and the property rights described in Section 7 hereof, whether
now owned or hereafter acquired or arising, wherever located, together with all
substitutions therefor and all accessions, replacements and renewals thereof,
and in all proceeds and products thereof (collectively, the "COLLATERAL") .
"INDEBTEDNESS" means all Domestic Co-Borrower Indebtedness and Foreign
Co-Borrower Indebtedness. "FOREIGN CO-BORROWER INDEBTEDNESS" means all
indebtedness, liabilities and obligations to Lender of all Foreign Co-Borrowers,
of any class or nature, whether arising under or in connection with this
Agreement, and/or the other Loan Documents or otherwise, whether now existing or
hereafter incurred, direct or indirect, absolute or contingent, secured or
unsecured, matured or unmatured, joint or several, whether for principal,
interest, fees, expenses, lease obligations, indemnities or otherwise,
including, without limitation, future advances of any sort, including all future
advances made by Lender for taxes, levies, insurance and/or repairs to or
maintenance of the Collateral, the unpaid principal amount of, and accrued
interest owed by the Foreign Co-Borrowers on the Notes, and any expenses of
collection or protection of Lender's rights, including reasonable attorneys'
fees. "DOMESTIC CO-BORROWER INDEBTEDNESS" means all indebtedness, liabilities
and obligations to Lender of Telscape or any Domestic Co-Borrower, of any class
or nature, whether arising under or in connection with this Agreement and/or all
other documents, instruments, agreements and certificates evidencing or securing
any advance hereunder or any obligation for the payment or performance thereof
and/or executed and delivered in connection with any of the foregoing (the "LOAN
DOCUMENTS") or otherwise, whether now existing or hereafter incurred, direct or
indirect, absolute or contingent, secured or unsecured, matured or unmatured,
joint or several, whether for principal, interest, fees, expenses, lease
obligations, indemnities or otherwise, including, without limitation, future
advances of any sort, all future advances made by Lender for taxes, levies,
insurance and/or repairs to or maintenance of the Collateral, the unpaid
principal amount of, and accrued interest owed by the Domestic Co-Borrowers on
the Notes, and any expenses of collection or protection of Lender's rights,
including reasonable attorneys' fees.
7. DESCRIPTION OF COLLATERAL: The Collateral includes, and each
Co-Borrower hereby grants Lender a security interest in, all such Co-Borrower's
presently existing or hereafter acquired right, title and interest in, and to
(a) the equipment, fixtures, and other property identified in a Borrowing
Certificate pursuant to which Lender advances funds hereunder (such collateral
description in Borrowing Certificates are collectively referred to as the
"Collateral Schedule") or otherwise acquired or financed directly or indirectly
with loan proceeds from Lender (including, without limitation, hardware and
software, components, parts, wiring, cabling and associated electronics) and any
and all replacements of or substitutions for any of the foregoing, together with
all additions, attachments, components, parts, accessions, improvements, and
upgrades forming an integral part thereof, and all accessories installed thereon
or affixed thereto; and (b) to the extent not otherwise included, all proceeds
of the foregoing, including without limitation, (i) any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to Co-Borrower from time to
time with respect to any of the Collateral; (ii) any and all payments (in any
form whatsoever) made or due and payable to any Co-Borrower from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any governmental body,
authority, bureau or agency (or any person acting under color of governmental
authority); (iii) any and all other amounts from time to time paid or payable
under or in connection with any of the Collateral; and (iv) any and all cash
proceeds and non-cash proceeds in the form of equipment, inventory, accounts,
general intangibles, chattel paper or other proceeds with respect to any of the
Collateral (collectively, "Proceeds"). The Collateral Schedule is incorporated
in and made a part of this Agreement. Collateral may be released from the
Collateral Schedule and the security interests described herein only pursuant to
Section 10 hereof.
8. REPRESENTATIONS AND WARRANTIES: In order to induce the Lender to enter
into this Agreement and to make the loans contemplated herein, each of Telscape
and each Co-Borrower represents and warrants that on the date of each Note's
execution and until payment in full of the indebtedness:
(a) Each of Telscape and each Co-Borrower (i) is duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it was
formed; (ii) has the power and legal authority to own or lease and operate its
property and to carry on its business as now being conducted; (iii) is properly
licensed, in good standing and duly qualified to do business in every
jurisdiction where necessary; (iv) has the power and authority and the legal
right to make, deliver and perform this Agreement and each Note to which it is a
party and to borrow hereunder and has received all necessary authorization from
its directors or partners, as applicable, to execute, deliver and perform this
Agreement, the Notes to which it is a party and any related documents to be
delivered pursuant to this Agreement, and (v) the Co-Borrowers are, and will
remain, Subsidiaries of Telscape for so long as such Subsidiary remains
obligated to Lender hereunder.
(b) The person executing this Agreement and each Note on behalf of each
Co-Borrower has been given the authority to bind Telscape and each Co-Borrower,
and this Agreement and all Notes executed by or on behalf of a Co-Borrower
constitute legally binding and enforceable obligations of such Co-Borrower and,
with respect to the Agreement, Telscape.
(c) The execution, delivery and performance of this Agreement and any Note
will not violate Telscape's or any Co-Borrower's charter, bylaws, partnership
agreement or other organizational papers, or any law, agreement or undertaking
to which Telscape or any Co-Borrower is a party, or by which Telscape or any
Co-Borrower is bound or affected.
(d) All required consents relative to the execution, delivery, and
performance of this Agreement and the Notes have been obtained, including any
required of the Federal Communications Commission, the Commerce Commission for
any state or other jurisdiction in which Telscape or any Co-Borrower is
operating ("PC") or any other governmental authority.
(e) All information, reports and other papers and data with respect to
Telscape and each Co-Borrower (other than projections) furnished to the Lender
by Telscape or a Co-Borrower at any time prior to the date hereof, were, to the
best knowledge of Telscape and such Co-Borrower at the time the same were
furnished, true and correct in all material respects, or have been subsequently
supplemented by other information, reports or other papers or data, to the
extent necessary to give the Lender a true and accurate knowledge of the subject
matter thereof in all material respects; and all projections with respect to
Telscape and any Co-Borrower furnished by Telscape or a Co-Borrower, as
supplemented, were prepared or presented in good faith by Telscape or a
Co-Borrower and had a reasonable basis. No fact is known to Telscape or any
Co-Borrower which materially and adversely affects the business, operations,
assets (taken as a whole), or financial condition of Telscape or any Co-Borrower
which has not been set forth in the financial statements provided to Lender in
connection with this Agreement or in such information, reports, papers and data,
or otherwise disclosed in writing to the Lender prior to the first borrowing
date relative to the initial loan made hereunder. All financial statements have
been prepared in accordance with GAAP applied consistently throughout the period
involved.
(f) There have been no material adverse changes in Telscape's consolidated
financial position since the date of the financial statements provided to Lender
in connection with the credit approval of Telscape relative to this Agreement.
(g) There is no litigation, investigation or proceeding threatened or
pending against Telscape or any Co-Borrower or against any of its assets or
revenues which, if decided adversely, would have a material adverse effect upon
Telscape's consolidated financial condition or its business, operations or
assets (taken
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as a whole).
(h) Each Co-Borrower is the sole owner of and has good and marketable
title to each item of Collateral (or will have at the time such Co-Borrower
acquires rights in the Collateral hereafter arising), free and clear of all
security interests, claims, liens, and encumbrances except as granted to Lender.
Lender has a fully-perfected first priority lien on, and security interest in,
all right, title and interest of each Co-Borrower in the US Collateral
enforceable against such Co-Borrower and third parties.
(i) Neither Telscape nor any Co-Borrower is in default under any
agreement, mortgage, note, security agreement or other documents to which it is
a party or by which it, or any of its property, is bound in any respect which
could be materially adverse to the business, operations, assets or financial
condition of Telscape on a consolidated basis, or which could materially
adversely affect the ability of Telscape or any Co-Borrower to perform its
obligations under this Agreement.
(j) Telscape and each Co-Borrower have paid all taxes due, except such
taxes as are being contested in good faith and against which Telscape has set up
reserves satisfactory to the Lender.
(k) Neither Telscape nor any Co-Borrower is engaged nor will any engage
principally, or as one of its important activities, in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin stock" within
the respective meaning of each of the quoted terms under Regulation U of the
Board of Governors of the Federal Reserve System as now, and from time to time,
hereafter in effect. No part of the proceeds of any loan will be used for
"purchasing" or "carrying" "margin stock" as so defined or for any purpose which
violates, or which would be inconsistent with, the provisions of the regulations
of such Board of Governors.
(l) Neither Telscape nor any Co-Borrower is an "investment company" or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940 as amended.
(m) Neither Telscape nor any Co-Borrower is in violation of any federal or
state law, rule or regulation or determination of an arbitrator, court or other
governmental authority, in each case applicable or binding upon Telscape or such
Co-Borrower or any of its properties or to which Telscape or such Co-Borrower or
any of its properties are subject, in each case which individually or in the
aggregate would have a material adverse effect on the rights of the Co-Borrower
or Lender in the Collateral or Telscape's consolidated financial condition or
operations or assets taken as a whole.
(n) There is no event which is, or with notice or lapse of time, or both,
would be an Event of Default as defined in Section 14 of this Agreement.
(o) A Purchase Agreement has been duly executed and delivered by the
Co-Borrower and the Supplier with respect to the Collateral for which proceeds
of an Advance are being requested by such Co-Borrower and will be in full force
and effect on the date of such Note.
(p) Telscape is reviewing its operations and those of its Subsidiaries
with a view to assessing whether its business (together with the businesses of
its Subsidiaries on a consolidated basis), will be vulnerable to a Year 2000
Problem or will be vulnerable to the effects of a Year 2000 Problem suffered by
any major commercial customers of Telscape or of any of its Subsidiaries, and
based upon this preliminary review has a reasonable basis to believe that no
Year 2000 Problem will cause a material adverse effect to Telscape on a
consolidated basis. For purposes of this Agreement, "Year 2000 Problem" means
any significant risk that computer hardware, software or equipment containing
embedded microchips essential to the business or operations of Telscape or any
other Co-Borrower will not, in the case of dates or time periods occurring after
December 31, 1999, function at least as effectively and reliably as in the case
of times or time periods occurring before January 1, 2000, including the making
of leap year calculations.
(q) Each Subsidiary of Telscape (other than Telereunion, Inc. and
Interlink Communications, Inc.) is a signatory to the Schedule of Borrowing
Subsidiaries attached hereto and forming a part hereof, and a Co-Borrower
hereunder.
9. CONDITIONS PRECEDENT:
(a) INITIAL LOAN. The obligation of the Lender to make the initial loan on
the first borrowing date shall be subject to the fulfillment prior to or
contemporaneously with the making of such loan of the following conditions
precedent:
(i) The Lender shall have received an opinion of legal counsel to
Telscape and each Co-Borrower as of such date, dated the first borrowing date,
in a form and substance satisfactory to Lender.
(ii) Lender shall have received a certificate of a responsible
officer of Telscape and each Co-Borrower as of such date, dated the first
borrowing date, as to the authority of such Co-Borrower(s) to execute, deliver
and perform this Agreement and all Notes.
(iii) The Lender shall have received a certificate of a responsible
officer of Telscape and each Co-Borrower as of such date, dated the first
borrowing date, as to the incumbency and signature of the officer or officers
signing the Agreement, the Notes and any other certificate or other documents to
be delivered pursuant thereto, together with evidence of the incumbency of such
responsible officer.
(iv) The Lender shall have received copies of all consolidated
financial statements of Telscape as required by Lender.
(B) ALL LOANS. The obligation of the Lender to make any loan (including
the initial loan) to be made by it on any borrowing date is subject to the
satisfaction of the following conditions precedent:
(i) The Lender shall have received a Note conforming to the
requirements hereof, and fully executed by the Co-Borrower which is requesting
the Advance evidenced thereby.
(ii) The representations and warranties made by Telscape and each
Co-Borrower in this Agreement and in each Borrowing Certificate shall be correct
in all material respects on and as of such borrowing date and after giving
effect to the loan to be made on such borrowing date.
(iii) No Event of Default or event or condition which with notice or
passage of time or both would constitute an Event of Default shall have occurred
and be continuing on such borrowing date or after giving effect to the loan to
be made on such borrowing date.
(iv) The Lender shall have received a Borrowing Certificate, dated
such borrowing date for such loan, satisfying the requirements of Section 3.
(v) Except where waived by Lender in the exercise of its reasonable
discretion, the Lender shall have received the waiver of liens and consent of
the real estate lessors of the Co-Borrower, and of such other persons as the
Lender shall deem desirable, to facilitate the removal by the Lender, upon the
occurrence of an Event of Default, of all items of US Collateral which are or
were personalty where first located on any real property that is subject to any
real estate leases and/or mortgages, such waivers of liens and consents to be in
form and substance satisfactory to the Lender and its counsel.
(vi) Telscape and all existing the Co-Borrowers shall have (1)
executed and delivered to Lender all documents (including, without limitation,
financing statements) necessary to create in favor of Lender a first-priority
perfected security interest in, and lien on, Collateral located in the United
States ("US Collateral") with evidence of any necessary filing, registration or
recordation of such documents, the payment of recording, stamp or other taxes
measured by indebtedness or otherwise required as a result of filing,
registration or recordation of such documents and searches confirming the
absence of any other liens or security interests thereon, and (2) with respect
to jurisdictions in the United States for which Lender has not previously
received an opinion of counsel covering its security interests in the US
Collateral, delivered an opinion of counsel to the applicable Co-Borrower(s),
dated the date of such Advance, in form and substance satisfactory to Lender to
the effect that the lien and security interest of Lender on such US Collateral
constitutes a perfected security interest in favor of Lender.
(vii) The Co-Borrowers shall have (1) executed and delivered to
Lender, if requested to do so by Lender, all trust documents requested by
Lender, together with such ancillary documents reasonably requested by Lender,
for Collateral located in Mexico which is enforceable against such Co-Borrower
and third parties ("Mexican Collateral"), together with evidence of (x) any
necessary filing, registration or recordation of such documents, (y) the payment
of any recording, stamp or other taxes measured by indebtedness or otherwise
required as a result of any filing, registration or recordation of such
documents and (z) to the extent available, the absence of any other liens or
security interests on such Mexican Collateral, and (2) delivered an opinion of
counsel to the applicable Co-Borrower(s), dated the date of such Advance, in
form and substance satisfactory to Lender to the effect that the documents have
been validly executed and delivered by, and are binding and enforceable upon,
the applicable Co-Borrower(s) and do not conflict with the applicable
Co-Borrower's organizational documents, material contracts or applicable law.
(viii) All proceedings and all other documents and legal matters in
connection with the transactions contemplated by the Agreement shall be
satisfactory in form and substance to the Lender and its counsel.
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(C) ALL LOANS FINANCING COLLATERAL IN LATIN AMERICAN JURISDICTIONS OTHER
THAN MEXICO. The obligation of the Lender to make any loan (including the
initial loan) to be made by it on any borrowing date financing Collateral in, or
to be placed in, Latin American jurisdictions other than Mexico is subject to
the satisfaction of the following conditions precedent, in addition to the
conditions for all loans and the initial loan set forth herein:
(i) For any Advance which is to finance Collateral in, or to be
placed in, a jurisdiction in Latin America other than Mexico and Advances
financing Collateral in such jurisdiction, when aggregated with the proposed
Advance, will exceed $150,000, Lender must be satisfied that a procedure or
mechanism is available under the law of such jurisdiction for creating in favor
of Lender a first-priority security interest in, lien on, or trust or comparable
security or ownership interest in, Collateral located in such jurisdiction which
is "perfected" or otherwise enforceable against such Co-Borrower and third
parties; and Co-Borrower shall have (A) (1) executed and delivered to Lender, if
requested to do so by Lender, all documents reasonably requested by Lender for
the purpose of creating in favor of Lender a first-priority security interest
in, lien on, or trust or comparable security or ownership interest in,
Collateral located in such jurisdiction which is "perfected" or otherwise
enforceable against such Co-Borrower and third parties, together with evidence
of (x) any necessary filing, registration or recordation of such documents, (y)
the payment of any recording, stamp or other taxes measured by indebtedness or
otherwise required as a result of the execution or any filing, registration or
recordation of such documents and (z) to the extent available, the absence of
any other liens on or security or other adverse ownership interests in such
Collateral, and (2) delivered an opinion of counsel to the applicable
Co-Borrower(s), dated the date of such Advance, in form and substance
satisfactory to Lender to the effect that the documents have been validly
executed and delivered by, and are binding and enforceable upon, the applicable
Co-Borrower(s) and do not conflict with the applicable Co-Borrower's
organizational documents, material contracts or applicable law, or (B) made
other arrangements for securing such Advance satisfactory to Lender in its sole
discretion.
(ii) For any Advance which is to finance Collateral in, or to be
placed in, a jurisdiction in Latin America other than Mexico and Advances
financing Collateral in Latin America other than Mexico, when aggregated with
the proposed Advance, will exceed $450,000, Lender must be satisfied that a
procedure or mechanism is available under the law of such jurisdiction for
creating in favor of Lender a first-priority security interest in, lien on, or
trust or comparable security or ownership interest in, Collateral located in
such jurisdiction which is "perfected" or otherwise enforceable against such
Co-Borrower and third parties; and Co-Borrower shall have (A) (1) executed and
delivered to Lender, if requested to do so by Lender, all documents reasonably
requested by Lender for the purpose of creating in favor of Lender a
first-priority security interest in, lien on, or trust or comparable security or
ownership interest in, Collateral located in such jurisdiction which is
"perfected" or otherwise enforceable against such Co-Borrower and third parties,
together with evidence of (x) any necessary filing, registration or recordation
of such documents, (y) the payment of any recording, stamp or other taxes
measured by indebtedness or otherwise required as a result of the execution or
any filing, registration or recordation of such documents and (z) to the extent
available, the absence of any other liens on or security or other adverse
ownership interests in such Collateral, and (2) delivered an opinion of counsel
to the applicable Co-Borrower(s), dated the date of such Advance, in form and
substance satisfactory to Lender to the effect that the documents have been
validly executed and delivered by, and are binding and enforceable upon, the
applicable Co-Borrower(s) and do not conflict with the applicable Co-Borrower's
organizational documents, material contracts or applicable law or (B) made other
arrangements for securing such Advance satisfactory to Lender in its sole
discretion.
10. RELEASE OF COLLATERAL AND SALE OF SUBSIDIARY. (a) In the event a Note
is paid in full, no Indebtedness remains outstanding under the Note and no Event
of Default (or condition or event which with the passing of time or the giving
of notice or both would constitute an Event of Default) has occurred and is
continuing, Lender agrees to release, at the cost and expense (including
reasonable attorneys' fees) of the obligors under such Note, that portion of
Collateral acquired with the proceeds of the Note from the lien(s) and security
interest(s) of this Agreement and the other Loan Documents, upon Lender's
receipt from the obligors under such Note of a request and adequate
documentation (including an itemized invoice of the Supplier) confirming that
the Collateral to be released was acquired with the proceeds of the Note that
has been paid in full.
(b) For so long as no Event of Default (or condition or event which with
the passing of time or the giving of notice or both would constitute an Event of
Default) has occurred and is continuing, Telscape may with the prior written
consent of Lender, such consent not to be unreasonably withheld, sell one or
more Co-Borrowers and obtain a release, at Telscape's sole cost and expense
(including reasonable attorneys' fees), from Lender of such Co-Borrower(s) from
any liability under this Agreement. Telscape and the Co-Borrowers acknowledge
that Lender may condition its consent on the repayment of all amounts advanced
hereunder (together with any applicable prepayment premium) which have financed
Collateral held by such Co-Borrower and the satisfaction of terms and conditions
concluded appropriate by Lender in the exercise of its reasonable discretion to
ensure that the sale of the Co-Borrower and the release of the Co-Borrower from
liability hereunder will not adversely affect the Lender's rights hereunder or
under the other Loan Documents or the likelihood of repayment of all amounts
advanced hereunder. As a condition to the exercise of the right to sell a
Co-Borrower and obtain the release of such Co-Borrower from any further
liability under this Agreement, (i) Telscape must give prior written notice (the
"Disposition Notice") to Lender of a pending transaction pursuant to which the
Co-Borrower would cease to be a Subsidiary of Telscape (a "Divested
Subsidiary"), which notice shall provide all material information about the
terms and conditions of the transaction and the anticipated closing date, (ii)
Telscape shall provide such other information about the proposed transaction as
Lender may reasonably request, and (iii) in the event of any change to the terms
of the proposed transaction from that disclosed to Lender, Telscape shall
provide all material information about such new or changed terms to Lender.
Lender must notify Telscape in writing whether it consents to the consummation
of the transaction as described in the notice within thirty (30) business days
of receipt of such Disposition Notice, provided if Lender has not received such
additional information requested by it within such time to permit it to be duly
considered or in the event of any change to the terms of the proposed
transaction from that disclosed to Lender, Lender shall have an additional
reasonable amount of time to consider (or in the event it has already given its
response) to reconsider whether to consent to the proposed transaction based
upon the additional and/or updated information. Any consent of Lender to such
transaction may be subject to the absence of any material adverse change between
the date of the consent and the consummation of the transaction.
11. AFFIRMATIVE AND FINANCIAL COVENANTS: Each of Telscape and each
Co-Borrower (with respect to itself and its business, property and Collateral)
warrants, covenants and agrees that from the Agreement date and until
performance and payment in full of the Indebtedness, it will:
(a) (i) Furnish to Lender as soon as available, but in any event within
one hundrd twenty (120) days after the end of each fiscal year of Telscape, a
copy of the consolidated balance sheet of Telscape as of the end of such year
and the related statements of operations and cash flows for such year, setting
forth in each case in comparative form, the figures for the previous year
audited by independent certified public accountants satisfactory to Lender. The
financial statements shall be complete and correct in all material respects, be
prepared in reasonable detail and in accordance with GAAP applied consistently
throughout the periods reflected therein (except as approved by such accountants
or a responsible officer, as the case may be, and disclosed therein), and be
accompanied by an opinion satisfactory to Lender of such independent certified
public accountants.
(ii) Within forty-five (45) days after the end of each fiscal quarter,
Borrower shall furnish to Lender (i) unaudited consolidated statements of
income, statements of cash flow and retained earnings for Borrower for such
period and for the period from the beginning of Borrower's then current fiscal
year to the end of such period, and an unaudited consolidated balance sheet of
Borrower as of the end of such period, all in reasonable detail and certified by
a Responsible Officer of Borrower as presenting fairly the financial position of
Borrower as of the end of such period and the results of its operations and the
changes in its financial position for such period, in conformity with GAAP
(except for accompanying notes thereto), subject to year-end audit adjustments,
and (ii) upon Lender's request, an aging of accounts payable and aging of
accounts receivable.
(b) Furnish to Lender, concurrently with the delivery of the financial
statements referred to in subsection (a) hereof, a certificate of a responsible
officer of Telscape and each Co-Borrower stating that, to the best of such
officer's knowledge, Telscape and each Co-Borrower, during such period, has
observed or performed all of its covenants and other agreements, and satisfied
every condition contained in this Agreement and in the Notes to be observed,
performed or satisfied by it, and that such officer has obtained no knowledge of
any Event of Default except as specified in such certificate.
(c) Promptly upon receipt thereof, furnish to Lender one copy of each
written financial audit report submitted to Telscape by independent accountants
resulting from any annual, interim or special audits made by them of Telscape's
books.
(d) Furnish to Lender copies of all financial statements and material
reports which Telscape or any Co-Borrower may make to, or file with, the
Securities and Exchange Commission or any successor.
(e) Pay promptly when due all taxes, assessments, governmental charges,
claims for labor, supplies, rent and other obligations, which, if unpaid, might
become a lien against the Collateral or Telscape's or any Co-Borrower's other
assets, except liabilities (i) being contested in good faith and by appropriate
proceedings, which proceedings do not involve any danger of the sale, forfeiture
or loss of the Collateral or any interest therein or a material part of
Telscape's or such Co-Borrower's other assets, and (ii) against which Telscape
has set up reserves satisfactory to the Lender.
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(f) Comply with all applicable laws, statutes, orders, rules, regulations,
and directions applicable to Telscape and each Co-Borrower and the Collateral or
any part thereof or operation of Telscape's or such Co-Borrower's business,
except where the failure to comply will not have a material adverse effect on
the value of the Collateral or the operations of Telscape on a consolidated
basis; provided that Telscape or such Co-Borrower may contest any such statutes,
orders, rules, regulations, and directions in any reasonable manner which will
not, in Lender's opinion, adversely affect Lender's rights or Telscape's
financial condition, business or operations or the priority of any lien or
security interest in the Collateral.
(g) Maintain and preserve in full force and effect all rights, privileges,
licenses, and franchises applicable to Telscape and each Co-Borrower necessary
for the orderly and efficient conduct of Telscape and each Co-Borrower's
business as is now conducted including, without limitation, any licenses or
authorizations required by the FCC or any other public utility commission or
comparable regulatory agency (a "PUC") for the operation and maintenance of its
present operations.
(h) Perform and comply in all material respects with all obligations under
the contracts and all other agreements to which it is a party or by which it is
bound relating to the Collateral except where the failure to do so would not
materially and adversely affect the value of the Collateral taken as a whole.
(i) Advise Lender promptly, in reasonable detail (i) of any lien, security
interest, encumbrance or claim made or asserted against any of the Collateral,
(ii) of any material change in the composition of the Collateral, and (iii) of
the occurrence of any other event which would have a material adverse effect on
the aggregate value of the Collateral, the security interest created hereunder,
or on Telscape's or such Co-Borrower's financial condition, business, or
operations.
(j) (1) Maintain books, records and accounts which, in reasonable detail,
accurately and fairly reflect its transactions and dispositions of its assets
and maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (A) transactions are executed in accordance with
management's general or specific authorization, (B) transactions are recorded as
necessary (x) to permit preparation of financial statements in conformity with
GAAP and (y) to maintain accountability for assets, (C) access to assets is
permitted only in accordance with management's general or specific authorization
and (D) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect to
any differences, and (2) prepare all financial statements required hereunder in
accordance with GAAP consistently applied and in compliance with the regulations
of any governmental regulatory body having jurisdiction over Co-Borrower or
Co-Borrower's business and keep such books and records pertaining to its
financial affairs and to the Collateral at Telscape's and the Co-Borrowers'
address set forth above.
(k) Permit Lender or its representatives, at all reasonable times, to
inspect and copy Telscape's and each Co-Borrower's books and records pertaining
to its financial affairs and to the Collateral;
(l) Keep the Collateral at the original location of such Collateral as set
forth in the Collateral Schedule and such principal place of business of each
Co-Borrower at the address set forth above and not move any of the Collateral
from such locations, or change the location of Co-Borrower's principal place of
business without giving Lender at least thirty (30) days advance written notice
of such change or move, and in connection with any change in location of
Collateral or the principal place of business of any Co-Borrower, at its cost
and expense, from time to time, at the written request of Lender, execute,
deliver, file or record documents, agreements, instruments, certificates and (in
connection with movements of Collateral or principal places of business between
locations in the United States, Mexico, and/or other jurisdictions in Latin
America) opinions to the effect that the documents, agreements or instruments
have been validly executed and delivered by, and are binding and enforceable
upon, the applicable Co-Borrower(s) and do not conflict with the applicable
Co-Borrower's organizational documents, material contracts or applicable law (in
such manner and form as Lender may reasonably require) in order to create,
preserve, perfect, validate, satisfy, evidence or confirm the first priority
perfected security interest in, lien on, or trust or comparable security or
ownership interest in the Collateral, PROVIDED THAT notwithstanding the
foregoing, Co-Borrower shall not be required to undertake execute, deliver, file
or record such documents, agreements, instruments, certificates or opinions in
connection with any such move of Collateral to or within any jurisdiction in
Latin America other than Mexico, unless:
(i) at the time of such change or move an Event of Default, or condition
or event which with the passage of time and/or giving of notice would
constitute an Event of Default, under this Agreement has occurred and is
continuing;
(ii) the Collateral is to be placed in a jurisdiction in Latin America
other than Mexico and Advances financing Collateral in such jurisdiction,
when aggregated with the Advance(s) made to finance the Collateral
proposed to be moved to such jurisdiction, exceed $150,000, in which case
as a condition precedent to such placement of Collateral in such
jurisdiction (A) (1) Lender must be satisfied that a procedure or
mechanism is available under the law of such jurisdiction for creating in
favor of Lender a first-priority security interest in, lien on, or trust
or comparable security or ownership interest in, Collateral located in
such jurisdiction which is "perfected" or otherwise enforceable against
such Co-Borrower and third parties; and (2) Co-Borrower shall have (I)
executed and delivered (or caused to be executed and delivered) to Lender,
if requested to do so by Lender, all documents reasonably requested by
Lender for the purpose of creating in favor of Lender a first-priority
security interest in, lien on, or trust or comparable security or
ownership interest in, Collateral located in such jurisdiction which is
"perfected" or otherwise enforceable against such Co-Borrower and third
parties, together with evidence of (x) any necessary filing, registration
or recordation of such documents, (y) the payment of any recording, stamp
or other taxes measured by indebtedness or otherwise required as a result
of the execution or any filing, registration or recordation of such
documents and (z) to the extent available, the absence of any other liens
on or security or other adverse ownership interests in such Collateral,
and (II) delivered an opinion of counsel to the applicable Co-Borrower(s),
dated the date of such Advance, in form and substance satisfactory to
Lender to the effect that the documents have been validly executed and
delivered by, and are binding and enforceable upon, the applicable
Co-Borrower(s) and do not conflict with the applicable Co-Borrower's
organizational documents, material contracts or applicable law, or (B)
made other arrangements for securing the Advance(s) financing such
Collateral satisfactory to Lender in its sole discretion; or
(iii) the Collateral is to be placed in a jurisdiction in Latin America
other than Mexico and Advances financing Collateral in jurisdictions in
Latin America other than Mexico, when aggregated with the Advance(s) made
to finance the Collateral proposed to be moved to such jurisdiction,
exceed $450,000, in which case as a condition precedent to such placement
of Collateral in such jurisdiction (A) (1) Lender must be satisfied that a
procedure or mechanism is available under the law of such jurisdiction for
creating in favor of Lender a first-priority security interest in, lien
on, or trust or comparable security or ownership interest in, Collateral
located in such jurisdiction which is "perfected" or otherwise enforceable
against such Co-Borrower and third parties; and (2) Co-Borrower shall have
(I) executed and delivered (or caused to be executed and delivered) to
Lender, if requested to do so by Lender, all documents reasonably
requested by Lender for the purpose of creating in favor of Lender a
first-priority security interest in, lien on, or trust or comparable
security or ownership interest in, Collateral located in such jurisdiction
which is "perfected" or otherwise enforceable against such Co-Borrower and
third parties, together with evidence of (x) any necessary filing,
registration or recordation of such documents, (y) the payment of any
recording, stamp or other taxes measured by indebtedness or otherwise
required as a result of the execution or any filing, registration or
recordation of such documents and (z) to the extent available, the absence
of any other liens on or security or other adverse ownership interests in
such Collateral, and (II) delivered an opinion of counsel to the
applicable Co-Borrower(s), dated the date of such Advance, in form and
substance satisfactory to Lender to the effect that the documents have
been validly executed and delivered by, and are binding and enforceable
upon, the applicable Co-Borrower(s) and do not conflict with the
applicable Co-Borrower's organizational documents, material contracts or
applicable law) or (B) made other arrangements for securing the Advance(s)
financing such Collateral satisfactory to Lender in its sole discretion.
(m) Keep the Collateral in good repair and operating condition, ordinary
wear and tear excepted and permit Lender or its representatives at all times,
upon reasonable notice, to enter into and upon any premises where any of the
Collateral is located for the purpose of inspecting it, observing its use or
otherwise protecting its interest therein.
(n) If any Collateral, in whole or in part, shall be lost, stolen or
destroyed or damaged, or is taken in any condemnation or similar proceeding by a
governmental authority (any such Collateral is referred to as the "Affected
Collateral"), promptly and fully notify Lender and (i) immediately place the
Affected Collateral in good condition and working order, or (ii) replace the
Affected Collateral with one of like value which is in good repair, condition,
and working order, and grant a first priority perfected security interest in,
lien on, or trust or comparable security ownership interest in such substitution
to the same extent that Lender had (or was required to have) in the Affected
Collateral, or (iii) prepay Lender, without prepayment premium, loans in an
amount equal to the value of such Affected Collateral.
(o) At its cost and expense, from time to time, at the written request of
Lender, execute, deliver, file or record documents, agreements and instruments
(in such manner and form as Lender may reasonably require) in
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compliance with or to accomplish the covenants and agreements of Telscape and
each Co-Borrower in this Agreement; in order to create, preserve, perfect,
validate or satisfy the security interest in, lien on, or trust or comparable
security ownership interest in the Collateral granted or required hereby, but in
each case subject to the conditions to such requirements as set forth elsewhere
herein; or to enable Lender to exercise and enforce its rights hereunder. Each
Co-Borrower also hereby authorizes Lender to file any such financing statement
or amendment thereto, without the signature of the Co-Borrower, or with a copy
or telecopy of the Co-Borrower's signature, to the extent permitted by
applicable law, or during upon the occurrence and during the continuance of an
Event of Default hereunder to execute any financing statement or amendment
thereof on behalf of each Co-Borrower as each Co-Borrower's attorney-in-fact.
(p) Telscape shall take all actions necessary and commit adequate
resources to assure that computer-based and other systems of Telscape and its
Subsidiaries are able to process dates effectively, including dates before, on
and after January 1, 2000, without experiencing any Year 2000 Problem that could
cause a material adverse effect to the consolidated financial results of
Telscape. At the reasonable request of Lender, Telscape will provide Lender with
assurances and substantiations (including but not limited to the results of
internal and external audit reports prepared in the ordinary course of business)
reasonably acceptable to Lender that Telscape and its Subsidiaries is taking all
reasonable actions to assure the future conduct of its and their businesses and
operations before, on and after January 1, 2000 without experiencing a Year 2000
Problem causing a material adverse effect.
(q) Furnish to Lender such additional information or documents,
certificates, reports and agreements regarding Telscape or such Co-Borrower, its
financial condition or the Collateral, as Lender may reasonably request.
(r) Cause each Subsidiary of Telscape formed or acquired after the date
hereof to become a Co-Borrower hereunder in conformity with the requirements of
Section 1(b).
(s) Use its best efforts to cause Interlink Communications, Inc. to become
a Co-Borrower hereunder on or before June 1, 1999 in conformity with the
requirements of Section 1(b).
(t) Each of Telscape and the Co-Borrowers agrees that it will obtain
Lender's prior written consent before using or generating any press release,
advertisement, publicity materials or other publication in which the name or
logo of Lender or any of its affiliates is used or may be reasonably inferred,
and will not distribute any such materials in the absence of such prior written
approval.
(u) (i) During the term of this Agreement, unless Lender shall otherwise
consent in writing, Telscape shall comply with the financial covenants set forth
on EXHIBIT D:
(ii) All accounting and financial terms herein shall be deemed to
include references to consolidated and consolidating principles.
Covenants, representations and agreements with respect to Telscape and its
properties and activities shall be deemed to refer to Telscape and the
Co-Borrowers collectively. The following words and terms shall have the
following meanings unless the context otherwise clearly requires:
"BOOK CAPITALIZATION": the sum of common stock, additional paid in
capital, retained earnings, treasury stock and Debt subordinated to the
payment of other Debt of Telscape to the satisfaction of Lender.
"DEBT": of any person means, without duplication, (a) all items of
indebtedness or liability which in accordance with generally accepted
accounting principles, consistently applied, would be included in
determining total liabilities as shown on the liablity side of a balance
sheet as of the date as of which indebtedness is to be determined, (b)
indebtedness or other liablilities secured by any mortgage, security
agreement, pledge, or lien existing on or encumbering property owned by
such person, whether or not the indebtedness or other liabilities secured
thereby shall have been assumed by such person, (c) all indebtedness of
such person (i) which such person has directly or indirectly guaranteed,
endorsed (otherwise than for collection or deposit in the ordinary course
of business), discounted with recourse, agreed (contingently or otherwise)
to purchase or repurchase or otherwise acquire, (ii) in respect of which
such person has agreed to supply or advance funds (whether by way of loan,
purchase of securities or capital contribution, through a commitment to
pay for property or services regardless of the nondelivery of such
property or the nonfurnishing of such services or othewise), or (iii) in
respect of which such person has otherwise become directly or indirectly
liable, and (d) all obligations of such person under any now or hereafter
existing interest swap or hedge agreements (net of any amounts owed to
that person under any such swap or hedge agreements).
"DEBT SERVICE": for any period of Telscape being measured, the sum
of all amortized principal and interest payments that Telscape is required
to make during such period on account of all of its Debt including,
without limitation, (a) amounts due during such period on account of
capitalized leases, (b) the then current portion of any long-term Debt of
Telscape calculated in accordance with GAAP, (c) amounts due on short-term
Debt of Telscape, and (d) amounts due under this Loan Agreement and the
Notes.
"EBITDA": for any fiscal period, Telscape's actual operating
earnings from ongoing operations and before interest, taxes, depreciation
and amortization for such fiscal period.
12. NEGATIVE COVENANTS: Until payment in full of the indebtedness, each of
Telscape and each Co-Borrower covenants that it will not directly or indirectly;
(a) Sell, lease, assign, transfer, pledge, create, or permit a security
interest in, or otherwise encumber any of the Collateral, or any of its rights
therein, or permit any levy, lien or encumbrance thereon in favor of anyone
other than Lender, provided that a Co-Borrower may remove any expansion,
modification or add-ons to Collateral if (i) such expansion, modification or
add-on is not a replacement of or substitution for Collateral, (ii) such
expansion, modification or add-on was not financed with an Advance, and (iii)
immediately after such removal, the Collateral at issue (including equipment,
software and operating systems) has a level of functionality equal to or better
than existing immediately prior to the initiation of the expansion, modification
or add-on and is in good repair and operating condition, ordinary wear and tear
excepted.
(b) Use, or permit the Collateral to be used, for any unlawful purpose or
in violation of any law, statue or ordinance if the effect of such use is to
materially and adversely affect the Collateral or the Lender's rights therein or
the operations of Telscape on a consolidated basis.
(c) Permit the Collateral to become part of, or be affixed to, any real
property without first assuring, to the reasonable satisfaction of Lender, that
Lender's security interest will be prior and senior to any interest or lien then
held, or thereafter acquired, by any mortgagee of such real property or the
owner or purchaser of any interest therein.
(d) Permit the Collateral to comprise a part of any Co-Borrower's
inventory.
(e) Permit anything to be done that may impair the value of any of the
Collateral or the security intended to be afforded by this Agreement, if the
effect of such impairment has a material adverse effect on the value of the
Collateral, either individually or in the aggregate, or the security intended to
be afforded by this Agreement.
(f) Dispose of any part of the Collateral without the express prior
written consent of Lender.
(g) Change its name or change its structure in any material way without
giving Lender at least thirty (30) days advance written notice thereof.
(h) Engage in any business activities or operations substantially
different from or unrelated to Telscape's or such Co-Borrower's present business
activities and operations.
(i) Permit any Change in Control of Telscape to take place without
Lender's prior written consent. A "Change in Control" of Telscape shall be
deemed to have occurred upon any change in the direct or indirect control of, or
the ability or right to control, a majority of the voting shares of any class of
securities or ownership rights in Telscape or in the right and/or the power to
control the election of the board of directors of Telscape.
(j) Permit any Co-Borrower to no longer be a Subsidiary of Telscape
without the prior written consent of Lender, such consent not to be unreasonably
withheld.
(k) Enter into or become the subject of, any transaction of merger,
acquisition or consolidation or liquidate, wind up or dissolve itself (or suffer
any liquidation or dissolution), or convey, sell, lease, transfer or otherwise
dispose of, in one transaction or a series of transactions, all or any
substantial part of Telscape's or any Subsidiary's business or assets, whether
now owned or hereafter acquired, without the prior written consent of Lender,
such consent not to be unreasonably withheld.
(l) Make any distribution of earnings or capital to any owner of any stock
or other ownership interest in Telscape or in any Subsidiary of Telscape (other
than to Telscape or to any Co-Borrower), or any redemption of stock or other
ownership interests in Telscape or in any Subsidiary of Telscape, either
directly or
7
<PAGE>
indirectly, whether in cash or property or in obligations of Telscape or any
Subsidiary of Telscape.
(m) Sell any asset with a value of $500,000 individually or assets with a
value of $500,000 in the aggregate (whether in one transaction or as part of a
series of related transactions), unless (i) the consideration to Telscape is at
least equal to the fair market value of the asset, and (ii) at least 75% of the
consideration to Telscape is received at the time of such sale and consists of
Cash.
13. RISK OF LOSS AND INSURANCE: All risk of loss of, damage to, or
destruction of the Collateral shall, at all times, be with each Co-Borrower.
Each Co-Borrower shall procure and maintain with financially sound and reputable
companies, insurance policies (i) insuring the Collateral against loss by fire,
explosion, theft and such other casualties as are usually insured against by
companies engaged in the same or similar business, and (ii) insuring such
Co-Borrower and the Lender against liability for personal injury and property
damage relating to the Collateral. The policies shall be in such form and in
such amounts and coverage as may be reasonably satisfactory to the Lender, with
losses payable to such Co-Borrower and the Lender as their respective interest
may appear. Each Co-Borrower shall, if requested by Lender, deliver to the
Lender evidence that such insurance coverage is in effect. All insurance shall
(i) contain a breach of warranty clause in favor of the Lender, (ii) provide
that no cancellation, reduction in amount or change in coverage thereof shall be
effective until at least thirty (30) days after receipt by the Lender of written
notice thereof, and (iii) be reasonably satisfactory in all respects to the
Lender. If any Co-Borrower fails to furnish such insurance or fails to pay the
premiums therefor, Lender may do so or may obtain insurance of its interest only
and add the amount of any such premium thereof to the other amounts secured
hereby. Lender is under no obligation nor duty, however, to pay such premiums or
obtain such insurance.
14. DEFAULT: The occurrence of any one or more of the following will
constitute an "Event of Default" under this Agreement:
(a) Telscape or any Co-Borrower shall fail to pay when due any
Payment Amount or any other amounts payable under this Agreement or any Note and
such failure continues for five (5) business days after receipt by Telscape or
such Co-Borrower of written notice from Lender of such failure;
(b) A breach or failure in the observance or performance by Telscape
or any Co-Borrower of any other material provision of this Agreement which is
not remedied within thirty (30) days after receipt by Telscape or such
Co-Borrower of notice of such breach or failure;
(c) Any material representation, warranty or covenant made herein,
or in any certificate, document, financial or other statement delivered in
connection with this Agreement, or hereafter made by Telscape or any Co-Borrower
proves to have been incorrect in any material adverse respect when made or
given;
(d) Telscape, any Co-Borrower, or any surety or guarantor of the
Indebtedness evidenced by this Agreement or a Note (i) files a petition or has a
petition filed against it under the bankruptcy code, or any proceeding for
relief of insolvent debtors; (ii) generally and materially fails to pay its
debts as such debts become due; (iii) shall admit in writing its inability to
pay its debts as they become due; (iv) has a custodian, trustee or receiver
appointed, voluntarily or otherwise, for it or its assets for relief of
insolvent or troubled debtors; (v) benefits from, or is subject to, the entry of
an order for relief by any court of insolvency; (vi) makes an assignment for the
benefit of creditors; (vii) becomes insolvent (however otherwise evidenced);
(viii) liquidates, winds-up, dissolves or suspends business; or (ix) has
commenced against it any case, proceeding or other action seeking the issuance
of a warrant of attachment, execution, distraint or similar process against all
or any substantial part of its assets, which results in the entry of an order
for any such relief which shall not have been vacated, discharged, or stayed or
bonded pending appeal within sixty (60) days from the entry thereof;
(e) Telscape or any Co-Borrower shall (i) default in any payment of
any other instrument or agreement (other than with Lender) with an aggregate
principal amount outstanding in excess of $200,000 beyond the period of grace,
if any, provided in the applicable instrument or agreement, or (ii) default in
the observance of any other provision of such other instrument or agreement as
to cause, or permit the holder of such instrument or agreement to cause, the
obligations thereunder to become due prior to its stated maturity;
(f) One or more judgments or decrees shall be entered against
Telscape or any Co-Borrower involving in the aggregate a liability (not paid or
fully covered by insurance) of $200,000 or more, and any of such judgments or
decrees shall not have been vacated, discharged, or stayed or bonded pending
appeal within sixty (60) days after the entry thereof; or
(g) Any guaranty or subordination agreement required pursuant to
this Agreement is breached or becomes ineffective, or any guaranty or
subordinating creditor disavows its obligations under the guaranty or
subordination agreement; or
(h) Telscape or any Co-Borrower fails to perform any of its
obligations under any other agreement or lease with Lender; or
(i) At any time a Co-Borrower ceases to be a Subsidiary of Telscape;
or
(j) If any Change in Control should occur without Lender's prior
written consent, which may be withheld in Lender's sole and absolute discretion.
15. RIGHTS AND REMEDIES ON DEFAULT: At Lender's option, upon the
occurrence of any such Event of Default under Section 14, and at any time
thereafter, at Lender's option, Lender's commitment to lend shall terminate
and/or all unmatured Indebtedness evidenced by the Notes will immediately become
due and payable without presentation, demand, protest, or notice of any kind,
all of which are expressly waived. Lender may exercise, from time to time, any
rights and remedies available to it under this Agreement, any Note, the Uniform
Commercial Code and other applicable law. Telscape and each Co-Borrower agree
that upon the occurrence and during the continuance of an Event of Default, to
the extent permitted by applicable law (i) any amounts payable under this
Agreement or under the Notes shall thereafter bear interest at a rate per annum
equal to the Interest Rate plus three percent (3%), or the maximum rate per
annum allowed by law, whichever is less, compounded monthly and payable on
demand (both before and after judgment), until the Indebtedness is paid in full
(which payment of Indebtedness in the event of acceleration shall not be subject
to any prepayment premium) or the Event of Default is cured, (ii) it will, at
Lender's request, assemble the Collateral and make it available to Lender at
places which Lender shall reasonably select, and (iii) Lender, by itself or its
agent, may, without notice to any person and without judicial process of any
kind, enter into any premises or upon any land owned, leased or otherwise under
the real or apparent control of Telscape or any Co-Borrower, or any agent of any
Co-Borrower, where the Collateral may be, or where Lender believes the
Collateral may be, and disassemble, render unusable, and/or repossess all or any
item of the Collateral, disconnecting and separating the Collateral from any
other property. Each Co-Borrower expressly waives all further rights to
possession of the Collateral after the occurrence and during the continuance of
an Event of Default and all claims for injuries suffered through, or loss caused
by, such entering and/or repossession.
Lender shall have the right to sell, lease or otherwise dispose of the
Collateral (or contract to do so), whether in its then condition or after
further preparation or processing, either at public or private sale, in lots or
in bulk, for cash or for credit, with or without warranties or representations,
and upon such terms and conditions as Lender, in its sole discretion, may deem
advisable. Lender shall have the right to purchase at any such sale. Lender will
give the applicable Co-Borrower reasonable notice of the time and place of any
public sale of the Collateral or of the time after which any private sale or
other intended disposition of the Collateral is to be made. Unless otherwise
provided by law, the requirement of reasonable notice shall be met if such
notice is delivered to the address of the Co-Borrowers and Telscape set forth
above at least ten (10) days before the time of the sale or disposition. Any
proceeds of any disposition by Lender of any of the Collateral may be first
applied by Lender to the payment of expenses, including reasonable attorneys'
fees and legal expenses, incurred in connection with the repossession, care,
safekeeping, sale or otherwise of any or all of the Collateral, or in any way
relating to the rights of Lender hereunder. Any balance of such proceeds may be
applied by Lender toward the payment of the Indebtedness in such order as
Lender, in its sole discretion, shall determine. The Co-Borrowers shall be
liable for, and shall pay to Lender on demand, any deficiency which may remain
after such sale, lease or other disposition, and Lender agrees to remit to the
Co-Borrowers any surplus resulting therefrom.
16. GENERAL AUTHORITY: Upon the occurrence and during the continuance of
an Event of Default hereunder, Lender shall have the full power to exercise at
any time and from time to time all or any of the following powers with respect
to all or any of the Collateral:
(a) To demand, sue for collection, receive and give acquittance for
any and all monies due or to become due upon or by virtue thereof;
(b) To receive, take, endorse, assign and deliver any and all
checks, notes, drafts, documents and other property taken or received by Lender
in connection therewith;
(c) To settle, compromise, compound, prosecute or defend any action
or proceeding with respect thereof;
(d) To sell, transfer, assign or otherwise deal in or with the same
or the proceeds thereof, as fully and effectually as if Lender were the absolute
owner thereof; and
(e) In general, to do all things necessary to perform the
8
<PAGE>
terms of this Agreement, including, without limitation, to take any action or
proceedings which Lender deems necessary or appropriate to protect and preserve
the security interest of Lender in the Collateral. In the case of failure of
Telscape or any Co-Borrower to comply with any provision of this Agreement which
constitutes an Event of Default and is continuing, Lender shall have the right,
but shall not be obligated, to so comply in whole or in part, and all moneys
spent, and expenses and obligations incurred or assumed by Lender in connection
with such performance or compliance, shall be payable on demand together with
interest on such amounts equal to the Interest Rate plus three percent (3%) from
the date and amount is expended or advanced by the Lender until paid. Such sums
plus interest shall constitute indebtedness secured hereby. Lender's effecting
such compliance shall not be a waiver of Telscape's or any Co-Borrower's
default. Lender shall be under no obligation or duty to exercise any of the
powers hereby conferred upon it.
17. EXPENSES: Telscape and each Co-Borrower will, upon demand, pay to
Lender all reasonable costs and expenses, including without limitation
attorneys' fees and expenses, incurred by Lender in the creation (with respect
to the creation, such fees not to exceed $25,000), satisfaction, protection,
defense or enforcement of Lender's rights hereunder, or in seeking to collect
the Indebtedness evidenced by this Agreement.
18. NOTICES: Notices, demands and other communications required to be
given hereunder to be effective shall be transmitted in writing by telex,
telecopy, or facsimile transmission and confirmed by a similar mailed writing,
by hand delivery, by first class, registered or certified mail, return receipt
requested, or an overnight courier service, addressed to Lender at 501 Corporate
Centre Drive, Suite 600, Franklin, TN 37067 (Attention: Director Operations &
Administration) or to the applicable as the case may be, at the address set
forth above or at such other address as any party may hereinafter substitute by
written notice. Notice shall be effective four (4) days after the date it was
mailed or upon receipt, whichever is earlier.
19. INDEMNIFICATION: Telscape and each Co-Borrower shall indemnify Lender
against and hold Lender harmless from any and all claims, actions, suits,
damages, allegations, liabilities, and liens and all costs and expenses,
including, without limitation, reasonable attorneys' fees incurred by Lender,
arising out of or in any way related to a Co-Borrower's ownership or use of the
Collateral, or in connection with the transactions contemplated by this
Agreement, including without limitation, the granting and perfection of the
security interest and lien described herein.
20. FCC AND PUC APPROVALS; NOTIFICATION: The exercise of any rights
hereunder by the Lender that may require FCC or PUC approval shall be subject to
obtaining such approval. Pending obtaining any such FCC or PUC approval, each
Co-Borrower will refrain from taking or permitting any action to be taken which
is contrary to the interest of the Lender. In accordance with the requirements
of 47 C.F.R. Section 22.917 (1984), or any successor provision, the Lender
agrees to notify the applicable Co-Borrower and the FCC (if required) in writing
at least ten (10) days prior to the repossession, in accordance with the
Agreement, of all or any part of the Collateral which is subject to the
regulation.
21. ASSIGNMENT: Lender may, in whole or in part, without notice to, or the
consent of Telscape or any Co-Borrower, sell, assign, grant a security interest
in or pledge its interest in the Collateral and/or a Note and any amounts due or
to become due hereunder to any third party ("Assignee"). Upon receiving written
notice from Lender, a Co-Borrower shall, if so directed, pay the amounts due
hereunder, directly to Assignee. Any Assignee shall be entitled to rely on
Telscape's and each Co-Borrower's agreements, representations, warranties, and
covenants contained herein, as applicable, and shall be considered a third-party
beneficiary thereof. Telscape and each Co-Borrower shall also execute and
deliver to Lender, or any Assignee, any additional documentation as Lender or
Assignee may reasonably request. Without Lender's prior written consent, neither
Telscape nor any Co-Borrower shall assign or transfer its obligations hereunder.
Any attempted transfer by Telscape or any Co-Borrower shall be void ab initio.
22. MISCELLANEOUS:
(a) No failure or delay by the Lender to exercise any right, power or
privilege hereunder shall operate as a waiver of any such right, power or
privilege, nor shall any single or partial exercise of any right, power or
privilege preclude any other or future exercise thereof. The Lender may waive
any default before or after the same has been declared and restore this
Agreement to full force without impairing any rights hereunder, such right of
waiver being a continuing one. The waiver of any provision hereunder will not be
effective unless in writing signed by the Lender.
(b) If any provision in this Agreement or a Note shall be prohibited or
unenforceable, such provision shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions.
(c) To the extent that the Indebtedness is now or hereafter secured by
property other than the Collateral, or by the guaranty, endorsement or property
of any other person, corporation or entity, then Lender shall have the right, in
its sole discretion, to determine which rights, security, liens, security
interest or remedies it shall, at any time, pursue, relinquish, subordinate,
modify, or take any other action with respect thereto without, in any way,
modifying or affecting any of them or any of its rights hereunder.
(d) Lender's duty of care (as imposed by law) with respect to the
Collateral in its possession shall be deemed fulfilled if Lender exercises
reasonable care in physically safekeeping such Collateral, or in the case of
Collateral in the custody or possession of a bailee or other third person,
exercises reasonable care in the selection of the bailee or other third person,
and Lender need not otherwise preserve, protect, insure, or care for any
Collateral.
(e) No right or remedy is exclusive of any other provided under this
Agreement or permitted by law or equity. All such rights and remedies shall be
cumulative and may be exercised singularly or concurrently at Lender's option.
The exercise or enforcement of any one such right or remedy shall neither be a
condition to, nor bar the exercise or enforcement of any other.
(f) All representations and warranties made herein or in any document,
certificate or statement delivered pursuant thereto, or in connection therewith,
shall survive the execution and delivery of this Agreement and the Notes.
(g) Subject to the notice requirement in Section 14, Telscape and each
Co-Borrower waives presentment, demand, protest and notice to the extent
permitted by applicable law.
(h) Time is of the essence with regard to each and every provision of this
Agreement and each Note.
(i) This Agreement may be executed in more than one counterpart, all of
which taken together, shall constitute one agreement.
23. SUCCESSORS AND ASSIGNS: This Agreement shall be binding on the parties
and inure to the benefit of Lender and each Co-Borrower and their successors and
permitted assigns.
24. GOVERNING LAW: This Agreement and the Notes are being delivered to
Lender in the State of New York and shall be construed in accordance with and
governed by the laws of such state, except to the extent the internal laws of
another jurisdiction are required to be applied in connection with the exercise
of rights pertaining to Collateral in that jurisdiction.
25. ENTIRE AGREEMENT: This Agreement constitutes the entire agreement
between Lender, Telscape and each Co-Borrower with respect to the subject matter
hereof and supersedes all previous negotiations, proposals, commitments,
writings, and understandings of any nature whatsoever.
9
<PAGE>
SCHEDULE OF BORROWING SUBSIDIARIES
By executing this Schedule of Borrowing Subsidiaries attached to and
forming a part of the Loan and Security Agreement dated as of January 11, 1999
(the "Loan Agreement"), between and among Telscape International, Inc. a Texas
corporation ("Telscape"), NTFC Capital Corporation (the "Lender"), (i) each of
TELSCAPE USA, INC., a Texas corporation, TSCP INTERNATIONAL, INC., a Texas
corporation, and MSN COMMUNICATIONS, INC., a California corporation, represents
and warrants that it is a Domestic Subsidiary of Telscape, joins as a party to
the Loan Agreement, assumes the obligations of a Domestic Co-Borrower under the
Loan Agreement, and confirms that it is bound by the terms and conditions of the
Loan Agreement, including but not limited to the grant to Lender of a security
interest in all Collateral (the execution of this instrument by the Co-Borrowers
constitutes a grant of a security interest in the Collateral) and (ii) each of
TELSCAPE DE MEXICO, SA DE CV, a corporation incorporated under the laws of
Mexico D.F., N.S.I., SA DE CV, a corporation incorporated under the laws of
Mexico D.F., TELEREUNION INTERNATIONAL, SA DE CV, a corporation incorporated
under the laws of Mexico D.F., VEXTRO DE MEXICO, SA DE CV, a corporation
incorporated under the laws of Mexico D.F., LAN AND WAN, SA DE CV, a corporation
incorporated under the laws of Mexico D.F., SERVICIOS CORPORATIVOS VEXTRO, SA DE
CV, a corporation incorporated under the laws of Mexico D.F., TELEREUNION, SA DE
CV, a corporation incorporated under the laws of Mexico D.F., and MS NOTICIAS,
SA DE CV, a corporation incorporated under the laws of Mexico D.F. represents
and warrants that it is a Foreign Subsidiary of Telscape, joins as a party to
the Loan Agreement, assumes the obligations of a Foreign Co-Borrower under the
Loan Agreement, and confirms that it is bound by the terms and conditions of the
Loan Agreement, including but not limited to the grant to Lender of a security
interest in all Collateral (the execution of this instrument by the Co-Borrowers
constitues a grant of a security interest in the Collateral). The undersigned
Co-Borrowers acknowledge and agree that (i) future Subsidiaries of Telscape are
required to become additional Co-Borrowers under the Loan Agreement without the
consent of any other Co-Borrower by execution of a form of the Annex to this
Schedule of Borrowing Subsidiaries by Telscape, the Subsidiary and the Lender;
(ii) the Lender is willing to extend certain credit to the undersigned
Co-Borrowers, subject to the terms and conditions set forth in the Loan
Agreement, including the condition that the undersigned Domestic Co-Borrowers
will be jointly and severally liable for the payment of all Indebtedness owed by
Telscape or any Co-Borrower to Lender under the Loan Agreement and the condition
that the undersigned Foreign Co-Borrowers will be jointly and severally liable
for the payment of all Indebtedness owed by any Foreign Co-Borrower to Lender
under the Loan Agreement; (iii) without this condition of joint and several
liability, Lender would not be willing to extend credit to any Co-Borrower; and
(iv) the undersigned Co-Borrowers and other Subsidiaries of Telscape which may
become additional Co-Borrowers under the Loan Agreement are (or will be) related
entities, and the undersigned Co-Borrowers expect to increase their respective
businesses, and to benefit directly and indirectly, through the use of the
equipment to be acquired by it and the other Co-Borrowers with the proceeds of
the loans to be made pursuant to the Loan Agreement.
This Schedule of Borrowing Subsidiaries to the Loan Agreement is attached
to, and forms a part of, the Loan Agreement, is being delivered to Lender in the
State of Tennessee together with the Loan Agreement and shall be construed in
accordance with and governed by the laws of such state, except to the extent the
internal laws of another jurisdiction are required to be applied in connection
with the exercise of rights pertaining to Collateral in that jurisdiction.
Capitalized terms used in this Schedule of Borrowing Subsidiaries without
definition shall have the meanings set forth in the Loan Agreement to which this
Schedule is attached and forms a part.
This Schedule of Borrowing Subsidiaries may be executed in any number of
counterparts (by facsimile transmission or otherwise) and by the different
parties hereto on separate counterparts, each of which, when so executed, shall
be deemed an original, but all such counterparts shall constitute but one and
the same document.
IN WITNESS WHEREOF, the parties have executed this Schedule of Borrowing
Subsidiaries to the Loan and Security Agreement by their duly authorized
representatives:
TELSCAPE:
TELSCAPE INTERNATIONAL, INC.
BY:
TITLE:
CO-BORROWERS:
TELSCAPE USA, INC.
BY:
TITLE:
TSCP INTERNATIONAL, INC.
BY:
TITLE:
MSN COMMUNICATIONS, INC.
BY:
TITLE:
TELSCAPE DE MEXICO, SA DE CV
BY:
TITLE:
(SIGNATURES CONTINUED ON NEXT PAGE)
10
<PAGE>
N.S.I., SA DE CV
BY:
TITLE:
TELEREUNION INTERNATIONAL,
SA DE CV
BY:
TITLE:
VEXTRO DE MEXICO, SA DE CV
BY:
TITLE:
LAN AND WAN, SA DE CV
BY:
TITLE:
SERVICIOS CORPORATIVOS
VEXTRO, SA DE CV
BY:
TITLE:
TELEREUNION, SA DE CV
BY:
TITLE:
MS NOTICIAS, SA DE CV
BY:
TITLE:
LENDER:
NTFC CAPITAL CORPORATION
BY:
TITLE:
11
<PAGE>
EXHIBIT A
FORM OF ANNEX TO SCHEDULE OF BORROWING SUBSIDIARIES
By executing this Annex to the Schedule of Borrowing Subsidiaries attached
to and forming a part of the Loan and Security Agreement dated as of January 11,
1999, (the "Loan Agreement"), between and among Telscape International, Inc. a
Texas corporation ("Telscape"), NTFC Capital Corporation (the "Lender"),
Domestic and/or Foreign Subsidiaries of Telscape which are signatories to the
Schedule of Borrowing Subsidiaries attached to, and forming a part of, the Loan
Agreement, and such additional Domestic and/or Foreign Subsidiaries of Telscape
which may become a party to the Loan Agreement pursuant to Section 1(b) thereof,
_____________________ represents and warrants that it is a [FOREIGN OR DOMESTIC]
Subsidiary of Telscape, joins as a party to the Loan Agreement, assumes the
obligations of a [FOREIGN/DOMESTIC] Co-Borrower under the Loan Agreement, and
confirms that it is bound by the terms and conditions of the Loan Agreement,
including but not limited to the grant by ___________________________ to Lender
of a security interest in all its right, title and interest in and to the
Collateral as provided in the Loan Agreement. (The execution of this instrument
constitutes a grant by of a security interest in the Collateral).
_____________________ acknowledges and agrees that one or more other
Subsidiaries of Telscape may become additional [FOREIGN/DOMESTIC] Co-Borrowers
under the Loan Agreement without the consent of any other [FOREIGN/DOMESTIC]
Co-Borrower by execution of a form of the Annex to the Schedule of Borrowing
Subsidiaries by Telscape, the Subsidiary and the Lender. __________________
acknowledges and agrees that (i) other Subsidiaries of Telscape may become
additional [FOREIGN/DOMESTIC] Co-Borrowers under the Loan Agreement without the
consent of any other Co-Borrower by execution of a form of the Annex to this
Schedule of Borrowing Subsidiaries by Telscape, the Subsidiary and the Lender;
(ii) the Lender is willing to extend certain credit to the Co-Borrowers, subject
to the terms and conditions set forth in the Loan Agreement, including the
condition that all Domestic Co-Borrowers will be jointly and severally liable
for the payment of all Indebtedness owed by Telscape or any Co-Borrower to
Lender under the Loan Agreement and the condition that all Foreign Co-Borrowers
will be jointly and severally liable for the payment of all Indebtedness owed by
any Foreign Co-Borrower to Lender under the Loan Agreement; (iii) without this
condition of joint and several liability, Lender would not be willing to extend
credit to any Co-Borrower; and (iv) ____________________, the existing
Co-Borrowers and Subsidiaries of Telscape which may become additional
Co-Borrowers under the Loan Agreement are (or will be) related entities, and
expects to increase its business, and to benefit directly and indirectly,
through the use of the equipment to be acquired by it and the other Co-Borrowers
with the proceeds of the loans to be made pursuant to the Loan Agreement.
_______________________ authorizes the Lender to attach this Annex to the
Schedule of Borrowing Subsidiaries to the Loan Agreement, which is attached to,
and forms a part of, the Loan Agreement. This Annex to the Schedule of Borrowing
Subsidiaries to the Loan Agreement is being delivered to Lender in the State of
Tennessee and shall be construed in accordance with and governed by the laws of
such state, except to the extent the internal laws of another jurisdiction are
required to be applied in connection with the exercise of rights pertaining to
Collateral in that jurisdiction. Capitalized terms used in this Annex to the
Schedule of Borrowing Subsidiaries without definition shall have the meanings
set forth in the Loan Agreement to which this Annex and the Schedule of
Borrowing Subsidiaries are attached and form a part.
This Annex may be executed in any number of counterparts (by facsimile
transmission or otherwise) and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same document.
IN WITNESS WHEREOF, the parties have executed this Annex to Schedule of
Borrowing Subsidiaries by their duly authorized representatives:
TELSCAPE:
TELSCAPE INTERNATIONAL, INC.
BY:
TITLE:
CO-BORROWER:
BY:
TITLE:
LENDER:
NTFC CAPITAL CORPORATION
BY:
TITLE:
12
<PAGE>
EXHIBIT D
TELSCAPE FINANCIAL
COVENANTS
<TABLE>
<CAPTION>
1 2 3
DEBT/BOOK EBITDA/ MINIMUM
PERIOD: CAPITALIZATION DEBT SERVICE EBITDA
------- -------------- ------------ ------
1999
<S> <C> <C> <C>
Quarter 1 1.20X ---- 1,344,000
Quarter 2 1.20X ---- 2,950,000
Quarter 3 1.20X ---- 3,760,000
Quarter 4 1.20X 1.25x 7,682,000
2000
Quarter 1 1.00X 1.50X 7,580,000
Quarter 2 1.00X 1.50X 7,580,000
Quarter 3 1.00X 1.50X 9,476,000
Quarter 4 1.00X 1.50X 13,266,000
2001
Quarter 1 1.00X 1.50X N/A
Quarter 2 1.00X 1.50X N/A
Quarter 3 1.00X 1.50X N/A
Quarter 4 1.00X 1.50X N/A
2002
Quarter 1 1.00X 1.50X N/A
Quarter 2 1.00X 1.50X N/A
Quarter 3 1.00X 1.50X N/A
Quarter 4 1.00X 1.50X N/A
2003
Quarter 1 1.00X 1.50X N/A
Quarter 2 1.00X 1.50X N/A
Quarter 3 1.00X 1.50X N/A
Quarter 4 1.00X 1.50X N/A
2004
Quarter 1 1.00X 1.50X N/A
Quarter 2 1.00X 1.50X N/A
Quarter 3 1.00X 1.50X N/A
Quarter 4 1.00X 1.50X N/A
2005
Quarter 1 1.00X 1.50X N/A
Quarter 2 1.00X 1.50X N/A
Quarter 3 1.00X 1.50X N/A
Quarter 4 1.00X 1.50X N/A
</TABLE>
Covenant 1 is measured on a quarterly basis, as of the last day of the period
being measured.
Covenant 2 is measured on a quarterly basis, with EBITDA calculated for the
preceding four quarters as of the day of the period being measured, and Debt
Service calculated as defined.
Covenant 3 is measured on a quarterly basis, as of the last day of the period
being measured.
13
SECURITIES PURCHASE AGREEMENT
AMONG
MDNH PARTNERS, L.P.,
KENDU PARTNERS
AND
TELSCAPE INTERNATIONAL, INC.
This SECURITIES PURCHASE AGREEMENT is entered into as of December 18, 1998
(the "AGREEMENT"), by and among MDNH Partners, L.P., a California limited
partnership ("MDNH"), Kendu Partners, a California general partnership ("Kendu,"
and together with MDNH, the "INVESTORS"), and Telscape International, Inc., a
Texas corporation (the "COMPANY").
RECITALS
A. The parties desire that, upon the terms and subject to the conditions
contained herein, the Company shall issue to the Investors, and the Investors
shall purchase from the Company, up to 950,000 shares of the Company's common
stock, par value $.001 per share (the "COMMON STOCK").
B. Except as otherwise provided in this Agreement, such investments will
be made in reliance upon the provisions of Section 4(2) promulgated by the
Securities and Exchange Commission under the United States Securities Act of
1933, as amended (the
"Securities Act"),
and/or upon such other exemption from the registration requirements of the
Securities Act as
may be available.
NOW, THEREFORE, in consideration of the foregoing Recitals which are
hereby incorporated by this reference and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as
follows:
ARTICLE I
PURCHASE AND SALE
SECTION 1.1 INITIAL PURCHASE.
(a) Upon the terms and conditions set forth herein, the Company shall
issue and sell to the Investors, and the Investors shall purchase from the
Company, 250,000 shares of Common Stock (the "INITIAL SHARES") at $6.00/share
(for a total purchase price of $1,500,000) (the "PURCHASE PRICE"). MDNH shall
purchase 125,000 of the Initial Shares for a total purchase price of $750,000
and Kendu shall purchase 125,00 of the Initial Shares for a total purchase price
of $750,000.
(b) The closing of the purchase and sale of the Initial Shares (the
"INITIAL CLOSING") shall be held at the offices of Coblentz, Patch Duffy & Bass,
LLP, located at 222 Kearny Street, San Francisco, California 94104, on the first
business day following execution of this Agreement
<PAGE>
and satisfaction of all conditions set forth in Section 2.1 (the "INITIAL
CLOSING DATE") or at such other time or place as the parties may agree. With
respect to the sale of the Initial Shares, on or before the Initial Closing
Date, (i) the Company shall deliver to the Investors certificates for the
Initial Shares and (ii) the Investors shall deliver or cause to be delivered to
the Company the Purchase Price (less the PCM Commission set forth in Section 1.6
hereof) by wire transfer of immediately available funds to one or more accounts
designated by the Company.
SECTION 1.2.OPTIONAL PURCHASES.
(a) In addition to the purchase of the Initial Shares pursuant to Section
1.1 above, the Investors agree to purchase during the Commitment Period (as such
term is defined below), at the Company's option and subject to the conditions
set forth in Section 2.2, up to $2,000,000 of shares of Common Stock (the "FIRST
OPTION SHARES") at a price equal to 80% of the Market Price (as such term is
defined below) of such shares. Beginning thirty (30) days after the closing of
the purchase and sale of all or any portion of the First Option Shares, the
Investors agree to purchase during the Commitment Period, at the Company's
option and subject to the conditions set forth in Section 2.2, up to an
additional $1,500,000 of shares of Common Stock (the "SECOND OPTION SHARES") at
a price equal to 80% of the Market Price of such shares. The First Option Shares
and the Second Option Shares are referred to herein collectively as the "OPTION
SHARES." Notwithstanding anything herein to the contrary, up to $500,000 of the
Option Shares may be purchased from certain shareholders of the Company who
shall be selected by the President or any Vice President of the Company (the
"Selling Shareholders"), rather than directly from the Company. The Company
acknowledges and agrees that the shares purchased from Selling Shareholders
shall be deemed to be part of the Option Shares. The term "COMMITMENT PERIOD"
means the period commencing five (5) Trading Days after public disclosure and
release of the Company's 1998 earnings pursuant to the rules and requirements
under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") and
expiring six months after the Initial Closing Date. The term "TRADING DAY" means
any day during which the Principal Market (as such term is defined below) shall
be open for business. The term "PRINCIPAL MARKET" means the NASDAQ National
Market, the NASDAQ Small-Cap Market, the American Stock Exchange or the New York
Stock Exchange, whichever is at the time the principal trading exchange or
market for the Company's Common Stock. The term "MARKET PRICE" means the average
closing price per share of the Company's Common Stock on the five (5) Trading
Days prior to the applicable Optional Closing Date (as such tem is defined
below). The Investors may allocate the purchase of Option Shares between
themselves as they agree; PROVIDED, HOWEVER, that the obligation of the
Investors to purchase Option Shares and to pay the purchase price therefor shall
be joint and several obligations of the Investors.
(b) The closing of the purchase and sale of Option Shares (each, an
"OPTIONAL CLOSING") shall be held at the offices of Coblentz, Patch Duffy &
Bass, LLP, located at 222 Kearny Street, San Francisco, California 94104, on a
Trading Day during the Commitment Period which is five (5) Trading Days after
the date on which the Company elects by delivery of an Optional Purchase Notice
pursuant to Section 1.3 to sell Option Shares to the Investors, in conformity
with the provisions of this Agreement (each, an "OPTIONAL CLOSING DATE" and,
together with the Initial Closing Date, the "CLOSING DATES") or at such other
time or place as the
<PAGE>
parties may agree. With respect to each Optional Closing relating to Option
Shares, on the applicable Optional Closing Date, (i) the Company shall deliver
certificates for the Option Shares to be purchased by the Investors pursuant to
this Section 1.2, and (ii) the Investors shall deliver the purchase price of
such Option Shares (less the PCM Commission, if any, set forth in Section 1.6
hereof) by wire transfer to the account designated by the Company. In addition,
on or prior to each Optional Closing, the Company and the Investors shall
deliver all documents, instruments and writings required to be delivered or
reasonably requested by either of them pursuant to this Agreement in order to
implement and effect the transactions contemplated herein.
SECTION 1.3 MECHANICS OF EXERCISE RELATING TO OPTION SHARES.
(a) DELIVERY OF THE OPTIONAL PURCHASE NOTICE. The Company may deliver only
one written notice to purchase First Option Shares and one written notice to
purchase Second Option Shares (each notice hereinafter referred to as an
"OPTIONAL PURCHASE Notice"). Each Optional Purchase Notice shall set forth the
number of Option Shares to be sold in an amount not less than $500,000, in
increments of $500,000, subject to the limitations imposed by Sections 1.2 and
2.2 herein. The Company may not deliver an Optional Purchase Notice to the
Investors on a day that any event described in Section 1.4 is then occurring or
if the applicable conditions set forth in Article II are not satisfied. If any
of the events described in Section 1.4 occur on or after the date on which an
Optional Purchase Notice is given, but prior to the Optional Closing Date
associated with such Optional Purchase Notice, or if the applicable conditions
set forth in Section 1.2 or Article II are not satisfied as of the applicable
Optional Closing Date (subject to any extension as mutually agreed by the
Company and the Investors), such Optional Purchase Notice shall be null, void
and of no further force or effect; provided, however, that the nullification and
voidance of an Optional Purchase Notice shall not reduce the number of Optional
Purchase Notices that the Company may deliver to the Investors. The following
example illustrates how the immediately preceding sentence should be
interpreted: if an event described in Section 1.4 occurs on or after the date
that an Optional Purchase Notice is given by the Company with respect to the
First Option Shares and that Optional Purchase Notice is deemed null, void and
of no force or effect, the Optional Closing shall be canceled; however, the
Company shall have the right to deliver an additional Optional Purchase Notice
with respect to the First Option Shares (subject to the conditions set forth in
this paragraph) and shall retain its right to deliver an Optional Purchase
Notice with respect to the Second Option Shares (subject to the conditions set
forth in this paragraph).
(b) DATE OF DELIVERY OF OPTIONAL PURCHASE NOTICE. An Optional Purchase
Notice shall be deemed delivered on (i) the Trading Day it is received by
facsimile or otherwise by the Investors if such notice is received prior to 5:00
P.M. Chicago time, or (ii) the immediately succeeding Trading Day if it is
received by facsimile or otherwise after 5:00 P.M. Chicago time. The Optional
Purchase Notice may not be delivered or deemed delivered, on a day which is not
a Trading Day.
SECTION 1.4 SUSPENSION OF OPTIONAL PURCHASE OBLIGATION. The Investors
shall not be required to purchase Option Shares from the Company on any Optional
Closing Date nor may an Optional Purchase Notice be delivered on a day that one
or more of the following has occurred or
<PAGE>
is occurring: (i) the average closing price of the Common Stock on any of the
five (5) Trading Days prior to the applicable Optional Closing Date is less than
$6.25 per share or more than $15.00 per share, (ii) the Company fails to satisfy
in all material respects the requirements in Sections 1.2 and 2.2(a) or (b) as
applicable, (iii) any failure or interruption in the compliance in all material
respects with the Company's covenants set forth in Article V or (iv) the Company
is in possession of material nonpublic information that it has not disclosed and
does not disclose to the Investors prior to the relevant Optional Closing Date
or material nonpublic information regarding the Company has been disclosed
(regardless of by whom) less than five (5) Trading Days before such Optional
Closing Date.
SECTION 1.5 ISSUANCE OF ADDITIONAL SHARES. In the event the Company makes
any election to sell Option Shares to the Investors at any time in which the
Company is in possession of material nonpublic information that it has not
disclosed and does not disclose to the Investors prior to the relevant Optional
Closing Date, and the market price of the Common Stock falls within the five (5)
Trading Days following disclosure of such information (whether of not such
disclosure is made by or on behalf of the Company and regardless of when such
disclosure is made), in addition to any other remedies that the Investors may
have for such action, the Company shall issue to the Investors, for no
additional cost, additional shares of Common Stock. Such shares shall be issued
promptly following delivery of a request by Investors to the Company and shall
be issued in an amount necessary to reduce the average purchase price of such
Option Shares to 80% of the average closing price of the Common Stock on the
five (5) Trading Days following release of the nonpublic information.
SECTION 1.6 PCM COMMISSION. The Company shall pay PCM a commission in
connection with the sale of Common Stock hereby in an amount equal to 5.75% of
the sales price of such shares (the "PCM COMMISSION"); provided, however, that
PCM shall receive no commission with respect to any Option Shares that are sold
by Selling Shareholders to the Investors. PCM may, in its sole discretion, elect
to receive the PCM Commission in either (i) cash, (ii) warrants to purchase
common stock of the Company, on commercially reasonable terms on which the
parties will mutually agree in good faith, or (iii) part in cash and part in
warrants. The PCM Commission shall be due and payable, and warrants shall be
issued, as the case may be, on each Closing Date hereunder with respect to the
shares sold on such date. The Company hereby authorizes the Investors to pay any
portion of the PCM Commission that is to be paid in cash directly to PCM at each
such closing as directed by PCM. In addition, the Company agrees to enter into
an amendment to the Investment Banking Agreement by and between the Company and
PCM originally dated November 23, 1998 in order to increase the compensation
payable to PCM in connection with the services to be provided thereunder to
seven (7) percent. Such amendment shall be in the form attached hereto as
EXHIBIT A. The Company shall be under no obligation to issue warrants to PCM
pursuant to this Section 1.6 until such time as PCM shall make written
representations to the Company (which shall be reasonably satisfactory to the
Company's counsel) in form and substance similar to those made by the Investors
in Article III hereof.
SECTION 1.7 REGISTRATION OF SHARES. The resale by the Investors of the
Initial Shares and the Option Shares shall be subject to a registration rights
agreement (the "REGISTRATION
<PAGE>
RIGHTS AGREEMENT") to be entered into between the Company and the Investor on
the Initial Closing Date. The Registration Rights Agreement shall be in form and
substance similar to that agreement which is attached hereto as EXHIBIT B.
ARTICLE II
CONDITIONS TO CLOSING
SECTION 2.1 CONDITIONS PRECEDENT TO THE OBLIGATIONS TO ISSUE AND SELL
COMMON STOCK BY THE COMPANY AND TO PURCHASE COMMON STOCK BY THE INVESTOR.
(a) CONDITIONS PRECEDENT TO COMPANY'S OBLIGATION. The obligation hereunder
of the Company to issue and sell the Initial Shares and the Option Shares is
subject to the satisfaction, at or before each such Closing, of each of the
conditions set forth below:
(i) ACCURACY OF EACH INVESTOR'S REPRESENTATIONS AND WARRANTIES. The
representations and warranties of each Investor shall be true and correct
in all material respects as of the date of this Agreement and as of the
date of each Closing as though made at each such time.
(ii) PERFORMANCE BY EACH INVESTOR. Each Investor shall have
performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by such Investor at or prior to such
Closing.
(iii) NO INJUNCTION. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent
jurisdiction which, in the reasonable opinion of the Company and its legal
counsel, prohibits or materially adversely affects any of the transactions
contemplated by this Agreement, and no proceeding shall have been
commenced which may have the effect of prohibiting or materially adversely
affecting any of the transactions contemplated by this Agreement.
(iv) OTHER. The Company shall have received and been reasonably
satisfied with such other certificates and documents as shall have been
reasonably requested by the Company in order for the Company to confirm
the Investors' satisfaction of the conditions set forth in this Agreement.
(b) CONDITIONS PRECEDENT TO EACH INVESTOR'S OBLIGATIONS. The obligation
hereunder of each Investor to purchase the Initial Shares and the Option Shares
is subject to the satisfaction, at or before each Closing Date, of each of the
conditions set forth below:
(i) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the Company shall be true and correct in
all material respects as of each Closing Date as though made at such time.
(ii) PERFORMANCE BY THE COMPANY. The Company shall have performed,
satisfied
<PAGE>
and complied in all material respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or
complied with by the Company at or prior to the each Closing Date.
(iii) NO INJUNCTION. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated
or endorsed by any court or governmental authority of competent
jurisdiction which prohibits or materially adversely affects any of the
transactions contemplated by this Agreement, and no proceeding shall have
been commenced which may have the effect of prohibiting or materially
adversely affecting any of the transactions contemplated by this
Agreement.
(iv) ADVERSE CHANGES. Except as described in the Company's press
release dated November 30, 1998 (and for each Optional Closing Date, as
described in press releases filed after the date of this Agreement) or
otherwise disclosed to the Investors, since the date of the Company's last
quarterly report pursuant to the Exchange Act, no event which had or is
reasonably likely to have a material adverse effect on the business,
operations, properties, prospects, or financial condition of the Company
(a "MATERIAL ADVERSE EFFECT") has occurred.
(v) LEGAL OPINIONS. The Company shall have caused to be delivered to
the Investors an opinion of the Company's independent counsel in the form
of EXHIBIT C
attached hereto.
(vi) OFFICER'S CERTIFICATE. The Company shall have delivered to the
Investors a certificate dated as of each Closing Date executed by an
executive officer of the Company and to the effect that all the conditions
to such Closing have been satisfied as at the date of each such
certificate.
(vii) REGISTRATION RIGHTS AGREEMENT. The Company shall have entered
into the Registration Rights Agreement.
(viii) OTHER. The Investors shall have received and been reasonably
satisfied with such other certificates and documents as shall have been
reasonably requested by the Investors in order for the Investors to
confirm the Company's satisfaction of the conditions set forth in this
Agreement.
SECTION 2.2 CONDITIONS PRECEDENT TO THE RIGHT OF THE COMPANY TO DELIVER AN
OPTIONAL PURCHASE NOTICE AND THE OBLIGATION OF THE INVESTORS TO PURCHASE OPTION
Shares.
(a) CONDITIONS PRECEDENT OF SECTION 2.1(B). The conditions precedent
listed in Section 2.1(b) shall have been satisfied.
(b) NO SUSPENSION OF TRADING IN OR DELISTING OF COMMON STOCK. The trading
of the Common Stock shall not have been suspended by Principal Market, the
Securities and Exchange Commission (the "SEC") or the National Association of
Securities Dealers, Inc. (the "NASD") and
<PAGE>
the Common Stock shall have been approved for listing or quotation on and shall
not have been delisted from the Principal Market. The issuance of such Option
Shares shall not violate the shareholder approval requirements of the Principal
Market.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Each Investor represents and warrants to the Company that:
SECTION 3.1 INTENT. The Investor (which for purposes of this Article III
shall include each beneficial owner of the Common Stock issued hereby, as
determined pursuant to Rule 13d-3 under the Exchange Act) is entering into this
Agreement for investment for its own account and the Investor has no present
arrangement (whether or not legally binding) at any time to sell, grant any
participation in or otherwise distribute such Common Stock to or through any
person or entity. Subject to Section 6.3 hereof, the Investor reserves the right
to dispose of the Common Stock at any time in accordance with federal and state
securities laws applicable to such disposition.
SECTION 3.2 SOPHISTICATED AND ACCREDITED INVESTOR. (a) The Investor is a
sophisticated investor (as described in Rule 506(b)(2)(ii) of Regulation D) and
an accredited investor (as defined in Rule 501 of Regulation D), and the
Investor has such experience in business and financial matters that it is
capable of evaluating the merits and risks of an investment in Common Stock
issued hereby. The Investor acknowledges that an investment in such Common Stock
is speculative and involves a high degree of risk. The Investor acknowledges
that the Common Stock to be issued pursuant to this Agreement are "RESTRICTED
SECURITIES" within the meaning of the Securities Act and the rules and
regulations promulgated thereunder and may not be resold in the absence of an
effective registration statement under the Securities Act or an available
exemption from the Securities Act registration requirements.
(b) The Investor understands that (i) the offering and sale of the Common
Stock is intended to be exempt from registration under the Securities Act
pursuant to Section 4(2) of the Securities Act, (ii) neither the Common Stock
nor the sale thereof to the Investor has been registered under the Securities
Act, or under any state securities law, and (iii) no registration statement with
respect to the Common Stock has been filed with the SEC, nor with any other
regulatory authority and that, as a result, any benefit which might normally
accrue to an investor such as the Investor by an impartial review of such a
registration statement by the SEC or other regulatory commission will not be
forthcoming.
SECTION 3.3 AUTHORIZATION; ENFORCEMENT. (i) The Investor has the requisite
partnership power and authority to enter into and perform this Agreement and to
purchase the Initial Shares and Option Shares, (ii) the execution, issuance and
delivery of this Agreement by the Investor and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
partnership action and no further consent or authorization of the Investor or
its partners is required, and (iii) this Agreement has been duly executed and
delivered by the Investor and constitutes valid and binding obligations of the
Investor enforceable against the Investor in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy,
<PAGE>
insolvency, or similar laws relating to, or affecting generally the enforcement
of, creditors' rights and remedies or by other equitable principles of general
application.
SECTION 3.4 NOT AN AFFILIATE. The Investor is not an officer, director or
"AFFILIATE" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
SECTION 3.5 ORGANIZATION AND STANDING. MDNH represents and warrants to the
Company that it is a limited partnership duly organized, validly existing, and
in good standing under the laws of California. Kendu represents and warrants to
the Company that it is a general partnership duly organized, validly existing,
and in good standing under the laws of California.
SECTION 3.6 ABSENCE OF CONFLICTS. The execution and delivery of this
Agreement and any other document or instrument executed in connection herewith,
and the consummation of the transactions contemplated thereby, and compliance
with the requirements thereof, will not violate any law, rule, regulation,
order, writ, judgment, injunction, decree or award binding on the Investor, or
the provision of any indenture, instrument or agreement to which the Investor is
a party or is subject, or by which the Investor or any of its assets is bound,
or conflict with or constitute a material default thereunder, or result in the
creation or imposition of any lien pursuant to the terms of any such indenture,
instrument or agreement, or constitute a breach of any fiduciary duty owed by
the Investor to any third party, or require the approval of any third-party
(which has not been obtained) pursuant to any material contract, agreement,
instrument, relationship or legal obligation to which the Investor is subject or
to which any of its assets, operations or management may be subject.
SECTION 3.7 DISCLOSURE; ACCESS TO INFORMATION. The Investor acknowledges
that (i) it has received all information it considers necessary or appropriate
for deciding whether to purchase the Common Stock; (ii) as a result of its
experience in financial matters, it is properly able to evaluate the capital
structure of the Company, the business of the Company and the risks inherent
therein and is capable of bearing the economic risks of its investment in the
Common Stock; and (iii) it has been given the opportunity to obtain any
additional information or documents from, and to ask questions and receive
answers of, the officers and representatives of the Company to the extent
necessary to evaluate the merits and risks related to its investment in the
Common Stock, and all such questions have been answered to the Investor's full
satisfaction. The Investor has received all documents, records, books and other
information pertaining to Investor's investment in the Company that have been
requested by the Investor. The Investor further acknowledges that it understands
that the Company is subject to the periodic reporting requirements of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and the
Investor has reviewed or received copies of any such reports that have been
requested by it.
SECTION 3.8 MANNER OF SALE. At no time was the Investor presented with or
solicited by or through any leaflet, public promotional meeting, television
advertisement or any other form of general solicitation or advertising.
SECTION 3.9 NO OTHER ACTION; NON-CONTRAVENTION. (a) No action, consent or
approval by or in respect of, or filing with, any governmental authority, agency
or official or any other Person
<PAGE>
is required for the execution, delivery and performance by the Investor of this
Agreement.
(b) The execution, delivery and performance by the Investor of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not (i) violate its charter or bylaws or other constituent documents
(including, without limitation, any limited liability company agreement or
partnership agreement) or (ii) violate any applicable law, rule, regulation,
judgment, injunction, order or decree, which violation would (a) affect the
validity of this Agreement or (b) individually or in the aggregate impair the
ability of the Investor to perform in any material respect the obligations which
it has under this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Investor that:
SECTION 4.1 COMPANY STATUS. The Company has registered its Common Stock
pursuant to Section 12(b) or 12(g) of the Exchange Act and is in full compliance
with all reporting requirements of the Exchange Act, and the Company has
maintained all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. As of the date hereof, the Principal Market is the NASDAQ National
Market System.
SECTION 4.2 CURRENT PUBLIC INFORMATION. The Company has delivered or made
available to the Investor true and correct copies of all registration
statements, reports and documents, including proxy statements (other than
preliminary proxy statements), filed with the SEC by or with respect to the
Company since December 31, 1997, pursuant to the Securities Act or Exchange Act.
All such registration statements, reports and documents, together with those
registration statements, reports and documents filed pursuant to the Securities
Act or Exchange Act subsequent to the date of this Agreement are collectively
referred to herein as the "SEC DOCUMENTS".
SECTION 4.3 NO GENERAL SOLICITATION IN REGARD TO THIS TRANSACTION. Neither
the Company nor any of its affiliates nor any distributor or any person acting
on its or their behalf has conducted any general solicitation (as that term is
used in Rule 502(c) of Regulation D) with respect to any of the Common Stock,
nor have they made any offers or sales of any security or solicited any offers
to buy any security under any circumstances that would require registration of
the Common Stock under the Securities Act.
SECTION 4.4 VALID ISSUANCE OF COMMON STOCK.
(a) All of the outstanding shares of Common Stock of the Company have been
duly and validly authorized and issued and are fully paid and nonassessable. As
of the date of this Agreement, the Company has authorized capitalization
consisting of 25,000,000 shares of Common Stock, par value $.001 per share,
5,000,000 shares of Preferred Stock, par value $.001 per share, and 1,000,000
shares of Series A Preferred Stock, par value $.001 per share. Stock options
granted or reserved for
issuance to employees and directors of the Company are as described in SCHEDULE
4.4. As of
<PAGE>
December 15, 1998, there were issued and outstanding 5,782,749 shares of Common
Stock. As of the date of this Agreement, the Company has no other capital stock
issued and outstanding and no other outstanding securities convertible into
Common Stock other than as set forth in SCHEDULE 4.4.
(b) The Initial Shares and Option Shares have been duly authorized and,
when issued in accordance with this Agreement, will be validly issued, fully
paid and nonassessable and free of any liens or encumbrances. Additionally, the
holders of outstanding Common Stock of the Company are not and shall not be
entitled to preemptive or other rights afforded by the Company to subscribe for
the capital stock or other securities of the Company as a result of the issuance
of the Initial Shares and Option Shares to the Investor hereunder.
SECTION 4.5 ORGANIZATION AND QUALIFICATION. The Company is a corporation
duly incorporated and existing in good standing under the laws of the State of
Texas and has the requisite corporate power to own its properties and to carry
on its business as now being conducted. Except as disclosed in SCHEDULE 4.5, the
Company does not have any subsidiaries. The Company and each subsidiary is duly
qualified as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, other than those in which the
failure so to qualify would not have a Material Adverse Effect.
SECTION 4.6 AUTHORIZATION; ENFORCEMENT. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement and to
issue the Initial Shares and Option Shares, (ii) the execution, issuance and
delivery of this Agreement by the Company and the consummation by it of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action and no further consent or authorization of the Company or its
Board of Directors or shareholders is required, and (iii) this Agreement has
been duly executed and delivered by the Company and constitutes valid and
binding obligations of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws relating to, or affecting generally the
enforcement of, creditors' rights and remedies or by other equitable principles
of general application.
SECTION 4.7 CORPORATE DOCUMENTS. The Company has furnished or made
available or will furnish and make available prior to the Initial Closing Date
to the Investor true and correct copies of the Company's Articles of
Incorporation, as amended and in effect on the date hereof (the "ARTICLES"), and
the Company's bylaws, as amended and in effect on the date hereof (the
"BYLAWS").
SECTION 4.8 NO CONFLICTS. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of the Initial
Shares and Option Shares do not and will not (i) result in a violation of the
Company's Articles of Incorporation or bylaws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument to which the Company or any of its subsidiaries is a party, or (iii)
result in a violation of any federal, state, local or foreign law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the
<PAGE>
Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries is bound or affected (except for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect); nor is the Company otherwise in violation of, in conflict with
or in default under any of the foregoing (except for such violations, conflicts
or defaults as would not, individually or in the aggregate, have a Material
Adverse Effect); provided that, for purposes of the Company's representations
and warranties as to violations of foreign law, rule or regulation referenced in
clause (iii), such representations and warranties are made only to the best of
the Company's knowledge insofar as the execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby are or may be affected by the status of the
Investor under or pursuant to any such foreign law, rule or regulation). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations which either singly or in the aggregate do not and will not have a
Material Adverse Effect. The Company is not required under federal, state or
local law, rule or regulation to obtain any consent, authorization or order of,
or make any filing or registration with, any court or governmental agency in
order for it to execute, deliver or perform any of its obligations under this
Agreement or issue and sell the Initial Shares and Option Shares in accordance
with the terms hereof (other than any SEC, NASD or state securities filings
which may be required to be made by the Company subsequent to any Closing, and
any registration statement which may be filed pursuant hereto; provided that,
for purposes of the representation made in this sentence, the Company is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Investor herein.)
SECTION 4.9 SEC DOCUMENTS. As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the Securities Act or
the Exchange Act, as the case may be, and rules and regulations of the SEC
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such SEC Documents, and none of the SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of the Company included in the SEC
Documents comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).
SECTION 4.10 NO MATERIAL ADVERSE EFFECT. Since the date of the Company's
last quarterly report under the Exchange Act, no Material Adverse Effect has
occurred or exists with respect to the Company or its subsidiaries except as
described in the Company's press release dated November 30, 1998.
<PAGE>
SECTION 4.11 NO UNDISCLOSED LIABILITIES. The Company and its subsidiaries
have no liabilities or obligations which are material, individually or in the
aggregate, and are not disclosed in the SEC Documents or otherwise publicly
announced, other than those incurred in the ordinary course of the Company's or
its subsidiaries' respective businesses since the filing of the Company's most
recent SEC Document, and which, individually or in the aggregate, do not or
would not have a Material Adverse Effect on the Company and upon any and its
subsidiaries.
SECTION 4.12 NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since the filing of
the Company's most recent SEC Document, no event or circumstance has occurred or
exists with respect to the Company or its subsidiaries or their respective
businesses, properties, prospects, operations or financial condition, which,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the SEC Documents.
SECTION 4.13 LITIGATION AND OTHER PROCEEDINGS. Except as may be set forth
on SCHEDULE 4.13 and in the SEC Documents, there are no lawsuits or proceedings
pending or to the best knowledge of the Company threatened, against the Company,
nor has the Company received any written or oral notice of any such action,
suit, proceeding or investigation, which could reasonably be expected to have a
Material Adverse Effect on the Company or which could reasonably be expected to
materially adversely affect the transactions contemplated by this Agreement.
Except as set forth in the SEC Documents no judgment, order, writ, injunction or
decree or award has been issued by or, so far as is known by the Company,
requested of any court, arbitrator or governmental agency which could reasonably
be expected to result in a Material Adverse Effect on the Company or which could
reasonably be expected to materially adversely affect the transactions
contemplated by this Agreement.
ARTICLE V
COVENANTS OF THE COMPANY
SECTION 5.1 REGISTRATION RIGHTS. The Company shall comply in all respects
with the terms the Registration Rights Agreement for the term provided for
therein.
SECTION 5.2 LISTING OF COMMON STOCK. The Company hereby agrees to maintain
the listing of the Common Stock on a Principal Market, and as soon as
practicable but in any event prior to the commencement of the Commitment Period
to list the additional shares of Common Stock issuable under this Agreement. The
Company further agrees, if the Company applies to have the Common Stock traded
on any other Principal Market, it will include in such application the Common
Stock issuable under this Agreement, and will take such other action as is
necessary or desirable to cause the Common Stock to be listed on such other
Principal Market as promptly as possible.
SECTION 5.3 EXCHANGE ACT REGISTRATION. The Company will cause its Common
Stock to continue to be registered under Section 12(g) or 12(b) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, and will not take any action or file any document (whether or
not permitted by the Exchange Act or the rules thereunder)
<PAGE>
to terminate or suspend such registration or to terminate or suspend its
reporting and filing obligations under the Exchange Act.
SECTION 5.4 CORPORATE EXISTENCE. The Company will take all steps necessary
to preserve and continue the corporate existence of the Company.
SECTION 5.5 ADDITIONAL SEC DOCUMENTS. The Company will furnish to the
Investors upon request copies of all SEC Documents furnished or submitted to the
SEC.
SECTION 5.6 PENALTIES FOR FAILURE TO OBTAIN OR MAINTAIN EFFECTIVENESS OF A
REGISTRATION STATEMENT. In the event (i) the Company fails to file a
Registration Statement and obtain the effectiveness of a Registration Statement
within nine (9) months from the Initial Closing Date (or for any Option Shares
sold to the Investors pursuant to this Agreement, from the relevant Optional
Closing Date), (ii) the effectiveness of the Registration Statement is suspended
(other than as required by the filing of post-effective amendments as required
by law), or (iii) an Investor desires to resell, transfer or otherwise dispose
of Registrable Securities and a current prospectus meeting the requirements of
Section 10 of the Securities Act is not available for delivery by such Investor
(such suspension in (ii) or failure of delivery in (iii) is referred to herein
as a "SUSPENSION"), and such occurrence is not the result of any information
provided or failed to be provided by such Investor or some unforeseeable
catastrophe affecting the operation of the SEC, the Company shall pay to such
Investor within five (5) days following the end of the first 30-day period
following the date by which such Registration Statement was required to have
been declared effective, or following the date of suspension, in cash, an
aggregate amount equal to one half of one percent (0.5%) of the aggregate
purchase price of the Common Stock purchased by such Investor hereunder, and for
each 30-day period thereafter, an aggregate amount equal to one percent (1%) of
the aggregate purchase price of the Common Stock purchased by such Investor
hereunder. All amounts payable hereunder shall be paid to the Investor by
cashier's check or wire transfer in immediately available funds to such account
or accounts as shall be designated in writing by the Investor.
SECTION 5.9 LEGAL FEES AND EXPENSES. The Company shall pay all reasonable
legal fees and expenses incurred by the Investors in connection with the
transactions contemplated by this Agreement and the Registration Rights
Agreement, including without limitation those incurred in connection with the
negotiation, drafting, documentation and closing thereof to a maximum of $2,500.
ARTICLE VI
LEGENDS; INVESTOR COVENANTS
SECTION 6.1 LEGENDS. The Initial Shares and Option Shares will bear the
following legend
(the "LEGEND"):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES
LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT
<PAGE>
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.
THESE SECURITIES ARE SUBJECT TO A LOCK-UP AGREEMENT BETWEEN THE
HOLDER AND THE COMPANY AS SET FORTH IN THE SECURITIES PURCHASE
AGREEMENT DATED AS OF DECEMBER 18, 1998.
The Initial Shares and Option Shares shall also bear a legend referencing
the Lock-Up set forth in Section 6.3.
SECTION 6.2 INVESTORS' COMPLIANCE. Nothing in this Article VI shall affect
in any way each Investor's obligations under any agreement to comply with all
applicable securities laws upon resale of the Common Stock.
SECTION 6.3 LOCK-UP PERIOD. (a) Each Investor agrees that it will not sell
or transfer, or contract to sell or transfer, any shares of Common Stock
acquired hereby until the expiration of nine (9) months after such shares of
Common Stock have been acquired.
(b) In the event of an underwritten public offering of the Company's
Common Stock, if the managing underwriter deems it necessary or appropriate that
the Investors agree to extend the lock-up period set forth in Section 6.3(a),
the parties agree to negotiate in good faith the terms of any such additional
lock-up period, including, without limitation, compensation for the Investors.
If the parties agree on the terms of any such additional lock-up period (during
a period deemed by the underwriter to be necessary or appropriate), the
Investors will enter into a written agreement with the underwriter and the
Company to that effect (including an agreement not to sell or otherwise transfer
or dispose of any shares of Common Stock acquired hereby in a market transaction
(including sales pursuant to Rule 144)). The parties acknowledge and agree that
if they are unable to agree in good faith on the terms of any such additional
lock-up period, the Investors shall have no obligation and the Company shall
have no right to extend the lock-up period set forth in Section 6.3(a) above or
modify the terms thereof in any manner, regardless of whether of not any
underwriter deems any such additional lock-up necessary or appropriate.
(c) In order to enforce the covenant in Section 6.3(a) and if the parties
agree to an extension of the lock-up period pursuant to Section 6.3(b), in order
to enforce such agreement the Company may impose stop-transfer instructions with
respect to the Registrable Securities of the Investor until the end of such
period.
ARTICLE VII
CHOICE OF LAW AND VENUE
SECTION 7.1 CHOICE OF LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT
SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
<PAGE>
PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW. The parties hereby agree that
all actions or proceedings arising directly or indirectly from or in connection
with this Agreement shall, at the option of either party, be litigated only in a
state or federal court located in Houston, Texas. The parties consent to the
jurisdiction and venue of the foregoing court and consent that any process or
notice of motion or other application to said court or a judge thereof may be
served inside or outside the State of Texas by registered mail, return receipt
requested, directed to the party for which it is intended at its address set
forth in this Agreement (and service so made shall be deemed complete five (5)
days after the same has been posted as aforesaid) or by personal service or in
such other manner as may be permissible under the rules of said court.
ARTICLE VIII
ASSIGNMENT; ENTIRE AGREEMENT, AMENDMENT; PUBLICITY
SECTION 8.1 ASSIGNMENT. Neither this Agreement nor any rights of the
Investors or the Company hereunder may be assigned by any party to any other
person, except that the Company may assign up to $500,000 of the First Option
Shares or Second Option Shares to a Selling Shareholder. Notwithstanding the
foregoing, (a) the provisions of this Agreement shall inure to the benefit of,
and be enforceable by, any transferee of any of the Common Stock purchased or
acquired by the Investors hereunder with respect to the Common Stock held by
such person, and (b) each Investor's interest in this Agreement may be assigned
at any time, in whole or in part, to any other person or entity (including any
affiliate of the Investor) upon the prior written consent of the Company, which
consent shall not to be unreasonably withheld.
SECTION 8.2 ENTIRE AGREEMENT, AMENDMENT. This Agreement, the Registration
Rights Agreement, and the other documents delivered or to be delivered pursuant
hereto constitute the full and entire understanding and agreement between the
parties with regard to the subject hereof and thereof, and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth in this Agreement
or therein. Except as expressly provided in this Agreement, neither this
Agreement nor any term hereof may be amended, waived, discharged or terminated
other than by a written instrument signed by the party against whom enforcement
of any such amendment, waiver, discharge or termination is sought.
SECTION 8.3 PUBLICITY. The Company agrees that it will not disclose, and
will not include in any public announcement (except for a press release
announcing the execution of this Agreement and the transactions contemplated
hereby), the name of the Investors without its consent, unless and until such
disclosure is required by law or applicable regulation, and then only to the
extent of such requirement.
<PAGE>
ARTICLE IX
NOTICES; COST AND EXPENSES; INDEMNIFICATION
SECTION 9.1 NOTICES. All notices, demands, requests, consents, approvals
or other communications required or permitted to be given hereunder or which are
given with respect to this Agreement shall be in writing and shall be personally
served or deposited in the mail, registered or certified, return receipt
requested, postage prepaid, or delivered by reputable air courier service with
charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile,
addressed as set forth below, or to such other address as such party shall have
specified most recently by written notice:
(a) if to the Company, to:
Telscape International, Inc.
2700 Post Oak Boulevard
Suite 1000
Houston, Texas 77056
Attention: Todd M. Binet, Executive Vice
President
Facsimile No.: (713) 968-0930
with a copy to:
Gardere Wynne Sewell & Riggs, L.L.P.
333 Clay Avenue, Suite 800
Houston, Texas 77002-4086
Attention: Eric A. Blumrosen, Esq.
Facsimile No.: (713) 308-5555
(b) if to the Investors, to:
Kendu Partners
220 Bush Street, Suite 660
San Francisco, CA 94104
Attention: Doug Engmann
Facsimile No.: (415) 781-6469
MDNH Partners, L.P.
220 Bush Street
Suite 660
San Francisco, CA 94104
Attention: Herb Kerlan.
Facsimile No.: (415) 781-6469
with copies to:
Coblentz, Patch, Duffy & Bass, LLP
<PAGE>
222 Kearny Street, Seventh Floor
San Francisco, California 94014
Attention: Louis J. Giraudo, Esq.
Facsimile No.: (415) 989-1663
Notice shall be deemed given on the date of service or transmission if
personally served or transmitted by facsimile. Notice otherwise sent as provided
herein shall be deemed given on the third business day following the date mailed
or on the second business day following delivery of such notice by a reputable
air courier service.
SECTION 9.2 INDEMNIFICATION.
(a) INDEMNIFICATION OF INVESTOR. The Company hereby agrees to indemnify
and hold harmless each of the Investors and each Person, if any, who controls
the Investors within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, and their respective directors and officers
(each, an "Investor Indemnified Person") from and against and to pay any losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
("Damages") to which such Investor Indemnified Person may become subject as the
result of any material breach of any representation or warranty or covenant made
or to be performed on the part of the Company under this Agreement, and will
reimburse any Investor Indemnified Person for all expenses (including, without
limitation, reasonable counsel and expert fees) as they are incurred by any such
Investor Indemnified Person in connection with any such misrepresentation or
breach of warranty or covenant or investigating, preparing or defending any such
action or proceeding, whether pending or threatened, and whether or not such
Investor Indemnified Person is a party hereto. Notwithstanding the foregoing,
the Company will not be responsible for any Damages or expenses to the extent
that a court of competent jurisdiction shall have finally determined that such
Damages or expenses resulted primarily from such Investor Indemnified Person's
bad faith or gross negligence or material breach of this Agreement or other
documents delivered pursuant hereto.
(b) INDEMNIFICATION OF THE COMPANY. The Investors, jointly and severally,
hereby agree to indemnify and hold harmless the Company, its Subsidiaries and
each Person, if any, who controls the Company within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, and their
respective directors and officers (each, a "Company Indemnified Person") from
and against and to pay any Damages to which such Company Indemnified Person may
become subject as the result of any material breach of any representation or
warranty or covenant made or to be performed on the part of an Investor under
this Agreement or other documents delivered pursuant hereto, and will reimburse
any Company Indemnified Person for all expenses (including, without limitation,
reasonable counsel and expert fees) as they are incurred by any such Company
Indemnified Person in connection with any such misrepresentation or breach of
warranty or covenant or investigating, preparing or defending any such action or
proceeding, whether pending or threatened, and whether or not such Company
Indemnified Person is a party hereto. Notwithstanding the foregoing, the
Investors will not be responsible for any Damages or expenses to the extent that
a court of competent jurisdiction shall have finally determined that such
Damages or expenses resulted primarily from such Company Indemnified Person's
bad faith or gross negligence or material breach of this Agreement or other
documents delivered pursuant hereto.
<PAGE>
(c) ACTION AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action, suit or proceeding commenced against it in respect of which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve such indemnifying party from any liability hereunder to
the extent it is not materially prejudiced as a result thereof and in any event
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. Upon receipt of such notice from the
indemnified party, the indemnifying party shall assume the defense of any such
action, suit or proceeding, including the employment of counsel (who shall be
reasonably acceptable to the indemnified party) and payment of all fees and
expenses. An indemnified party shall have the right to employ separate counsel
in any such action, suit or proceeding and may participate at its own expense in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of the indemnified person unless (i) the indemnifying party has agreed
in writing to pay such fees and expenses, (ii) the indemnifying party has failed
to assume the defense and employ counsel, or (iii) the named parties to any such
action, suit or proceeding include both the indemnified party and the
indemnifying party and the indemnified party shall have been advised by its
counsel in writing that representation of such indemnified party and
indemnifying party by the same counsel would be inappropriate under applicable
standards of professional conduct (whether or not such representation by the
same counsel has been proposed) due to actual or potential differing interests
between them (in which case the indemnifying party shall not have the right to
assume the defense of such action, suit or proceeding). In no event shall the
indemnifying party be liable for fees and expenses of more than one counsel (in
addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry or any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section or Section 9.3 hereof (whether or not the
indemnified parties are actual or potential parties thereto), unless such
settlement, compromise or consent (i) includes an unconditional release of each
indemnified party from all liability arising out of such litigation,
investigation proceeding or claim and (ii) does not include a statement as to or
an admission of fault, culpability or a failure to act by or on behalf of an any
indemnified party. The indemnifying party shall not be liable for any settlement
of any action, suit or proceeding effected without its express prior written
consent, but if settled with such written consent or if there be a final
judgment for the plaintiff in any such action, suit or proceeding, the
indemnifying party agrees to indemnify and hold harmless the indemnified party
to the extent provided in this Section 9.2 from and against any Damages by
reason of such settlement or judgment.
SECTION 9.3 CONTRIBUTION. If the indemnification provided for in Section
9.2 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to herein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Investors on the other hand from the offering of the Initial Shares
and Option Shares pursuant to this Agreement or (ii) if the allocation
<PAGE>
provided by clause (i) is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Company on the one hand and of the
Investors on the other hand in connection with the statements or omissions which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Investors on the other hand in connection with the purchase and sale of the
Common Stock pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the purchase and sale of
the Option Shares and Initial Shares pursuant to this Agreement received by the
Company and the total net proceeds received by the Investors bear to the
aggregate purchase price.
The Company and the Investors agree that it would not be just and
equitable if contribution pursuant to this Section 9.3 were determined on a
pro-rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this Section 9.3.
The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 9.3 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 9.3, the Investors shall
not be required to contribute any amount in excess of the amount by which the
total price at which the Common Stock purchased by the Investors exceeds the
amount of any Damages which the Investors have otherwise been required to pay
pursuant to this Article IX.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such
fraudulent misrepresentation.
For purposes of this Section 9.3, each person, if any, who controls an
Investor within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act shall have the same rights to contribution as such Investor,
and each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act shall have the same rights to contribution as the Company.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one instrument.
SECTION 10.2 SURVIVAL; SEVERABILITY. The representations, warranties,
covenants and
<PAGE>
agreements of the parties hereto shall survive each Closing hereunder. The
indemnity and contribution agreements contained in Sections 9.2 and 9.3 hereof
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement or of the Commitment Period, (ii) any
investigation made by or on behalf of any indemnified party or by or on behalf
of the Company, and (iii) the consummation of the sale or successive resales of
the Common Stock. In the event that any provision of this Agreement becomes or
is declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that such severability shall be ineffective if it materially
changes the economic benefit of this Agreement to any party.
SECTION 10.3 TITLE AND SUBTITLES. The titles and subtitles used in this
Agreement are used
for convenience only and are not to be considered in construing or
interpreting this Agreement.
SECTION 10.4 REPORTING ENTITY FOR THE COMMON STOCK. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement shall
be Bloomberg L.P. or any other reputable pricing service chosen by the Investors
and reasonably acceptable to the Company.
[SIGNATURES ON FOLLOWING PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the date first
written
above.
TELSCAPE INTERNATIONAL, INC.
By: ______________________________
Name: Todd M. Binet
Title: Executive Vice President
MDNH PARTNERS, L.P.
By MDNH Trading Corp., its General Partner
By: ______________________________
Name:
Title:
KENDU PARTNERS
By: ______________________________
Name:
Title:
<PAGE>
EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of
December 18, 1998 (the "EFFECTIVE DATE"), is made and entered into by and among
MDNH Partners, L.P., a California limited partnership ("MDNH"), Kendu Partners,
a California general partnership ("Kendu," and together with MDNH, the
"INVESTORS"), and Telscape International, Inc., a Texas corporation (the
"COMPANY").
RECITALS:
A. The Company and the Investors have entered into that certain Securities
Purchase Agreement, dated of even date herewith (the "SECURITIES PURCHASE
AGREEMENT"), pursuant to which the Company will sell to the Investors up to
950,000 shares of its Common
Stock, par value $.001 per share.
B. Pursuant to the terms of, and in partial consideration for, the
Investors' agreement to enter into the Securities Purchase Agreement, the
Company has agreed to provide the Investors with certain registration rights
with respect to the Registrable Securities (as defined
below).
NOW, THEREFORE, in consideration of the premises, the representations,
warranties, covenants and agreements contained herein and in the Securities
Purchase Agreement, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1.DEFINITIONS. Capitalized terms defined in the Securities
Purchase Agreement shall have the same meanings herein as are ascribed to them
therein. In addition, the following terms shall have the meanings ascribed
below:
"REGISTRABLE SECURITIES" means all of the Common Stock and any other
securities issued or issuable pursuant to the Securities Purchase Agreement as
provided therein until (i) a registration statement under the Securities Act
covering the offering of such securities has been declared effective by the SEC
and such securities have been disposed of pursuant to such effective
registration statement, (ii) such securities are sold under circumstances in
which all of the applicable conditions of Rule 144 (or any similar provision
then in force) under the Securities Act ("RULE 144") are met, (iii) such
securities have been otherwise transferred and the Company has delivered a new
certificate or other evidence of ownership for such securities not bearing a
restrictive legend or (iv) such time as, in the opinion of counsel to the
Company, which counsel shall be reasonably acceptable to the Investors, such
securities may be sold without any time, volume or manner limitation pursuant to
Rule 144(k) (or any similar provision then in effect) under the Securities Act.
"REGISTRATION STATEMENT" See Section 2.1 (a).
<PAGE>
ARTICLE II
REGISTRATION RIGHTS
Section 2.1. REGISTRATION STATEMENTS.
(a) Subject to the terms and conditions of this Agreement and in
accordance with the provisions of Section 5.3 of the Securities Purchase
Agreement, the Company shall file with the SEC a registration statement on Form
S-1 or otherwise appropriate form under the Securities Act (or shall
appropriately amend an existing registration statement) (the "REGISTRATION
STATEMENT") for the registration of the resale by the Investors of any
Registrable Securities that the Investors purchase pursuant to the Securities
Purchase Agreement.
(b) The Registration Statement relating to the Initial Shares shall be
declared effective by the SEC no later than nine (9) months following the
Initial Closing Date and shall remain in effect until such time as the Investors
have sold all of the Initial Shares. Each Registration Statement relating to any
Option Shares that the Investors purchase pursuant to the Securities Purchase
Agreement shall be declared effective by the SEC no later than nine (9) months
following each respective Optional Closing Date and shall remain in effect until
such time as the Investors have sold all of the Option Shares.
(c) In the event (i) the Company fails to obtain the effectiveness of a
Registration Statement within the time period set forth in Section 2.1(b), (ii)
the effectiveness of the Registration Statement is suspended (other than as
required by the filing of post-effective amendments as required by law), or
(iii) an Investor desires to resell, transfer or otherwise dispose of
Registrable Securities and a current prospectus meeting the requirements of
Section 10 of the Securities Act is not available for delivery by such Investor,
and such occurrence is not the result of any information provided or failed to
be provided by such Investor or some unforeseeable catastrophe affecting the
operation of the SEC, the Company shall pay to such Investor the amounts set
forth in Section 5.8 of the Securities Purchase Agreement.
ARTICLE III
REGISTRATION PROCEDURES
Section 3.1. FILINGS; INFORMATION. Whenever the Company is required to
effect or cause the registration of Registrable Securities pursuant to Section
2.1 hereof, the Company will use its best efforts to effect the registration of
such Registrable Securities in accordance with the intended method of
disposition thereof as quickly as practicable, and in connection with any such
request:
(a) The Company will as expeditiously as possible, prepare and file with
the SEC the Registration Statement and use its best efforts to cause such filed
Registration Statement to be declared effective as soon as possible and to
remain effective thereafter (pursuant to Rule 415 under the Securities Act or
otherwise), and the Company will as expeditiously as possible prepare and file
with the SEC such amendments and supplements to such Registration Statement and
the prospectus used in connection therewith as may be necessary to keep such
Registration Statement effective for the time periods prescribed in Section
2.1(b) hereof and comply with the provisions of the Securities
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Act with respect to the disposition of all securities covered by such
Registration Statement during such period in accordance with the intended
methods of disposition by the Investors set forth in such Registration
Statement.
(b) The Company will (i) prior to filing a Registration Statement or
prospectus or any amendment or supplement thereto (excluding amendments deemed
to result from the filing of documents incorporated by reference therein),
furnish to the Investors and counsel for the Investors, copies of such
Registration Statement, prospectus, amendment or supplement as proposed to be
filed, together with exhibits thereto, (ii) provide the Investors and counsel an
adequate and appropriate opportunity to review and comment on such documents,
(iii) not file any such documents to which the Investors or counsel shall have
reasonably objected on the grounds that such filing does not comply in all
material respects with the requirements of the Securities Act or of the rules or
regulations thereunder, and (iv) thereafter furnish to the Investors and its
counsel for their review such number of copies of such Registration Statement,
each amendment and supplement thereto (in each case including all exhibits
thereto), the prospectus included in such Registration Statement (including each
preliminary prospectus) and such other documents or information as the Investors
or counsel may reasonably request in order to facilitate the disposition of the
Registrable Securities that the Investors purchase pursuant to the Securities
Purchase Agreement.
(c) After the filing of the Registration Statement, the Company will
promptly notify the Investors of the issuance by the SEC or any other federal or
state governmental authority of any stop order suspending the effectiveness of
the Registration Statement or the initiation or threatening of any proceeding
for that purpose; and take all reasonable actions required to prevent the entry
of such stop order or to remove it if entered.
(d) The Company will use its reasonable good faith efforts to register or
qualify the Registrable Securities it sells to the Investors under such other
securities or blue sky laws of such jurisdictions in the United States as the
Investors may reasonably (in light of its intended plan of distribution)
request, and (ii) cause such Registrable Securities to be registered with or
approved by such other governmental agencies or authorities in the United States
as may be necessary by virtue of the business and operations of the Company and
do any and all other acts and things that may be reasonably necessary or
advisable to enable the Investors to consummate the disposition of the
Registrable Securities that the Investors purchase pursuant to the Securities
Purchase Agreement; provided that the Company will not be required to (A)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this paragraph (d), (B) subject itself
to taxation in any such jurisdiction or (C) consent or subject itself to general
service of process in any such jurisdiction.
(e) The Company will immediately notify the Investors upon the occurrence
of any of the following events in respect of a Registration Statement or related
prospectus in respect of an offering of Registrable Securities: (i) receipt of
any request for additional information by the SEC or any other federal or state
governmental authority during the period of effectiveness of the Registration
Statement, for amendments or supplements to the Registration Statement or
related
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prospectus; (ii) the issuance by the SEC or any other federal or state
governmental authority of any stop order suspending the effectiveness of the
Registration Statement or the initiation or threatening of any proceeding for
that purpose; (iii) receipt of any notification with respect to the suspension
of the qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose that the Company has knowledge of; (iv) the
happening of any event which makes any statement made in the Registration
Statement or related prospectus or any document incorporated or deemed to be
incorporated therein by reference untrue in any material respect or which
requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of the Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (vi) the Company's reasonable determination that a
post-effective amendment to the Registration Statement would be appropriate; and
the Company will promptly make available to the Investors and counsel for the
Investors any such supplement or amendment to the related prospectus in
accordance with paragraph (b) hereof.
(f) The Company will make available to the Investors (and Investors'
counsel), subject to restrictions imposed by the United States federal
government or any agency or instrumentality thereof, copies of all
correspondence between the SEC and the Company, its counsel or auditors and will
also make available for inspection by the Investors and any attorney, accountant
or other professional retained by the Investors (collectively, the
"INSPECTORS"), all financial and other records, pertinent corporate documents
and properties of the Company (collectively, the "RECORDS") as shall be
reasonably necessary to enable each Investor to exercise its due diligence
responsibility, and cause the Company's officers and employees to supply all
information reasonably requested by any Inspectors in connection with such
Registration Statement. Records which the Company determines, in good faith, to
be confidential and which it notifies the Inspectors are confidential shall not
be disclosed by the Inspectors unless (i) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in such Registration
Statement or (ii) the disclosure or release of such Records is requested or
required pursuant to oral questions, interrogatories, requests for information
or documents or a subpoena or other order from a court of competent jurisdiction
or other process; provided that prior to any disclosure or release pursuant to
clause (ii), the Inspectors shall provide the Company with prompt notice of any
such request or requirement so that the Company may seek an appropriate
protective order or waive such Inspectors' obligation not to disclose such
Records; and, provided further, that if failing the entry of a protective order
or the waiver by the Company permitting the disclosure or release of such
Records, the Inspectors, upon advice of counsel, are compelled to disclose such
Records, the Inspectors may disclose that portion of the Records which counsel
has advised the Inspectors that the Inspectors are compelled to disclose. Each
Investor agrees that information obtained by it solely as a result of such
inspections (not including any information obtained from a third party who,
insofar as is known to the Investor after reasonable inquiry, is not prohibited
from providing such information by a contractual, legal
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or fiduciary obligation to the Company) shall be deemed confidential and shall
not be used by it as the basis for any market transactions in the securities of
the Company or its Affiliates unless and until such information is made
generally available to the public. Each Investor further agrees that it will,
upon learning that disclosure of such Records is sought in a court of competent
jurisdiction, give notice to the Company and allow the Company, at its expense,
to undertake appropriate action to prevent disclosure of the Records deemed
confidential.
(g) The Company will appoint a transfer agent and registrar for all such
Registrable Securities covered by such Registration Statement not later than the
effective date of such Registration
Statement.
The Company may require the Investors to promptly furnish in writing to
the Company such information regarding the distribution of the Registrable
Securities as the Company may from time to time reasonably request and such
other information as may be legally required in connection with such
registration including, without limitation, all such information as may be
requested by the SEC, the NASD or the Principal Market. Each Investor agrees to
provide such information requested in connection with such registration within
ten (10) business days after receiving such written request and the Company
shall not be responsible for (and the penalties specified in Section 2.1(c)
hereof shall not apply in respect of) any delays in obtaining or maintaining the
effectiveness of the Registration Statement caused by the Investor's failure to
timely provide such information. Each Investor agrees that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 3.1(e) hereof, the Investor will forthwith discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until the Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3.1(e) hereof, and,
if so directed by the Company, the Investor will deliver to the Company all
copies, other than permanent file copies then in the Investor's possession, of
the most recent prospectus covering such Registrable Securities at the time of
receipt of such notice. In the event the Company shall give such notice, the
Company shall extend the period during which such Registration Statement shall
remain effective (including the period referred to in Section 3.1(a) hereof) by
the number of days during the period from and including the date of the giving
of notice pursuant to Section 3.1(e) hereof to the date when the Company shall
make available to such Investor a prospectus supplemented or amended to conform
with the requirements of Section 3.1 (e) hereof.
Section 3.2.REGISTRATION EXPENSES. In connection with each Registration
Statement, the Company shall pay all expenses incurred in connection with the
registration thereunder including, without limitation, the following (the
"REGISTRATION EXPENSES"): (i) all registration and filing fees, (ii) fees and
expenses of compliance with securities or blue sky laws (including reasonable
fees and disbursements of counsel in connection with blue sky qualifications of
the Registrable Securities), (iii) printing expenses, (iv) the Company's
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), (v) the fees
and expenses incurred in connection with the listing of the Registrable
Securities, (vi) reasonable fees and disbursements of counsel for the Company
and customary fees and expenses, if any, for independent certified public
accountants retained by the Company, (vii) the fees and
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expenses of any special experts retained by the Company in connection with such
registration and (viii) reasonable fees and expenses (which shall not exceed the
sum of (Y) $1,000 of such fees and expenses, and (Z) 50% of any additional fees
and expenses in excess thereof up to $5,000 in the aggregate for the Investors,
it being understood that the Company shall not have liability for such fees and
expenses in excess of $3,000 in the aggregate pursuant to this clause) of
counsel for the Investors retained as the Investors' counsel with respect to
such Registration Statement. The Company shall have no obligation to pay any
underwriting fees, discounts or commissions attributable to the sale of
Registrable Securities, such costs to be borne by the Investors.
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
Section 4.1 INDEMNIFICATION.
(a) INDEMNIFICATION OF INVESTOR. The Company agrees to indemnify and hold
harmless each Investor, its members, partners, Affiliates (as defined below),
officers, directors, employees and duly authorized agents, and each Person (as
defined below), if any, who controls the Investor within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, together with the
partners, Affiliates, officers, directors, employees and duly authorized agents
of such controlling Person (collectively, the "CONTROLLING PERSONS"), from and
against any loss, claim, damage, liability (joint or several), reasonable
attorneys' fees, costs or expenses and costs and expenses of investigating and
defending any such claim (collectively, "DAMAGES"), and any action in respect
thereof to which the Investor, its partners, Affiliates, officers, directors,
employees and duly authorized agents, and any such Controlling Person may become
subject under the Securities Act or otherwise, insofar as such Damages (or
proceedings in respect thereof) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement or prospectus relating to the Registrable Securities or
any preliminary prospectus, or arises out of, or are based upon, any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
the same are based upon information furnished in writing to the Company by the
Investor expressly for use therein, and shall reimburse the Investor, its
partners, Affiliates, officers, directors, employees and duly authorized agents,
and each such Controlling Person for any legal and other expenses reasonably
incurred by the Investor, its partners, Affiliates, officers, directors,
employees and duly authorized agents, or any such Controlling Person in
investigating or defending or preparing to defend against any such Damages or
proceedings; provided, however, that the Company shall not be liable to the
Investor to the extent that any such Damages arise out of or are based upon an
untrue statement or omission made in any preliminary prospectus if (i) the
Investor failed to send or deliver a copy of the final prospectus with or prior
to the delivery of written confirmation of the sale by the Investor to the
Person asserting the claim from which such Damages arise, and (ii) the final
prospectus would have corrected such untrue statement or alleged untrue
statement or such omission or alleged omission.
For purposes of this agreement, "AFFILIATE" shall mean, as to any Person,
any other Person
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that directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person; and "PERSON" shall
mean an individual, corporation, partnership, limited liability company,
business trust, association, joint-stock company, trust, unincorporated
organization, joint venture or governmental authority or other regulatory body.
(b) INDEMNIFICATION OF COMPANY. Each Investor agrees, jointly and
severally, to indemnify and hold harmless the Company, its directors, each of
its officers who signed the Registration Statement, and each of its Controlling
Persons from and against any Damages, as incurred, but only with respect to
untrue statements or omissions, or alleged untrue statements or omissions, made
in the Registration Statement (or any amendment thereto), including any
prospectus (or any amendment or supplement thereto), or offering circular or
other document, as applicable, in reliance upon and in conformity with written
information furnished to the Company by the Investor expressly for use in the
Registration Statement (or any amendment or supplement thereto), or in any
offering circular or other document, as applicable.
(c) ACTION AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action, suit or proceeding commenced against it in respect of which
indemnity may be sought hereunder, but failure to so notify an indemnifying
party shall not relieve such indemnifying party from any liability hereunder to
the extent it is not materially prejudiced as a result thereof and in any event
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. Upon receipt of such notice from the
indemnified party, the indemnifying party shall assume the defense of any such
action, suit or proceeding, including the employment of counsel (who shall be
reasonably acceptable to the indemnified party) and payment of all fees and
expenses. An indemnified party shall have the right to employ separate counsel
in any such action, suit or proceeding and may participate at its own expense in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of the indemnified person unless (i) the indemnifying party has agreed
in writing to pay such fees and expenses, (ii) the indemnifying party has failed
to assume the defense and employ counsel, or (iii) the named parties to any such
action, suit or proceeding include both the indemnified party and the
indemnifying party and the indemnified party shall have been advised by its
counsel in writing that representation of such indemnified party and
indemnifying party by the same counsel would be inappropriate under applicable
standards of professional conduct (whether or not such representation by the
same counsel has been proposed) due to actual or potential differing interests
between them (in which case the indemnifying party shall not have the right to
assume the defense of such action, suit or proceeding). In no event shall the
indemnifying party be liable for fees and expenses of more than one counsel (in
addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent to
the entry or any judgment with respect to any litigation, or any investigation
or proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever in respect of which indemnification or contribution could
be sought under this Section 4.1 or Section 4.2 hereof (whether or not the
indemnified parties are actual or potential
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parties thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of an any indemnified party. The indemnifying party shall not be
liable for any settlement of any action, suit or proceeding effected without its
express prior written consent, but if settled with such written consent or if
there be a final judgment for the plaintiff in any such action, suit or
proceeding, the indemnifying party agrees to indemnify and hold harmless the
indemnified party to the extent provided in this Section 4.1 from and against
any Damages by reason of such settlement or judgment.
Section 4.2 CONTRIBUTION. If the indemnification provided for in this
Article IV is unavailable to the indemnified parties in respect of any Damages
referred to herein, then each indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such Damages as between the Company on the one
hand and the Investors on the other, in such proportion as is appropriate to
reflect the relative benefits to and faults of the indemnifying party on the one
hand and the indemnified party on the other in connection with the offering of
Registrable Securities (taking into account the portion of the proceeds of the
offering realized by each such party) and the statements or omissions or alleged
statements or omissions which resulted in such Damages, as well as any other
equitable considerations. The relative fault of the indemnifying party and of
the indemnified party shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The Company and the Investors agree that it would not be just and
equitable if contribution pursuant to this Section 4.2 were determined by a pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 4.2. The
amount paid or payable by an indemnified party as a result of the Damages
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim.
Notwithstanding the provisions of this Section 4.2, the Investors shall in
no event be required to contribute any amount in excess of the amount by which
the total proceeds from the public sale of the Registrable Securities (less
underwriting discounts and commissions) exceeds the amount of any Damages which
the Investors have otherwise paid in accordance with this Article IV.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent
misrepresentation.
For purposes of this Section 4.2, each person, if any, who controls the
Investors within the
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meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
shall have the same rights to contribution as an Investor, and each director of
the Company, each officer of the Company who signed the Registration Statement,
and each person, if any, who controls the Company within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act shall have the same
rights to contribution as the Company.
ARTICLE V
MISCELLANEOUS
Section 5.1.TERM. The registration rights provided to the holders of
Registrable Securities hereunder shall terminate two (2) years from the date
hereof; PROVIDED, HOWEVER, that the provisions of Article IV hereof shall
survive any termination of this Agreement.
Section 5.2.RULE 144. The Company covenants that it will file all reports
required to be filed by it under the Act and the Exchange Act and that it will
take such further action as holders of Registrable Securities may reasonably
request, all to the extent required from time to time to enable the Investor to
sell Registrable Securities without registration under the Securities Act within
the limitation of the exemptions provided by (a) Rule 144, as such Rule may be
amended from time to time, or (b) any successor or similar rule or regulation
hereafter adopted by the SEC. If at any time the Company is not required to file
such reports, it will, upon the request of any holder of Registrable Securities,
make publicly available other information so long as necessary to permit sales
pursuant to Rule 144. Upon the request of the Investors, the Company will
deliver to the Investors a written statement as to whether it has complied with
such requirements.
Section 5.3.AMENDMENT AND MODIFICATION. Any provision of this Agreement
may be waived, provided that such waiver is set forth in a writing executed by
the party against whom the enforcement of such waiver is sought. The provisions
of this Agreement, including the provisions of this sentence, may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, unless the Company has obtained the
written consent of the holders of a majority of the then outstanding Registrable
Securities. Notwithstanding the foregoing, the waiver of any provision hereof
with respect to a matter that relates exclusively to the rights of holders of
Registrable Securities whose securities are being sold pursuant to a
Registration Statement and does not directly or indirectly affect the rights of
other holders of Registrable Securities may be given by holders of at least a
majority of the Registrable Securities being sold by such holders; provided that
the provisions of this sentence may not be amended, modified or supplemented
except in accordance with the provisions of the immediately preceding sentence.
No course of dealing between or among any Persons having any interest in this
Agreement will be deemed effective to modify, amend or discharge any part of
this Agreement or any rights or obligations of any person under or by reason of
this Agreement.
Section 5.4.SUCCESSORS AND ASSIGNS; ENTIRE AGREEMENT. This Agreement and
all of the provisions hereof shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns. Each Investor
may assign its rights under this Agreement to any subsequent holder of the
Registrable Securities, provided that the Company shall have the right to
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require any holder of the Registrable Securities to execute a counterpart of
this Agreement as a condition to such holder's claim to any rights hereunder.
This Agreement, together with the Securities Purchase Agreement, sets forth the
entire agreement and understanding among the parties as to the subject matter
hereof and merges and supersedes all prior discussions, agreements and
understandings of any and every nature among them.
Section 5.5.SEPARABILITY. In the event that any provision of this
Agreement or the application of any provision hereof is declared to be illegal,
invalid or otherwise unenforceable by a court of competent jurisdiction, the
remainder of this Agreement shall not be affected except to the extent necessary
to delete such illegal, invalid or unenforceable provision unless that provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
Section 5.6.NOTICES. All notices, demands, requests, consents, approvals
or other communications required or permitted to be given hereunder or which are
given with respect to this Agreement shall be in writing and shall be personally
served or deposited in the mail, registered or certified, return receipt
requested, postage prepaid, or delivered by reputable air courier service with
charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile,
addressed as set forth below, or to such other address as such party shall have
specified most recently by written notice:
(a) if to the Company, to:
Telscape International, Inc.
2700 Post Oak Boulevard
Suite 1000
Houston, Texas 77056
Attention: Todd M. Binet,
Executive Vice President
Facsimile No.: (713) 968-0930
with a copy to:
Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W., Suite 300
Washington, DC 20007
Attention: Morris F. DeFeo, Jr., Esq.
Facsimile No.: (202) 424-7643
(b) if to the Investor, to:
Kendu Partners
220 Bush Street,
Suite 660
San Francisco, CA 94104
Attention: Doug Engmann
Facsimile No.: (415) 781-6469
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MDNH Partners, L.P.
220 Bush Street
Suite 660
San Francisco, CA 94104
Attention: Herb Kerlan
Facsimile No.: (415) 781-6469
with copies to:
Coblentz, Patch, Duffy & Bass LLP
222 Kearny Street, 7th Floor
San Francisco, CA 94108-4510
Attention: Louis J. Giraudo
Facsimile No.: 415-989-1663
Notice shall be deemed given on the date of service or transmission if
personally served or transmitted by telegram, telex or facsimile. Notice
otherwise sent as provided herein shall be deemed given on the third business
day following the date mailed or on the second business day following delivery
of such notice by a reputable air courier service.
Section 5.7.GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAW OF THE STATE OF TEXAS, WITHOUT
GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
Section 5.8.SUBMISSION TO JURISDICTION. The parties hereby agree that all
actions or proceedings arising directly or indirectly from or in connection with
this Agreement shall, at the option of either party, be litigated only in a
state or federal court located in the State of Texas. The parties consent to the
jurisdiction and venue of the foregoing court and consent that any process or
notice of motion or other application to said court or a judge thereof may be
served inside or outside the State of Texas by registered mail, return receipt
requested, directed to the party for which it is intended at its address set
forth in this Agreement (and service so made shall be deemed complete five (5)
days after the same has been posted as aforesaid) or by personal service or in
such other manner as may be permissible under the rules of said court.
Section 5.9.WAIVER OF JURY TRIAL. Each of the Company and each Investor
hereby waives any right to a trial by jury in any action, proceeding or
counterclaim concerning any rights under this Agreement or under any amendment,
waiver, consent, instrument, document or the Agreement delivered or which in the
future may be delivered in connection herewith, or arising from any relationship
existing in connection with this Agreement, and agrees that any such action,
proceeding or counterclaim shall be tried before a court and not before a jury.
The Company
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certifies that no officer, representative, agent or attorney of the Investors
has represented, expressly or otherwise, that the Company would not, in the
event of any action, proceeding or counterclaim, seek to enforce the foregoing
waivers. The Company hereby acknowledges that this provision is a material
inducement for the Investors entering into this Agreement.
Section 5.10HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not constitute a part of this Agreement, nor shall
they affect their meaning, construction or
effect.
Section 5.11COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original instrument and all
of which together shall constitute one and the same instrument.
Section 5.12FURTHER ASSURANCES. Each party hereto shall cooperate and take
such action as may be reasonably requested by another party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
Section 5.13REMEDIES. In the event of a breach or a threatened breach by
any party to this Agreement of its obligations under this Agreement, any party
injured or to be injured by such breach will be entitled to specific performance
of its rights under this Agreement or to injunctive relief, in addition to being
entitled to exercise all rights provided in this Agreement and granted by law.
The parties agree that the provisions of this Agreement shall be specifically
enforceable, it being agreed by the parties that the remedy at law, including
monetary damages, for breach of any such provision will be inadequate
compensation for any loss and that any defense or objection in any action for
specific performance or injunctive relief that a remedy at law would be adequate
is waived.
[SIGNATURES ON FOLLOWING PAGE]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by the undersigned, hereunto duly authorized, as of the date first set
forth above.
TELSCAPE INTERNATIONAL, INC.
By: ______________________________
Name: Todd M. Binet
Title: Executive Vice President
MDNH PARTNERS, L.P.
By MDNH Trading Corp., its General Partner
By: ______________________________
Name:
Title:
KENDU PARTNERS
By: ______________________________
Name:
Title:
13
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Telescape USA, Inc.
Texas
Telereunion, Inc.
Delaware
Vextro de Mexico S.A. de C.V.
Mexico City, Mexico
Telescape de Mexico S.A. de C.V.
Mexico City, Mexico
M.S.N. Communications, Inc.
California
TSCP International, Inc.
Texas
INTERLINK Communications, Inc.
Delaware
Telereunion de Mexico S.A. de C.V.
Mexico City, Mexico
Telereunion International S.A. de C.V.
Mexico City, Mexico
EXHIBIT 23.1
CONSENT TO INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Telescape International, Inc.
Houston, Texas
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 No. 333-66417 of our report dated February 22, 1999,
relating to the financial statements of Telscape International, Inc. appearing
in this Annual Report on Form 10-K -- for the year ended December 31, 1998.
We also consent to the reference to us under the caption "Experts" in the
Registration Statement.
Houston, Texas
March 31, 1999
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