-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, On8zB/OL5jhlv1a5Gyo1eJ6Sdx0y6l78AomujSlysHw6afK7S72saPJq/YghUyig UvfETD2v14siUbPRgq0dDg== 0000912057-99-006024.txt : 19991117 0000912057-99-006024.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELSCAPE INTERNATIONAL INC CENTRAL INDEX KEY: 0000925928 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 752433637 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24622 FILM NUMBER: 99754602 BUSINESS ADDRESS: STREET 1: 4635 SOUTHWEST FRWY STREET 2: STE 800 CITY: HOUSTON STATE: TX ZIP: 77027 BUSINESS PHONE: 7139680968 MAIL ADDRESS: STREET 1: 4635 SOUTHWEST FRWY STREET 2: STE 800 CITY: HOUSTON STATE: TX ZIP: 77027 FORMER COMPANY: FORMER CONFORMED NAME: POLISH TELEPHONES & MICROWAVE CORP DATE OF NAME CHANGE: 19940623 10-Q 1 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q /X/ QUARTERLY REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 / / TRANSITION REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITIONAL PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-24622 ------------------------ TELSCAPE INTERNATIONAL, INC. (Exact name of Small Business Issuer as specified in its charter) TEXAS 75-2433637 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) identification number) 2700 POST OAK BLVD., SUITE 1000, 77056 HOUSTON, TEXAS (Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code--713/968-0968 ---------------------------------------------------------------------- (Former name, former address and former fiscal year if changed since last report) ------------------------ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / 7,229,175 shares of Registrant's common stock ($.001 Par Value) were outstanding as of November 11, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TELSCAPE INTERNATIONAL, INC. TABLE OF CONTENTS FORM 10-Q SEPTEMBER 30, 1999
PAGE -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets-- As of December 31, 1998 and September 30, 1999 (unaudited)................................................. 1 Unaudited Condensed Consolidated Statements of Operations--Three Months and Nine Months Ended September 30, 1998 and 1999................................. 2 Unaudited Condensed Consolidated Statements of Cash Flows--Nine Months Ended September 30, 1998 and 1999........ 3 Notes to Unaudited Condensed Consolidated Financial Statements.................................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................... 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................ 28 (a) Exhibits................................................ 28 (b) Reports on Form 8-K..................................... 28 Signatures.............................................................. 29
TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------- -------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 9,631,000 $ 6,040,000 Accounts receivable, less allowance for doubtful accounts of $275,000 and $467,000 (unaudited), respectively...... 14,387,000 14,448,000 Inventories............................................... 4,581,000 4,724,000 Prepaid expenses and other................................ 3,519,000 8,311,000 Deferred income taxes..................................... 628,000 571,000 ----------- ------------ Total current assets.................................... 32,746,000 34,094,000 Property and equipment, net of accumulated depreciation..... 14,576,000 53,042,000 Goodwill and other intangibles, net of accumulated amortization.............................................. 31,416,000 29,624,000 Other assets................................................ 1,593,000 4,656,000 ----------- ------------ Total assets............................................ $80,331,000 $121,416,000 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.......................................... $22,090,000 $ 40,482,000 Accrued expenses.......................................... 10,182,000 11,907,000 Current portion of notes payable and capital lease obligations............................................. 2,714,000 8,707,000 Convertible debentures.................................... 4,996,000 -- ----------- ------------ Total current liabilities............................... 39,982,000 61,096,000 Notes payable and capital lease obligations, net of current portion................................................... 1,488,000 27,835,000 Convertible subordinated debentures......................... 3,935,000 994,000 Minority interests.......................................... -- -- Commitments and contingencies............................... -- -- STOCKHOLDERS' EQUITY: Preferred stock, $.001 par value, 5,000,000 shares authorized; without defined preference rights........... -- -- Series A preferred stock, $.001 par value, 1,000,000 shares authorized....................................... -- -- Common stock, $.001 par value, 25,000,000 shares authorized; 6,048,909 and 7,002,458 issued, respectively............................................ 6,000 7,000 Additional paid-in capital................................ 39,398,000 45,774,000 Accumulated deficit....................................... (3,881,000) (13,518,000) Treasury stock............................................ (480,000) (480,000) Capital subscriptions receivable.......................... (117,000) (292,000) ----------- ------------ Total stockholders' equity.............................. 34,926,000 31,491,000 ----------- ------------ Total liabilities and stockholders' equity.............. $80,331,000 $121,416,000 =========== ============
The accompanying notes are an integral part of these financial statements. 1 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- --------------------------- 1998 1999 1998 1999 ----------- ----------- ------------ ------------ Revenues................................ $36,529,000 $26,613,000 $102,306,000 $ 83,341,000 Cost of revenues........................ 29,727,000 23,602,000 86,783,000 72,861,000 ----------- ----------- ------------ ------------ Gross profit............................ 6,802,000 3,011,000 15,523,000 10,480,000 Selling, general and administrative expenses.............................. 3,660,000 5,949,000 9,365,000 15,337,000 ----------- ----------- ------------ ------------ Operating income (loss) before depreciation and amortization......... 3,142,000 (2,938,000) 6,158,000 (4,857,000) Depreciation and amortization........... 960,000 1,601,000 2,218,000 4,638,000 ----------- ----------- ------------ ------------ Operating income (loss)................. 2,182,000 (4,539,000) 3,940,000 (9,495,000) OTHER INCOME (EXPENSE): Interest income....................... 45,000 64,000 308,000 186,000 Interest expense...................... (317,000) (509,000) (821,000) (2,436,000) Amortization of debt offering costs... (63,000) (292,000) (73,000) (1,152,000) Foreign exchange income (loss)........ (581,000) 367,000 (768,000) 262,000 Other, net............................ 241,000 (74,000) 337,000 (541,000) ----------- ----------- ------------ ------------ Total other expense, net............ (675,000) (444,000) (1,017,000) (3,681,000) ----------- ----------- ------------ ------------ Income (loss) before income taxes and minority interests.................... 1,507,000 (4,983,000) 2,923,000 (13,176,000) Income tax benefit (expense)............ (652,000) 1,288,000 (1,547,000) 3,539,000 ----------- ----------- ------------ ------------ Income (loss) before minority interests............................. 855,000 (3,695,000) 1,376,000 (9,637,000) Minority interests in subsidiaries...... 14,000 -- (15,000) -- ----------- ----------- ------------ ------------ Net income (loss)....................... $ 869,000 $(3,695,000) $ 1,361,000 $ (9,637,000) ----------- ----------- ------------ ------------ EARNINGS (LOSS) PER SHARE: Basic................................. $ 0.16 $ (0.53) $ 0.28 $ (1.47) Diluted(1)............................ $ 0.11 n/a $ 0.17 $ n/a WEIGHTED AVERAGE SHARES OUTSTANDING: Basic................................. 5,547,651 6,994,998 4,877,604 6,568,371 Diluted(1)............................ 8,228,284 n/a 7,788,139 n/a
- ------------------------ (1) Inclusion of additional shares under a diluted analysis for the three and nine months ended September 30, 1999 is inappropriate due to the anti-dilutive effect. The accompanying notes are an integral part of these financial statements. 2 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1998 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 1,361,000 $ (9,637,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision for doubtful accounts........................... 556,000 268,000 Depreciation and amortization............................. 2,218,000 4,638,000 Interest accrued on non-interest bearing notes payable and amortization of debt offering costs..................... 212,000 1,346,000 Charges incurred on refinancing of operating lease........ -- 327,000 Expenses incurred related to warrants issued to third parties................................................. -- 139,000 Deferred income taxes..................................... 290,000 (1,448,000) Minority interest in subsidiaries' income................. 15,000 -- Equity in income from unconsolidated subsidiary........... -- 89,000 Changes in assets and liabilities: Accounts receivable..................................... (5,672,000) (329,000) Inventories............................................. (191,000) (143,000) Prepaid and other assets................................ (2,579,000) (6,848,000) Accounts payable........................................ 9,490,000 11,262,000 Accrued expenses........................................ 991,000 1,724,000 ------------ ------------ Net cash provided by operating activities................. 6,691,000 1,388,000 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (9,194,000) (26,522,000) Acquisition of MSN, net of cash acquired.................. (2,325,000) -- Acquisition of INTERLINK, net of cash acquired............ (8,250,000) -- ------------ ------------ Net cash used in investing activities....................... (19,769,000) (26,522,000) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments on capital lease obligations..................... (55,000) (115,000) Payments on notes payable................................. (538,000) (1,295,000) Purchase of treasury shares............................... (594,000) -- Payments/borrowings on line of credit, net................ 1,948,000 (1,688,000) Proceeds from exercise of options and warrants............ 4,784,000 383,000 Proceeds from sales of common stock....................... -- 2,897,000 Payments on convertible debt.............................. -- (6,000,000) Payments on short term notes payable...................... -- (9,000,000) Proceeds from short term notes payable.................... -- 12,426,000 Borrowings under Lucent credit facility................... -- 23,935,000 Proceeds from issuance of convertible debt................ 10,000,000 -- ------------ ------------ Net cash provided by financing activities................... 15,545,000 21,543,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents........ 2,467,000 (3,591,000) ------------ ------------ Cash and cash equivalents at beginning of period............ 4,734,000 9,631,000 ------------ ------------ Cash and cash equivalents at end of period.................. $ 7,201,000 $ 6,040,000 ------------ ------------
The accompanying notes are an integral part of these financial statements. 3 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1998 1999 ---------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................. $ 398,000 $ 2,253,000 Income taxes paid......................................... 1,334,000 817,000 NON-CASH TRANSACTIONS: Issuance of common stock and promissory notes in connection with acquisition of MSN: Promissory Notes........................................ 672,000 -- Common Stock............................................ 880,000 -- Issuance of warrants in connection with financings and to other third parties..................................... -- 915,000 Issuance of common stock in connection with conversion of convertible debentures.................................. 497,000 2,006,000 Network construction costs incurred and included as accounts payable to be financed through Lucent credit facility................................................ -- 12,000,000 Refinancing of operating lease............................ -- 2,554,000
The accompanying notes are an integral part of these financial statements. 4 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements include the accounts of Telscape International, Inc. and its subsidiaries (collectively, the "Company"). The unaudited condensed consolidated financial statements of the Company for the three and nine months ended September 30, 1998 and September 30, 1999 have been prepared without an audit pursuant to the rules and regulations of the Securities and Exchange Commission. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, which consist of normal recurring adjustments, considered necessary to present fairly the financial position, results of operations and cash flows for all periods presented have been made. Operating results for the three and nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. MANAGEMENT'S ESTIMATES AND ASSUMPTIONS The accompanying financial statements are prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. The Company reviews all significant estimates affecting the financial statements on a recurring basis and records the effect of any necessary adjustments prior to their issuance. The actual results could differ from those estimates. CONCENTRATION OF RISK--MEXICO The devaluation of the Mexican peso in late 1994 caused Mexico to experience an economic crisis characterized by exchange rate instability, increased inflation, high domestic interest rates, reduced consumer purchasing power and high unemployment. Consequently, the Mexican government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican governmental actions could have a significant effect on Mexican companies, including the Company's customers, and overall market conditions. The Company's foreign currency risk is mitigated in Mexico due to the fact that many of the Company's customers are multinational firms that pay in U.S. dollars. In addition, most of the customers that do pay in pesos pay at the spot exchange rate in effect at the time of payment as opposed to the exchange rate at the time the receivable is created. Significant adverse effects from any downturns in the Mexican economy could result in an adverse effect on the Company's operations. The Company also has a significant amount of its payables denominated in pesos, which exposes the Company to exchange rate risk. In addition, the Company has begun construction of a fiber-optic long distance network in Mexico which will significantly increase its operations in Mexico. NEW ACCOUNTING STANDARDS SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at 5 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 1--FINANCIAL STATEMENTS (CONTINUED) fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. The Company does not expect adoption of the new standard to have a material effect on its financial statements. SOP 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," requires all start-up and organizational costs to be expensed as incurred. It also requires all remaining historically capitalized amounts of these costs existing at the date of adoption to be expensed and reported as the cumulative effect of a change in accounting principles. SOP 98-5 is effective for all fiscal years beginning after December 31, 1998. The adoption of SOP 98-5 did not have a material effect on its financial statements. SFAS No. 135, "RESCISSION OF FINANCIAL ACCOUNTING STANDARDS BOARD NO. 75 ("SFAS NO. 75") AND TECHNICAL CORRECTIONS," rescinds SFAS No. 75 and amends Statement of Financial Accounting Standards Board No. 35. SFAS No. 135 also amends other existing authoritative literature to make various technical corrections, clarify meanings, or describe applicability under changed conditions. SFAS No. 135 is effective for financial statements issued for fiscal years ending after February 15, 1999. The Company believes that the adoption of SFAS No. 135 will not have a material effect on its financial statements. NOTE 2--EARNINGS (LOSS) PER SHARE Earnings (loss) per share is calculated as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------- ------------------------ 1998 1999 1998 1999 ---------- ------------ ---------- ----------- BASIC Net income (loss) as reported............. $ 869,000 ($ 3,695,000) $1,361,000 ($9,637,000) Weighted average common shares outstanding............................. 5,547,651 6,994,998 4,877,604 6,568,371 Basic earnings (loss) per share........... $ 0.16 $ (0.53) $ 0.28 $ (1.47) DILUTED Net income (loss) as reported............. $ 869,000 ($ 3,695,000) $1,361,000 ($9,637,000) Weighted average common shares outstanding............................. 5,547,651 6,994,998 4,877,604 6,568,371 Weighted average diluted potential common shares outstanding...................... 2,680,633 2,281,057 2,910,535 2,135,921 Weighted average common and dilutive potential common shares outstanding..... 8,228,284 9,276,056 7,788,139 8,704,292 Diluted earnings (loss) per share......... $ 0.11 $ (0.40) $ 0.17 $ (1.11)
6 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 2--EARNINGS (LOSS) PER SHARE (CONTINUED) Diluted EPS for the three and nine months ended September 30, 1999 was not disclosed on the Unaudited Condensed Consolidated Statement of Operations as the effect is anti-dilutive. Certain performance based warrants issued in connection with the Company's acquisitions vested upon the achievement of certain operating performance measures. In accordance with SFAS 128, these contingently issuable shares were included in the calculation of diluted EPS when all the necessary conditions were met. For purposes of the diluted EPS calculations for the three and nine months ended September 30, 1999, there were 1,170,367 and 1,238,367 options and warrants outstanding, respectively, which were not included in the calculation of diluted EPS as their exercise prices were greater than the average market price of the Company's common stock during the period and inclusion of these securities in the calculation would result in an anti-dilutive effect. NOTE 3--CONSTRUCTION IN PROGRESS The Company began construction of a long distance fiber optic network in Mexico late in the second quarter of 1999. Provided that the necessary funding is obtained, the Company expects that the network will be completed in the fourth quarter of 1999 and become operational in the first quarter of 2000. Amounts incurred through September 30, 1999 on the network total $30.9 million of which $14.2 million has been funded through the Lucent Facility. As of September 30, 1999, there are approximately $12.0 million in costs due to Lucent classified as accounts payable awaiting funding under the Lucent Facility once the remaining conditions precedent to additional fundings under the Lucent Facility are satisfied. The Company estimates that there are an additional $10-$15 million in expenditures related to the network and its network expansions which will not be funded through the Lucent Facility. NOTE 4--NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS The Company's notes payable and capital lease obligations consist of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------- -------------- Deere Park Convertible Subordinated Debentures, bearing interest at 8%, convertible into Common Stock, maturing three years from closing.................................... $3,935,000 994,000 Gordon Brothers Convertible Debentures, bearing interest at 8%, convertible into Common Stock, maturing on May 29, 1999, secured by substantially all assets of Interlink Communications, Inc. and stock of Telereunion, Inc., repaid in May of 1999.............................................. 4,996,000 -- Non-interest bearing promissory notes, imputed interest at 10%, unamortized discount of $228,000 and $167,000, respectively, issued in connection with Integracion acquisition, maturing at various dates through January 1, 2001........................................................ 1,713,000 1,299,000
7 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------- -------------- Promissory note issued to repurchase common stock, payable in six semi-annual installments through May 20, 2000, and bearing interest at 6%, secured by common shares repurchased................................................. 150,000 100,000 Capital lease obligations payable in monthly installments of $13,258 including principal and interest, maturing at various dates through December 1, 2003 secured by equipment and furniture............................................... 221,000 424,000 Non-interest bearing promissory note, imputed interest at 10%, unamortized discount of $49,000 and $0, respectively, issued in connection with MSN acquisition, remaining amount due paid in full on June 17, 1999..................... 430,000 -- Revolving credit facility maturing July 31, 1999 bearing interest at prime plus 1%, secured by accounts receivable... 1,688,000 -- Promissory note, interest at 10.62%, payable in 36 equal monthly installments of $52,234 including principal and interest, maturing April 1, 2002, secured by equipment...... -- 1,371,000 Promissory note, interest at 10.93%, payable in 36 equal monthly installments of $14,700 including principal and interest, maturing June 1, 2002, secured by equipment....... -- 406,000 Promissory note, interest and payment terms described below, maturing January 1, 2005, secured by equipment.............. -- 4,462,000 Promissory note, interest and payment terms described below, maturing January 1, 2005, secured by equipment.............. -- 1,119,000 Senior Notes, interest and payment terms described below, maturing November 5, 2000................................... -- 850,000 $2.0 million Senior notes, interest at 8%, maturing December 18, 2000........................................... -- 2,000,000 Unsecured promissory note, interest and payment terms described below, maturing November 24, 1999................. -- 576,000 Promissory notes, interest and payment terms described below, maturing August 27, 2004, secured as described below....................................................... -- 23,935,000 ---------- ---------- Total notes payable and capital leases...................... 13,133,000 37,535,000 Current portion............................................. 7,710,000 8,707,000 ---------- ---------- Long term portion........................................... $5,423,000 28,828,000 ---------- ----------
8 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED) The annual maturity of the debt indicated above for the five years following September 30, 1999 are $809,000 in 1999, $3,635,000 in 2000, $10,230,000 in 2001, $6,832,000 in 2002 and $7,732,000 in 2003 and $8,297,000 in 2004 and following. On January 11, 1999, the Company signed a financing arrangement with a finance company which provides for funding of equipment purchases of up to $7.0 million through December 31, 1999. The financing is structured as loans maturing January 1, 2005. The loans provide for payments of interest only through January 1, 2000. Thereafter, payments of principal and interest are due quarterly. Interest is calculated on available basis during the interest only period at 425 basis points above the 90 day commercial paper rate. Interest thereafter is calculated at 500 basis points above the five year Federal Reserve Treasury Constant Maturity Rate. The Company has drawn approximately $5.6 million under this facility through November 5, 1999, of which $2.5 million resulted in refinancing equipment, which was previously financed through an operating lease. The Company is not in compliance with certain financial covenants under this loan facility and has secured a waiver from the finance company of their rights under the agreement to enforce default provisions due to non compliance with these financial covenants for the third quarter of 1999. The Company also agreed that should the lender in the Lennox facility decide to terminate the Lennox facility prior to funding the entire $10.0 million amount of the facility, the finance company may declare a default under the agreement and accelerate the maturity date. The amounts outstanding under this facility of $5.6 million have been classified as current in the financial statements as of September 30, 1999. The Company may have to request additional waivers from the finance company due to non compliance with financial covenants in future quarters. The Company cannot guarantee that the finance company would provide the Company with additional waivers in which case they could enforce the default provisions and accelerate the maturity date. Should that be the case, there is no guarantee that the Company would be able to obtain a replacement facility. A default under this agreement could trigger cross defaults with several of our other obligations totaling $31.3 million at September 30, 1999. In July 1999, the Company received a bridge loan of $3.0 million from Lucent ("Lucent Bridge Loan"). The Lucent Bridge Loan was repaid on August 27, 1999, upon the funding of the Lucent facility. In connection therewith, the Company issued to Lucent warrants to purchase an aggregate of 85,000 shares of Common Stock at an exercise price of $8.50 per share. The warrants have a term of three years. On May 7, 1999, the Company issued $6,850,000 in Senior Notes (the "Senior Notes") originally maturing in November 2000. E. Scott Crist, CEO of the Company, is holder of the remaining $850,000 balance of the Senior Notes ("Crist Loan"). The maturity of the Crist Loan can be extended unilaterally by the Company through January 4, 2001. In the event that the Crist Loan is not paid by November 5, 1999, then Mr. Crist will be issued an additional 31,805 warrants. In the event that the Crist Loan is not paid by May 5, 2000, then Mr. Crist will be issued an additional 31,805 warrants. As a result, the Crist Loan is classified as long-term in the financial statements as of September 30, 1999. The Company repaid $6,000,000 of the Senior Notes on August 27, 1999, upon the funding of the Lucent facility. The Crist Loan bears interest at 8% from May through November 6, 1999. Thereafter, the interest rate increases by 1 percent for each month after November 6, 1999. Pursuant to the terms of the Senior Notes, the Company issued to the holders of the Senior Notes a total of 256,315 warrants at an exercise price of $6.68. The proceeds from the Senior Notes were utilized to repay the entire principal amount of the Gordon Brothers Convertible Debentures plus $1.1 million in exit fees. The Company estimated the fair value of the warrants by utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield 9 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED) of 0%, expected volatility of 53.91%, risk free interest rate of 5% and expected life of 3 months. The resulting cost of approximately $398,000 will be amortized as interest expense over three months. On June 18, 1999, the Company issued $2,000,000 in Senior Notes (the "$2 Million Senior Notes") maturing December 18, 2000. The $2 Million Senior Notes are subject to optional prepayment provisions allowing the Company to prepay a portion or all of the outstanding principal amount without premium or penalty. The $2 Million Senior Notes bear interest at 8% from June through December 17, 1999. Thereafter, the interest rate increases by 1 percent for each month after December 17, 1999. The Company also issued to the holders of the $2 Million Senior Notes a total of 62,501 warrants with an exercise price of $8.00 per share and a term of three years. In the event that the $2 Million Senior Notes are not paid by December 18, 1999, then the holders will be issued an additional 62,501 warrants. In the event that the $2 Million Senior Notes are not paid by June 18, 2000, then the holders will be issued an additional 62,501 warrants in which case the final maturity date is December 18, 2000. The Company may unilaterally extend the maturity date of the $2 Million Senior Notes an additional 60 days beyond December 18, 2000. The Company estimated the fair value of the warrants by utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 53.91%, risk free interest rate of 5% and expected life of 2 months. The resulting cost of approximately $116,000 will be amortized as interest expense over two months. In July 1999, the Company's Revolving Credit Facility expired and the Company repaid all amounts outstanding at that time. On July 28, 1999, the Company issued an unsecured and subordinated promissory note in the amount of $576,000 maturing on November 24, 1999. The Company may prepay this note with no penalty subject to the following limitations. In the event that the Company's common stock closes above $11 per share for the five consecutive trading days prior to November 24, 1999, the Company may elect to pay the holder the principal amount in cash plus accrued interest at a rate of 15% per annum. In the event that the price of the Company's stock is greater than $5.25 per share and less than $11 per share at the time of maturity, the Company must provide the holder of the note with 91,042 shares of the Company's common stock as payment of the note and no interest shall be owing. In the event that the price of the Company's common stock is less than $5.25 per share, the Company agrees to pay the note in cash at maturity plus accrued interest at 15% per annum. On August 27, 1999, Telscape International, Inc., the registrant, along with its subsidiaries, Telereunion S.A. de C.V. ("Telereunion"), Telereunion International, S.A. de C.V., Telereunion, Inc., Telscape USA, Inc., MSN Communications, Inc., Interlink Communications, Inc., TSCP International, Inc., Vextro De Mexico S.A. de C.V., Servicios Corporativos Vextro, S.A. de C.V., Telscape de Mexico S.A. de C.V., N.S.I. S.A. de C.V., Lan and Wan S.A. de C.V. and M.S. Noticias y Telecomunicaciones, S.A. de C.V. (collectively, the "Borrowers") signed a credit agreement ("Credit Agreement") with Lucent Technologies, Inc. ("Lucent"). The Credit Agreement provides for up to $40 million in financing. The registrant borrowed $23.9 million under the Credit Agreement on August 27, 1999, of which $9.0 million was utilized to repay the $3.0 million Lucent Bridge Loan and $6.0 million of the Senior Notes and $14.9 million was utilized to pay for costs directly related to construction of the network and debt offering costs. Subsequent loans under 10 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 4--NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED) the Credit Agreement are subject to the satisfaction of certain conditions precedent, one of which has not been satisfied as of the date of this filing. The Credit Agreement provides for principal payments on each Loan to be made in nine installments with the first installment due on the first anniversary of the closing date with each succeeding installment due in six month increments. The amount of the payment on each installment shall be a percentage of the total aggregate amount of the Loan, as follows: installments 1-2: 5%; installments 3-4: 10%; installments 5-6: 12.5%; installments 7-9: 15%. In addition, the Credit Agreement provides for annual mandatory prepayments beginning in the year ended December 31, 2000 equal to 50% of Excess Cash Flow of such year. Excess Cash Flow is defined in the Credit Agreement and includes EBITDA (as defined) less certain items including capital expenditures, payments of indebtedness, income tax payments, and equity investments in telecommunications companies. Interest under the Credit Agreement is calculated, at the Borrowers' option, at either the London interbank offered rates plus an Applicable Margin or the Bank of America, N.A. prime lending rate plus an Applicable Margin. Applicable Margin is defined as follows: Year 1: 5.75%; Year 2: 6.00%; Year 3: 6.25%; Year 4: 6.75%, Year 5: 7.25%. The Company has the option of borrowing under the Credit Facility for interest payments until the first anniversary date of the closing date. There is a 0.75% commitment fee on the unutilized and undrawn commitment until the commitment termination date, which is on the first anniversary of the closing date of the Credit Agreement. The Credit Agreement is secured by substantially all of the assets of the Company including the network assets, accounts receivable, the capital stock and equity interests of the subsidiaries of Telscape International, and all other tangible and intangible assets of the Company excluding encumbered assets at the time of signing. The Credit Agreement includes several covenants including financial performance covenants as well as covenants which limit the ability of the Company to take on additional borrowings, merge with or acquire other companies without the lender's prior approval. On October 22, 1999, the Company signed a loan agreement with Lennox Invest Ltd., a BVI Corporation, which provides for funding of up to $10.0 million (the "Lennox Facility"). Each individual funding under the agreement is to be evidenced by a Promissory Note maturing 180 days from its respective funding. A total of $1.5 million has been funded on this facility, which bears interest at 10% per annum. Interest on each Note is to be paid at maturation of the respective Note. For every $1,000,000 advanced under the agreement, the Company is obligated to issue a three year warrant to Lennox to acquire 35,714 shares of the Company at an exercise price related to the market price of the common stock. For every $1,000,000 that is outstanding for more than one month, the Company is obligated to issue an additional three-year warrant to acquire 35,714 shares of the Company. For every $1,000,000 that is outstanding for more than two months, the Company is obligated to issue a third three-year warrant to acquire 35,714 shares of the Company. Either party may terminate the agreement after the funding of $3 million without any further liability. The collateral provided for under the Lennox Facility consists of Telscape common stock owned directly or indirectly by certain members of management provided on a formula basis based on the level of borrowings outstanding under the Lennox Facility and the market value of the Company's common stock. 11 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5--SEGMENT INFORMATION The Company has two reportable segments: International Long Distance and Advanced Services. Revenues in the International Long Distance segment are generated on a retail and wholesale basis. Revenues in the Advanced Services segment are generated from Network Solution services, Customer Relationship Management and Broadband Services and Products. The Company provides international long distance services to customers in the United States and in Mexico. Advanced Services are provided to customers in the United States, Mexico and Latin America. The Company measures segment profit as earnings before interest, depreciation, amortization of intangibles, other income and taxes (EBITDA). Revenues, operating information and identifiable assets by business segment are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------- 1998 1999 1998 1999 ----------- ----------- ------------ ----------- Revenues International long distance: Retail............................... $13,044,000 $15,054,000 $ 45,471,000 $49,726,000 Wholesale............................ 9,839,000 4,025,000 26,641,000 11,764,000 Advanced services: Network solutions.................... 10,127,000 2,636,000 24,525,000 9,935,000 Customer relationship management..... 939,000 2,563,000 1,883,000 5,589,000 Broadband services and products...... 2,580,000 2,335,000 3,786,000 6,327,000 ----------- ----------- ------------ ----------- Total revenues........................... $36,529,000 $26,613,000 $102,306,000 $83,341,000 Operating income (loss) before interest, depreciation and amortization International long distance............ $ 2,735,000 $(2,659,000) $ 5,309,000 $(2,795,000) Advanced services...................... 940,000 756,000 2,071,000 513,000 Corporate and other.................... (533,000) (1,035,000) (1,222,000) (2,575,000) ----------- ----------- ------------ ----------- Total operating income (loss) before interest, depreciation and amortization........................... $ 3,142,000 $(2,938,000) $ 6,158,000 $(4,857,000) Depreciation and amortization.......... $ 960,000 $ 1,601,000 $ 2,218,000 $ 4,638,000 Operating income (loss) as reported on the Statements of Operations........... $ 2,182,000 $(4,539,000) $ 3,940,000 $(9,495,000) ----------- ----------- ------------ ----------- Capital Expenditures International long distance............ $ 3,152,000 $20,910,000 $ 8,443,000 $25,241,000 Advanced services...................... 345,000 522,000 749,000 1,245,000 Corporate and other.................... 1,000 1,000 2,000 36,000 ----------- ----------- ------------ ----------- Total capital expenditures......... $ 3,498,000 $21,433,000 $ 9,194,000 $26,522,000 =========== =========== ============ ===========
12 TELSCAPE INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) NOTE 5--SEGMENT INFORMATION (CONTINUED)
DECEMBER 31, 1998 SEPTEMBER 30, 1999 ------------------ ------------------- Identifiable assets International long distance............................... $21,819,000 $ 63,582,000 Advanced services......................................... 37,043,000 36,302,000 Corporate and other....................................... 21,469,000 21,532,000 ----------- ------------ Total identifiable assets............................. $80,331,000 $121,416,000 =========== ============
Information concerning principal geographic areas is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------- 1998 1999 1998 1999 ----------- ----------- ------------ ----------- Revenues United States.......................... $24,972,000 $20,791,000 $ 75,317,000 $66,065,000 Mexico................................. 11,065,000 5,200,000 26,407,000 15,525,000 Latin America.......................... 492,000 622,000 582,000 1,751,000 ----------- ----------- ------------ ----------- Total revenues........................... $36,529,000 $26,613,000 $102,306,000 $83,341,000 =========== =========== ============ ===========
DECEMBER 31, 1998 SEPTEMBER 30, 1999 ------------------ ------------------- Fixed assets, net of accumulated depreciation United States............................................. $ 7,297,000 $14,105,000 Mexico.................................................... 5,174,000 37,462,000 Latin America............................................. 2,105,000 1,475,000 ----------- ----------- Total fixed assets.......................................... $14,576,000 $53,042,000 =========== ===========
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans" or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Such statements include, but are not limited to, statements under the captions "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q as to the Company's plans to implement its growth strategy, improve its financial performance, expand its infrastructure, develop new products and services, expand its sales force, expand its customer base and enter international markets. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Furthermore, such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission (the "Commission"), or press releases or oral statements made by or with the approval of an authorized executive officer of the Company. Management wishes to caution the reader that the forward-looking statements referred to above and contained in this Quarterly Report on Form 10-Q regarding matters that are not historical facts involve and are based on numerous assumptions and predictions about future conditions that could prove not to be accurate. No assurance can be given that the future results will be achieved; actual events, transactions or results may differ materially as a result of risks facing the Company. Such risks include, but are not limited to, the effectiveness of management's strategies and decisions, the ability to raise the necessary capital to effectuate the Company's business plan, changes in business conditions, changes in the telecommunications industry and the general economy, competition, changes in service offerings and risks associated with the Company's limited operating history, entry into developing markets, managing rapid growth, international operations, dependence on effective information systems, ability to consummate acquisitions or enter into joint ventures with companies on terms acceptable to the Company and development of its network, as well as regulatory developments any of which could cause actual results to vary materially from the future results indicated, expressed or implied, in such forward-looking statements. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. Statements with respect to acquisitions and continued trends are forward-looking and involve risks and uncertainties. Furthermore, the Company has significant operations in Mexico, subjecting the Company to certain political, economy and commercial risk. The Company undertakes no obligation and does not intend to update, revise or otherwise publicly release the result of any revisions to these forward-looking statements that may be made to reflect future events or circumstances. 14 OUTLOOK The Company operates in mainly two business segments: International Long Distance and Advanced Services. Following is a summary of revenues in each segment by types of services provided.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------- -------------------------- 1998 1999 1998 1999 ----------- ----------- ------------ ----------- INTERNATIONAL LONG DISTANCE: Retail................................. $13,044,000 $15,054,000 $ 45,471,000 $49,726,000 Wholesale.............................. 9,839,000 4,025,000 26,641,000 11,764,000 ADVANCED SERVICES: Network solutions...................... 10,127,000 2,636,000 24,525,000 9,935,000 Customer relationship management....... 939,000 2,563,000 1,883,000 5,589,000 Broadband services and products........ 2,580,000 2,335,000 3,786,000 6,327,000 ----------- ----------- ------------ ----------- Total revenues....................... $36,529,000 $26,613,000 $102,306,000 $83,341,000 =========== =========== ============ ===========
In the International Long Distance Segment, the Company derives its revenues from the sale of U.S. outbound international long distance services to Latin America, principally Mexico. The Company provides these services on a wholesale basis to other carriers and on a retail basis through the sale of prepaid phone cards. The Company has been focusing on the expansion of its retail prepaid calling card brand, TELEFIESTA-REGISTERED TRADEMARK-, as the long distance business has come under increasing competitive pressure and contracting margins. As pricing pressures have affected the international long distance revenues, management has elected to dedicate its network assets to supporting its retail business due to management's belief that the retail business has greater long term value. The Company intends to expand its retail offerings in the future as it expands it network facilities. The Company started offering prepaid calling cards for sale in Mexico during the third quarter. The Company believes that owning a long distance network in Mexico will increase the percentage of minutes of traffic it carries on-net, enabling it to increase revenues, margins and profitability and ensure quality of service on both international and domestic long distance traffic. The Company began construction of their network late in the second quarter of 1999 and expects to complete it by the end of the year. As of the end of the third quarter, obligations and expenditures incurred by the Company for its network in Mexico, accounted for as construction in progress, totaled $30.9 million In the Advanced Services Segment, the Company derives its revenues principally from three areas: Network Solutions, Customer Relationship Management and Broadband Services and Products. The Company provides Network Solution services to private and public sector customers in Mexico. Revenues from these services are expected to soften due to the Company's efforts to restructure its product and services offerings to concentrate on higher margin value-added services and away from lower margin equipment-only sales and may soften as a result of weakening economic conditions in Mexico. As traditional telecommunications services become more of a commodity, the Company believes that Network Solution services will become an increasingly important component of the Company's service offerings. The Company has leveraged its systems integration expertise to provide outsourced network management services to local and multi-national business customers in Mexico. A natural migration is occurring in the Network Solutions business as customers migrate from private networking solutions to solutions that depend on the public network. The Company believes that the build-out of the Mexican Network will enhance its ability to provide these services by allowing it to provide a complete package of network solutions and data, voice, video and Internet services under one umbrella to its customers. The Company provides Customer Relationship Management services through its customer management call center in Mexico. This call center was established in late 1997 with the signing of the contract 15 with the U.S. Embassy. Revenues from these services have increased significantly with the expansion of the facility and the addition of other customers including the Mexican Ministry of Foreign Affairs. The Company expects revenues from these services to continue to grow in the future. The Company has secured a new facility for the call center that will allow it to increase its capacity from its current operator base of approximately 180 to approximately 700. The Company expects to occupy the new facility and have it in full operation by early in the first quarter of 2000. The Company provides Broadband Services and Products through its INTERLINK subsidiary. INTERLINK operates a satellite teleport facility in Mountain View, California and provides voice, video, data and Internet services including fractional and full T-1 data broadcast, dedicated circuits and private line up-link and down-link services in the U.S., Latin America and other parts of the world. INTERLINK has expanded its product offering to include Bandwidth-on-Demand, Integrated Services Digital Network ("ISDN") video conferencing and Internet-through-satellite services. INTERLINK serves as an Internet backbone provider to Internet service providers ("ISPs") and universities in remote areas where access to high speed fiber optics is limited, such as the case in many Latin American countries. In the second quarter of 1999, the Company began the construction of the Mexican Network, a combined fiber-optic and microwave long distance network, connecting the Gulf region of Mexico with certain key Mexican cities. The first stage of the Mexican Network consists of 650 km of fiber optic cable and microwave, circuit switched type of transmission and switching facilities, in the Gulf region of Mexico from Mexico City to Puebla, Puebla to Veracruz and Veracruz to Poza Rica. The Company intends to lease and swap capacity from other long distance providers to connect with the central (Mexico City, Guanajuato and Guadalajara) and northeast (Monterrey) regions of Mexico, and to install switching facilities in Mexico City and Monterrey. In May 1999, the Company signed an agreement with Avantel S.A., which owns the second largest network in Mexico, to exchange strands of fiber along 1100 kilometers of Avantel's network from Poza Rica to Reynosa (providing the Company with a border crossing) to Monterrey for strands of fiber along 650 kilometers of the Company's network. The agreement is subject to regulatory approval. The Company believes that more than half of the domestic long distance traffic and nearly half of the domestic residential long distance traffic originates in the region that will be serviced by the Mexican Network. The Company is currently negotiating fiber exchange agreements with other concessionaires. The Company's Mexican Network, when complete, will link 22 cities and towns and cover, including interconnection agreements, the majority of the population in Mexico. As of the end of the third quarter, obligations and expenditures incurred by the Company for its network in Mexico, accounted for as construction in progress, totaled $30.9 million. GROSS PROFIT. The Company has been experiencing pricing pressure on its international long distance services resulting in lowering of gross profit percentage and contribution. The Company has not been able to reduce its termination costs as quickly as prices have declined in the international long distance business and has relied partially on certain lower margin outsourcing arrangements to support its prepaid calling cards. Upon the completion of its own long distance network in Mexico, expected in early 2000, the Company believes that the percentage of minutes of traffic it carries on-net will increase, effectively lowering its termination costs. In its Advanced Services segment, the Company has been successful in increasing the overall percentage of revenues derived from enhanced, value-added services and as a result has seen a significant increase in gross profits as a percentage of revenues from these services. OPERATING EXPENSES. With the selection of Lucent to engineer, furnish and install the Company's long distance network in Mexico, the Company is moving into a period of significant investment in facilities and human resources. As a result, the Company expects operating expenses to continue to increase. 16 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES decreased from $36,529,000 in 1998 to $26,613,000 in 1999. This decrease of $9,916,000, or 27.1%, was due principally to the Company's decision to reduce sales to distributors of low margin equipment in Mexico, a decline in the Company's international long distance revenues, a decrease in the Company's Broadband services and products and the weakened economic conditions in Mexico. These declines were offset by an increase in revenues from the Company's Customer Relationship Management services. Network Solutions revenues in Mexico decreased $7,491,000 from $10,127,000 in 1998 to $2,636,000 in 1999. This decline is largely attributable to the Company's refocusing on higher margin products and a general slowdown in the market caused by weakened economic conditions in Mexico and concerns about the Y2K virus. Wholesale international long distance revenues decreased $5,814,000 from $9,839,000 in 1998 to $4,025,000 in 1999. Retail international long distance revenues increased $2,010,000 from $13,044,000 in 1998 to $15,054,000 in 1999. Customer Relationship Management services revenues increased $1,624,000 from $939,000 in 1998 to $2,563,000 in 1999 as the Company increased its operator positions to accommodate higher demand for its services. Broadband Services and Products revenues decreased $245,000 from $2,580,000 in 1998 to $2,335,000 in 1999 due to decreased sales of manufacturing products in this quarter. COST OF REVENUES decreased from $29,727,000 in 1998 to $23,602,000 in 1999, or $6,125,000. The 20.6% decrease in cost of revenues was due principally to the decrease of revenues offset by the increased costs associated with the international long distance services. The cost of revenues as a percentage of revenues increased from 81.4% to 88.7%, or 7.3%, due principally to the increase in costs of revenues as a percentage of revenues associated with international long distance revenues offset by the effect of relatively lower costs of revenues from the Company's Advanced Services business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from $3,660,000 in 1998 to $5,949,000 in 1999, or $2,289,000. The 62.5% increase in SG&A was due to the overhead necessary to support the growth in the Company's Customer Relationship Management operations, the increased staffing associated with the Mexican network build out and increased staffing at existing operations to meet the additional resource requirements associated with these operations. Overall SG&A as a percentage of revenues increased from 10.0% to 22.4%, or 12.4%, due to the factors stated above. DEPRECIATION AND AMORTIZATION increased from $960,000 in 1998 to $1,601,000 in 1999, or $641,000. This increase is due to an increase in goodwill amortization associated with the acquisition INTERLINK. In addition, depreciation increased as a result of the Company's continuing expansion of its communications network, which includes purchases of switches and other telecommunications equipment and facilities. The Company expects depreciation expense to increase as it continues to expand its telecommunications network. INTEREST INCOME (EXPENSE), NET increased from ($272,000) in 1998 to ($445,000) in 1999, or ($173,000). This increase was mainly due to an increase in the Company's level of borrowings, including the financing agreement used to finance approximately $5.6 million in equipment, the Lucent credit agreement and the Senior Notes. During the third quarter of 1999, the Company capitalized interest expense attributable to its Mexico network construction in the amount of $194,000. OTHER INCOME (EXPENSE) decreased from ($403,000) in 1998 to $1,000 in 1999, or $404,000. The Company recognized a foreign exchange gain of $367,000 in the third quarter of 1999 as compared to a foreign exchange loss of (581,000) in the third quarter of 1998. In addition, the Company incurred $292,000 in amortization of debt offering costs. Included in debt offering costs are warrants the Company issued to the holders of the Deere Park Convertible Debentures, Gordon Brothers Convertible Debentures, the Lucent Bridge Loan, the Senior Notes and the $2 Million Senior Notes. These warrants were 17 valued utilizing the Black-Scholes pricing model and the resulting amount is amortized as interest expense over the life of the notes. INCOME TAX BENEFIT (EXPENSE) changed from an income tax expense of ($652,000) in 1998 to an income tax benefit of $1,288,000 in 1999. The Company's overall effective tax benefit for the three months ended September 30, 1999, was 25.9% which reflect the tax benefits recognized on the losses realized offset by permanent items, the most significant of which is the non deductible nature of goodwill amortization. NET INCOME (LOSS). The Company experienced net income of $869,000 in 1998 as compared to a net loss of ($3,695,000) in 1999 due to a combination of the factors discussed above. NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 REVENUES decreased from $102,306,000 in 1998 to $83,341,000 in 1999. This decrease of $18,965,000, or 18.5%, was due principally to the Company's decision to reduce sales to distributors of low margin equipment in Mexico, a decline in the Company's international long distance revenues in its wholesale segment, and weakened economic conditions in Mexico. These declines were offset by an increase in revenues from the Company's Customer Relationship Management services, the incremental sales of the Company's INTERLINK subsidiary, which was acquired in May 1998, and an increase in the Company's international long distance revenues on a retail basis. As a result, Network Solutions revenues in Mexico decreased $14,590,000 from $24,525,000 in 1998 to $9,935,000 in 1999. This decline is largely attributable to the Company's refocusing on higher margin products and a general slowdown in the market caused by the weakened economic condition in Mexico and concerns about the Y2K virus. Wholesale international long distance revenues decreased $14,877,000 from $26,641,000 in 1998 to $11,764,000 in 1999. Retail international long distance revenues increased $4,255,000 from $45,471,000 in 1998 to $49,726,000 in 1999. Customer Relationship Management services revenues increased $3,706,000 from $1,883,000 in 1998 to $5,589,000 in 1999 as the Company increased its operator positions to accommodate higher demand for its services. Broadband Services and Products revenues increased $2,541,000 from $3,786,000 in 1998 to $6,327,000 in 1999. COST OF REVENUES decreased from $86,783,000 in 1998 to $72,861,000 in 1999, or $13,922,000. The 16.0% decrease in cost of revenues was due principally to the decrease of revenues offset by the increased costs associated with the international long distance services. This decrease in cost of revenues was also offset by the incremental cost of revenues associated with the acquisition of INTERLINK. The cost of revenues as a percentage of revenues increased from 84.8% to 87.4%, or 2.6%, due principally to the higher cost of revenues as a percentage of revenues associated with the Company's international long distance services. This increase was offset partially by the decrease in cost of revenues as a percentage of revenues associated with the Customer relationship management revenues. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") increased from $9,365,000 in 1998 to $15,337,000 in 1999, or $5,972,000. The 63.8% increase in SG&A was due to the overhead necessary to support the growth in the Company's Customer Relationship Management operations, the incremental SG&A related to the acquisition of INTERLINK, the increased staffing associated with the Mexican network build out and increased staffing at existing operations to meet the additional resource requirements associated with these operations. Overall SG&A as a percentage of revenues increased from 9.2% to 18.4%, or 9.2%, due to the factors stated above. DEPRECIATION AND AMORTIZATION increased from $2,218,000 in 1998 to $4,638,000 in 1999, or $2,420,000. This increase is due to an increase in goodwill amortization associated with the acquisitions of Telereunion and INTERLINK. In addition, depreciation increased as a result of the Company's continuing expansion of its communications network, which includes purchases of switches and other telecommunications 18 equipment and facilities. The Company expects depreciation expense to increase as it continues to expand its telecommunications network. INTEREST INCOME (EXPENSE), NET increased from ($513,000) in 1998 to ($2,250,000) in 1999, or ($1,737,000). This increase was mainly due to an increase in the Company's level of borrowings, including the Deere Park Convertible Debentures and Gordon Brothers Convertible Debentures issued in connection with the INTERLINK acquisition, the Senior Notes and the $2 Million Senior Notes. The Gordon Brothers Convertible Debentures provide for an "exit fee" which was paid at the time of the repayment of the Gordon Brothers Convertible Debentures in May 1999. The Company paid an "exit fee" of $1.1 million of which $648,000 was accrued during the six months ended June 30, 1999. In addition, the Company repaid $1.0 million of the Deere Park Convertible Subordinated Debentures in May 1999. The Company paid an "exit fee" of $120,000 which was accrued during the six months ended June 30, 1999. Lastly, the Company recognized additional interest expenses related to its equipment financing agreements and the Lucent Credit agreement. OTHER INCOME (EXPENSE) increased from ($504,000) in 1998 to ($1,431,000) in 1999, or $(927,000). The Company recognized a foreign exchange gain of $262,000 in the first nine months of 1999 as compared to a foreign exchange loss of ($768,000) in the first nine months of 1998. In addition, the Company incurred $1,152,000 in amortization of debt offering costs. Included in debt offering costs are warrants the Company issued to the holders of the Deere Park Convertible Debentures, Gordon Brothers Convertible Debentures, the Lucent Bridge Loan, the Senior Notes and the $2 Million Senior Notes. These warrants were valued utilizing the Black-Scholes pricing model and the resulting amount is amortized as interest expense over the life of the notes. INCOME TAX BENEFIT (EXPENSE) changed from an income tax expense of ($1,547,000) in 1998 to an income tax benefit of $3,539,000 in 1999. The Company's overall effective tax benefit for the nine months ended September 30, 1999, was 26.9% which reflect the tax benefits recognized on the losses realized offset by permanent items, the most significant of which is the non deductible nature of goodwill amortization. NET INCOME (LOSS). The Company experienced net income of $1,361,000 in 1998 as compared to a net loss of $(9,637,000) in 1999 due to a combination of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $6,691,000 and $1,388,000 for the nine months ended September 30, 1998 and September 30, 1999, respectively. The Company's operating results contributed to the decline in cash from operating activities. Net cash used in investing activities was ($19,769,000) and ($26,522,000) for the nine months ended September 30, 1998 and September 30, 1999, respectively. For the nine months ended September 30, 1998, the Company expended approximately $9.1 million on purchases of, or deposits on, property and equipment as part of the Company's network expansion strategy. In addition, the Company acquired MSN for $2.3 million, net of cash acquired and INTERLINK for $8.3 million, net of cash acquired. For the nine months ended September 30, 1999, the Company expended approximately $26.5 million on purchases of property and equipment as part of the Company's network expansion strategy. Net cash provided by financing activities was $15,545,000 and $21,543,000 for the nine months ended September 30, 1998 and September 30, 1999, respectively. During the nine months ended September 30, 1999, the Company realized approximately $3.3 million (net of commissions) from sales of its common stock and exercise of options and warrants. The Company also received $12,426,000 in short term financing and $23,935,000 in financing under the Lucent credit facility. The Company made payments of $1,295,000 on its notes payable, $6,000,000 on its convertible debt, $9,000,000 on its short term financings and $1,688,000 on the Revolving Line of Credit. 19 As of September 30, 1999, the Company had cash and cash equivalents of $6,040,000 and negative working capital of $27.0 million. Of this $27.0 million, approximately $12.0 million represents accounts payable incurred in connection with the construction of the Mexican Network, $5.1 million represents long term debt reclassified as short term due to a covenant default and $3.2 million represents other network expenditures classified as short term obligations. The Company plans to finance the $12.0 million under the Lucent credit agreement subject to availability as discussed below. In the fourth quarter of 1998, the Company signed a financing arrangement with a finance company, which provides for funding of equipment purchases of up to $6.0 million through May 1999. The financing is structured as loans maturing three years from funding at interest rates 550 basis points above the Federal Reserve Treasury Constant Maturity Rate. The Company has drawn approximately $2.0 million in the first nine months of 1999 under this facility. On January 11, 1999, the Company signed a financing arrangement with a finance company which provides for funding of equipment purchases of up to $7.0 million through December 31, 1999. The financing is structured as loans maturing January 1, 2005. The loans provide for payments of interest only through January 1, 2000. Thereafter, payments of principal and interest are due quarterly. Interest is calculated on available basis during the interest only period at 425 basis points above the 90-day commercial paper rate. Interest thereafter is calculated at 500 basis points above the five year Federal Reserve Treasury Constant Maturity Rate. The Company has drawn approximately $5.6 million under this facility through August 15, 1999, of which $2.5 million resulted in refinancing equipment, which was previously financed through an operating lease. The Company is not in compliance with certain financial covenants under this loan facility and has secured a waiver from the finance company of their rights under the agreement to enforce default provisions due to non compliance with these financial covenants for the third quarter of 1999. The Company also agreed that should the lender in the Lennox facility decide to terminate the Lennox facility prior to funding the entire $10.0 million amount of the facility, the finance company may declare a default under the agreement and accelerate the maturity date. The amounts outstanding under this facility of $5.6 million have been classified as current in the financial statements as of September 30, 1999. The Company may have to request additional waivers from the finance company due to non compliance with financial covenants in future quarters. The Company cannot guarantee that the finance company would provide the Company with additional waivers in which case they could enforce the default provisions and accelerate the maturity date. Should that be the case, there is no guarantee that the Company would be able to obtain a replacement facility. A default under this agreement could trigger cross defaults with several of our other obligations totaling $31.3 million at September 30, 1999. In the fourth quarter of 1998, the Company entered into a stock purchase agreement with third parties (the "Stock Purchase Commitment"), which allows the Company to sell at the Company's option (subject to certain conditions precedent), up to $5.0 million of the Company's Common Stock. The sale price of the Common Stock is equal to the average of the previous 5 days closing prices less a 20% discount. The Company sold 250,000 shares of Common Stock realizing approximately $1.3 million (net commissions) in the fourth quarter of 1998. These shares were sold on December 18, 1998, and may not be re-sold by the purchasers for nine months from such date. In the first quarter of 1999, the Company sold an additional 296,296 shares of Common Stock, realizing approximately $1.9 million (net of commissions). These shares were sold on March 15, 1999, and may not be re-sold by the purchasers until July 31, 1999. In July of 1999, the Company sold an additional 146,000 shares of Common Stock, realizing approximately $924,000 in proceeds. In addition, the Company received $576,000 in the form of a short-term loan which is due on November 24, 1999. In July 1999, the Company received a bridge loan of $3.0 million from Lucent ("Lucent Bridge Loan"). The Lucent Bridge Loan was repaid upon the funding of the Credit Facility. In connection therewith, the Company issued to Lucent warrants to purchase an aggregate of 85,000 shares of Common Stock at an exercise price of $8.50 per share. The warrants have a term of three years. 20 On August 27, 1999, Telscape International, Inc., the registrant, along with its subsidiaries, Telereunion S.A. de C.V. ("Telereunion"), Telereunion International, S.A. de C.V., Telereunion, Inc., Telscape USA, Inc., MSN Communications, Inc., Interlink Communications, Inc., TSCP International, Inc., Vextro De Mexico S.A. de C.V., Servicios Corporativos Vextro, S.A. de C.V., Telscape de Mexico S.A. de C.V., N.S.I. S.A. de C.V., Lan and Wan S.A. de C.V. and M.S. Noticias y Telecomunicaciones, S.A. de C.V. (collectively, the "Borrowers") signed a credit agreement ("Credit Agreement") with Lucent Technologies, Inc. ("Lucent"). The Credit Agreement provides for up to $40 million in financing. The registrant borrowed $23.9 million under the Credit Agreement on August 27, 1999, of which $9.0 million was utilized to repay the $3.0 million Lucent Bridge Loan and $6.0 million of the Senior Notes and $14.9 million was utilized to pay for costs directly related to construction of the network debt offering costs. Subsequent loans under the Credit Agreement are subject to the satisfaction of certain conditions precedent, one of which has not been satisfied as of the date of this filing. On May 7, 1999, the Company issued $6,850,000 in Senior Notes (the "Senior Notes") originally maturing in November 2000. E. Scott Crist, CEO of the Company, is holder of the remaining $850,000 balance of the Senior Notes ("Crist Loan"). The maturity of the Crist Loan can be extended unilaterally by the Company through January 4, 2001. In the event that the Crist Loan is not paid by November 5, 1999, then Mr. Crist will be issued an additional 31,805 warrants. In the event that the Crist Loan is not paid by May 5, 2000, then Mr. Crist will be issued an additional 31,805 warrants. As a result, the Crist Loan is classified as long-term in the financial statements as of September 30, 1999. The Company repaid $6,000,000 of the Senior Notes on August 27, 1999, upon the funding of the Lucent facility. The Crist Loan bears interest at 8% from May through November 6, 1999. Thereafter, the interest rate increases by 1 percent for each month after November 6, 1999. Pursuant to the terms of the Senior Notes, the Company issued to the holders of the Senior Notes a total of 256,315 warrants at an exercise price of $6.68. The proceeds from the Senior Notes were utilized to repay the entire principal amount of the Gordon Brothers Convertible Debentures plus $1.1 million in exit fees. The Company estimated the fair value of the warrants by utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 53.91%, risk free interest rate of 5% and expected life of 3 months. The resulting cost of approximately $398,000 will be amortized as interest expense over three months. On June 18, 1999, the Company issued $2,000,000 in Senior Notes (the "$2 Million Senior Notes") maturing December 18, 2000. The $2 Million Senior Notes are subject to optional prepayment provisions allowing the Company to prepay a portion or all of the outstanding principal amount without premium or penalty. The $2 Million Senior Notes bear interest at 8% from June through December 17, 1999. Thereafter, the interest rate increases by 1 percent for each month after December 17, 1999. The Company also issued to the holders of the $2 Million Senior Notes a total of 62,501 warrants with an exercise price of $8.00 per share and a term of three years. In the event that the $2 Million Senior Notes are not paid by December 18, 1999, then the holders will be issued an additional 62,501 warrants. In the event that the $2 Million Senior Notes are not paid by June 18, 2000, then the holders will be issued an additional 62,501 warrants in which case the final maturity date is December 18, 2000. The Company may unilaterally extend the maturity date of the $2 Million Senior Notes an additional 60 days beyond December 18, 2000. The Company estimated the fair value of the warrants by utilizing the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 53.91%, risk free interest rate of 5% and expected life of 2 months. The resulting cost of approximately $116,000 will be amortized as interest expense over two months. In July 1999, the Company's Revolving Credit Facility expired and the Company repaid all amounts outstanding at that time. As of September 30, 1999 and the date of this filing, the Company has an outstanding receivable of $1.4 million from a customer of its Mexican Network Solutions services subsidiaries. This receivable has 21 been outstanding since December 31, 1998. The Company has been forced to utilize legal resources to enforce collection of this amount. In the event that the Company determines that this amount or a portion of the amount is uncollectible in the future, the Company may be forced to incur a charge in excess of its current reserve for uncollectibles of $467,000. The Company's debt at September 30, 1999 totaled $37.5 million, resulting in a debt to equity ratio of 119% as compared to $13.1 million and 38%, respectively, as of December 31, 1998 and $3.2 million and 14%, respectively, as of December 31, 1997. Fully funding the Lucent Facility will significantly increase the Company's leverage. In addition, the Company estimates that there are an additional $10-$15 million in expenditures related to the Mexican Network and its network expansion which will not be funded through the Lucent Facility. In the first nine months of 1999, the Company incurred losses and had negative cash flow from operations. The Company does not expect that cash flow from operations will be sufficient to meet these capital expenditures and debt repayments requirements when they are due without additional financing. The Company intends to finance its growth, principal and interest obligations under existing debt obligations and additional capital investments required for its planned facility expansion through vendor financing and the sale of debt or equity securities (or a combination of both). There can be no assurance that the Company will be able to obtain additional financing on commercially reasonable terms, if at all, to fund its losses generated from operations, to fund its capital expenditures, to fund its debt service obligations as they become due or to fund strategic investment alternatives. The Company is also exploring various strategic investment alternatives. There can be no assurance that the Company will be able to identify any future joint ventures, acquisitions, mergers or strategic alliances or that, if identified, the Company will be able to successfully execute these transactions. If necessary funds are not available, the Company's business and results of operations and the future expansion of its business could be materially adversely affected. The Company is not in compliance with certain financial covenants under lease agreements with a finance company that funded $5.6 million in equipment for us earlier this year. The Company has secured a waiver from the finance company of their rights under the agreement to enforce default provisions due to non compliance with these financial covenants for the third quarter of 1999. The Company also agreed that should the lender in the Lennox facility decide to terminate the Lennox faciltiy prior to funding the entire $10.0 million amount of the facility, the finance company may declare a default under the agreement and accelerate the maturity date. The amounts outstanding under this facility of $5.6 million have been classified as current in the financial statements as of September 30, 1999. The Company may have to request additional waivers from the finance company due to non compliance with financial covenants in future quarters. The Company cannot guarantee that the finance company would provide the Company with additional waivers in which case they could enforce the default provisions and accelerate the maturity date. Should that be the case, there is no guarantee that the Company would be able to obtain a replacement facility. A default under this agreement could trigger cross defaults with several of our other obligations totaling $31.3 million at September 30, 1999. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. 22 Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. The Company does not expect adoption of the new standard to have a material effect on its financial statements. SOP 98-5, "REPORTING ON THE COSTS OF START-UP ACTIVITIES," requires all start-up and organizational costs to be expensed as incurred. It also requires all remaining historically capitalized amounts of these costs existing at the date of adoption to be expensed and reported as the cumulative effect of a change in accounting principles. SOP 98-5 is effective for all fiscal years beginning after December 31, 1998. The adoption of SOP 98-5 did not have a material effect on its financial statements. SFAS No. 135, "RESCISSION OF FINANCIAL ACCOUNTING STANDARDS BOARD NO. 75 ("SFAS NO. 75") AND TECHNICAL CORRECTIONS," rescinds SFAS No. 75 and amends Statement of Financial Accounting Standards Board No. 35. SFAS No. 135 also amends other existing authoritative literature to make various technical corrections, clarify meanings, or describe applicability under changed conditions. SFAS No. 135 is effective for financial statements issued for fiscal years ending after February 15, 1999. The Company believes that the adoption of SFAS No. 135 will not have a material effect on its financial statements. UNCERTAINTIES The Company continues to face many risks and uncertainties, including general and specific market economic risks. Exploitation of opportunities presented by the Mexican market is expected to require substantial capital. To the extent the Company's Mexican subsidiaries do not have a positive net cash flow from operations in 1999, it can be expected that the Company would have to fund any shortfalls from its working capital. In addition, any capital expenditures needed to expand the operations of the Mexican subsidiaries would likely be funded out of the working capital of the parent corporation or through additional financings to the extent the Company can secure these. Any such fundings would reduce the funds available to finance and expand the Company's strategy to compete in the international long distance services business. Also, any economic crises in Mexico could result in the need to fund any cash flow shortfalls of the Company's Mexican subsidiaries. As of September 30, 1999, the Company had cash and cash equivalents of $6,040,000 and negative working capital of $27.0 million. Of this $27.0 million, $12.0 million represents accounts payable incurred in connection with the construction of the Mexican Network, $5.1 million represents long term debt reclassified as short term due to a covenant default and $3.2 million represents other network expenditures classified as short term obligations. The Company plans to finance the $12.0 million under the Lucent credit agreement subject to availability as discussed above. As in any recently deregulated market, drastic changes and adjustments of regulations or changes in government policies may occur from time to time that will directly affect the Company. The Company's competitive position in the telecommunications services and long distance markets depends heavily on the license granted by the Mexican government. Should this permit be revoked for whatever reason, the Company would be severely impaired or unable to provide many of its telecommunications services. In addition, the Company relies on other carriers to complete the transmission of certain telecommunications services. To the extent that any of these carriers was to no longer do business with the Company, the Company would either have to find an alternate source or not be able to provide those services. The international long distance market, although large and rapidly growing, is also very competitive. The Company competes in this market with companies that have greater experience and substantially greater resources, both financial and otherwise. In recent months, competition in the industry has seen dramatic trends which have resulted in decreased prices which have impacted the Company's revenues, margins and cash flow. In addition, the Company faces certain additional risks in competing in this market, including changes in U.S. and foreign government regulations and telecommunications standards, dependence on strategic partners, tariffs, taxes and other trade barriers, the potential for nationalization and economic downturns and political instability in foreign countries. In addition, the Company could be 23 adversely affected by a reversal in the trend toward deregulation of telecommunication markets. The Company will be increasingly exposed to these risks as the Company expands its presence in this market. The Company's growth in this business is dependent on its ability to expand its capacity through investments in additional facilities or entering into termination arrangements with other carriers. There can be no assurance that the Company will be successful in raising the capital required to fund the additional facilities or to enter into such arrangements with other carriers, in which case the Company's operations, the future growth in this business and the ability to compete effectively against competitors with significantly more resources could be materially adversely affected. The Company will compete in this market with companies that have greater experience and have substantially greater resources. In addition, the prepaid phone card industry is subject to extensive U.S. federal and state regulation including the imposition of various excise taxes and fees, including the "Universal Service Fund". As with the wholesale international long distance business, the Company's growth in this business is dependent on its ability to expand its capacity through investments in additional facilities or entering in partnering arrangements for outsourcing the telecommunications services related to calls initiated on the prepaid phone cards it serves. There can be no assurance that the Company will be successful in raising the capital required to fund the additional facilities, or in obtaining such partnering arrangements, in which case the Company's operations, the future growth in this business and the ability to compete effectively against competitors with significantly more resources could be materially adversely affected. The Company is also pursuing a strategy of growth through selective acquisitions. However, there can be no assurance that any acquisition will be completed, that attractive candidates will be identified in the future, that the Company will be successful in raising the capital to fund such acquisitions, or that, if completed, any acquisition will be beneficial to the Company. In June 1998, Telereunion S.A. de C.V. ("Telereunion S.A."), a subsidiary of the Company, received a 30-year, facilities-based carrier license from the Mexican government allowing it to construct and operate a long distance network in Mexico (the "Concession"). Under the terms of the Concession, Telereunion S.A. was to have begun operations on its network as of June 3, 1999. In addition, under the terms of the Concession, Telereunion S.A. is required to meet certain capitalization thresholds prior to beginning operations. The Company has petitioned the Comision Federal de Telecomunicaciones (the "COFETEL"), the equivalent of the Federal Communications Commission in the United States, to have the Concession amended to extend the start of operations date and waive or amend the equity and debt to equity requirements. The Company obtained a waiver from the COFETEL allowing it to delay the beginning of its network operations by December 3, 1999. The Company cannot confirm that it will meet this deadline at the time of this filing and may have to obtain a further waiver on this matter. Although several other concessionaires have received certain waivers for defaults under their respective concessions, there can be no assurance that these amendments will be obtained from the COFETEL. If such amendments are not obtained, the Company will not have the right to operate the Mexican Network which could have a material adverse effect on the Company's ability to effectuate its business plan and its financial condition. FOREIGN CURRENCY RISK The general economic conditions of Mexico are greatly affected by the fluctuations in exchange rates and inflation. The Company's foreign currency risk is mitigated in Mexico due to the fact that many of the Company's customers are multinational firms that transact and pay in U.S. dollars. In addition, most of the customers that do pay in pesos pay at the spot exchange rate in effect at the time of payment as opposed to the exchange rate at the time the receivable is created. The Company's functional currency in Mexico is the U.S. dollar because the majority of its transactions are in such currency. However, from time to time the Company transacts in the local currency and thus faces foreign currency risk with respect to these transactions. U.S.-originated calls will be paid in U.S. dollars; however, the Company also expects to derive 24 a certain portion of its revenues from calls originated outside of the U.S. thus exposing the Company to additional exchange rate risk. In addition, the Company pays its termination partners in Latin America in their respective local currencies, exposing the Company to additional exchange rate risk. The Company may choose to limit its exposure to foreign currency risk through the purchase of forward foreign exchange contracts or similar hedging strategies. There can be no assurance that any foreign currency hedging strategy would be successful in avoiding exchange-related losses. The Company does not currently hedge against the risk of foreign exchange rate fluctuations. See further discussion in Item 3--Quantitative and Qualitative Disclosures about Market Risk. YEAR 2000 PLANS A significant percentage of the software that runs most of the computers in the United States relies on two-digit, rather than four-digit, date codes to define the applicable year, resulting in date-sensitive software having the potential inability to interpret date codes properly, misreading "00" for the year 1900 instead of the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, without limitation, a temporary inability to process transactions, send invoices or engage in similar normal business activities, which could have material adverse operational and financial consequences. STATE OF READINESS The Company has initiated a comprehensive program to identify, evaluate and address issues associated with the ability of its information and non-information technology systems (collectively, "Systems") to properly recognize the Year 2000 (the "Year 2000 Readiness Program") in order to avoid interruption of the operation of these Systems and a material adverse effect on the Company's business, financial position and results of operation as a result of the century change. The Company has empowered a "Y2K Committee" to manage the Year 2000 Readiness Program. The Y2K Committee shall also review the Year 2000 compliance efforts of the Company's key vendors and customers and shall regularly report to and be controlled by the Board of Directors. Each of the information technology software programs that the Company currently uses has either been certified by its respective vendor as Year 2000 compliant or will be replaced with software that is so certified prior to year-end. The Company intends to conduct comprehensive tests of all of its software programs for Year 2000 compliance as part of its Year 2000 Readiness Program. An integral part of the Company's non-information technology systems, its telecommunications switches, however, may not currently be Year 2000 compliant. The respective vendors of the Company's switches are in the process of reviewing their switches for Year 2000 readiness. However, there can be no assurance that such switches are Year 2000 compliant and that the Company will not experience switch related problems in Year 2000. In addition to other reasons, the production of accurate and timely customer invoices depends upon the generation of accurate and timely underlying data by the Company's switches. The Company does not believe that its other non-information technology systems will be affected by the Year 2000, but will not know definitively until the Company tests and evaluates such equipment. While the Company continues to exert efforts to test and determine the state of readiness of its systems, the Company cannot presently confirm that all the required Year 2000 compliance testing and conversions have been completed nor can it confirm that they shall be completed before the end of the year. The Company's computer systems interface with the computers and technology of many different domestic and international telecommunications companies on a daily basis. If one of these telecommunication companies should fail or suffer an adverse effect from a Year 2000 problem, the Company's customers could experience impairment of services. The Company considers the Year 2000 readiness of its international customers and vendors of particular importance given the general concern that the computer systems abroad may not be as prepared as those in domestic operations to handle the century change. As 25 part of its Year 2000 Readiness Program, the Company continues to contact its key vendors and customers to ascertain whether the systems used by such third parties are Year 2000 compliant. COSTS The Company has not incurred any material costs to date to reprogram, replace and test its Systems for Year 2000 compliance. The Company doesn't expect that any remaining costs will be significant; though such expenditures may increase materially following testing of non-information technology systems and evaluation of the Year 2000 compliance status of integral third party vendors and customers. Any additional costs incurred in connection with the Company's Year 2000 compliance efforts will be expensed as incurred, unless new systems are purchased that should be capitalized in accordance with generally accepted accounting principles. The Company currently anticipates that its Systems will be Year 2000 compliant before January 1, 2000, though no assurances can be given that the Company's compliance testing will not detect unanticipated Year 2000 compliance problems that prevent such Year 2000 compliance. Furthermore, a system failure by any of the Company's significant customers or vendors could have a material adverse effect on the Company's operations. Because the Company does not yet know the Year 2000 compliance status of integral third parties, it is currently unable to assess the likelihood or the risk to the Company of third party system failures. RISKS The Company believes that a disruption in the operation of its networks, billing system and financial and accounting systems and/or an inability to access interconnections with other telecommunications carriers, are the major risks associated with the inability of its Systems to process Year 2000 data correctly. The failure of the Company to correct a material Year 2000 problem could cause an interruption or failure of certain of the Company's normal business functions or operations and could have a material adverse effect on the Company's business, financial position and results of operations. In addition, there could also be a material adverse effect on the Company's business, financial position and results of operations if the systems of other companies on whose services the Company depends, or with whom the Company's Systems interface, are not Year 2000 compliant. Based upon risk assessment work conducted thus far, the Company believes that the most reasonably likely worst case scenario of the failure by the Company, or any integral third party, to resolve Year 2000 issues would be an inability by the Company (i) to provide telecommunications services to the Company's customers, (ii) to route and deliver telephone calls originating from or terminating with other telecommunications carriers for an indeterminable period of time and (iii) to timely and accurately bill customers. Such worst-case scenario could have a material adverse affect on the Company's business, results of operations and liquidity. These failures could also result in a loss of customers due to service interruptions and billing errors, substantial claims by customers and increased expenses associated with Year 2000 litigation, stabilization of operations and executing mitigation and contingency plans. While the Company believes that it is taking appropriate measures to mitigate these risks, there can be no assurance that such measures will be successful. CONTINGENCY PLAN At this time, the Company does not have a formal contingency plan. The Company intends to develop contingency plans to handle Year 2000 system failures experienced by its Systems and to handle any necessary interactions with the computers and technology of any integral non-complying third party. The Company expects that its plan shall continue to be under development throughout the remainder of this year. 26 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to financial market risks, including interest rate risk and foreign currency exchange risk. During the third quarter of 1999, insofar as the Company is concerned, there were no material changes in financial market risks except for the changes in the Mexican peso exchange rate to the U.S. dollar as described below. FOREIGN CURRENCY EXCHANGE RISK The Company conducts a significant amount of its operations in countries outside the United States. The Company's foreign currency exchange risk includes the following: In the past years, the Mexican economy has had periods of exchange rate instability and peso devaluation. The Company's Network Solutions services and Customer Relationship Management services business is conducted in Mexico. The majority of the Company's revenues in the value-added services business are contracted in dollars or in pesos indexed to the dollar at the time of settlement. The products and services the Company sells in the value-added services business line are generally imported from the U.S. or other countries and are payable in dollars. The Company's remaining operating costs in this segment are generally paid in pesos. The Company's major outsourcing contracts with the U.S. Embassy and the Ministry of Foreign Affairs generate revenues that are collected in pesos and costs that are paid in pesos. The Company generally collects its revenues from the Broadband Services and Products services in U.S. dollars and pays for its costs to provide these services in U.S. dollars In the International Long Distance business segment, the Company sells it services to customers in the U.S. and thus its revenues are collected in U.S. dollars. The Company's costs of providing these services are paid to vendors both in the U.S. and in Mexico or other Latin American countries. A significant portion of its costs to provide these services are structured under operating agreements with carriers in Mexico under which the costs historically have been settled in pesos. The Company has entered into new, additional agreements with carriers in Mexico that will provide it with additional termination capacity in Mexico in 1999. These new arrangements provide for settlement in U.S. dollars. In periods in which the peso devaluates, this results in a cost reduction to the Company as it generally extends short credit terms to its customers and has received extended credit terms from its vendors. In periods when the peso appreciates, this results in a cost increase to the Company. Over the last several years, the peso has experienced devaluations in the exchange rates to the U.S. dollar. In the second quarter of 1999, the peso exchange rate strengthened from over 10 to 1 to an average 9.5 to 1 resulting in an increase in the Company's cost. Due to limited credit availability, the Company has not historically hedged its peso costs. In the future as the Company's operations in Mexico increase, the Company's peso denominated transactions may increase causing the Company to enter into hedging activities as credit availability allows. In addition, as the Company invests in the Mexican Network and begins to generate more revenues in Mexico, the Company's foreign currency risk will increase. Moreover, upon completion, the Lucent Facility will be denominated in U.S. dollars. 27 PART II. OTHER INFORMATION ITEM 3. LEGAL PROCEEDINGS VEXTRO DE MEXICO, S.A. DE C.V. VS. CONTINENTAL COMNET HOLDINGS, INC. In September 1999, Telscape International, Inc., and Vextro S.A. de C.V. (collectively, the "Company") filed a lawsuit against Continental Comnet Holdings Inc. (collectively, the "Defendants"). The Company has filed a complaint for breach of contract. The Company has prayed for relief to include payments of amounts outstanding in the amount of no less than $1.4 million plus attorney's fees and costs. The lawsuit is pending in the U.S. District Court for the Southern District of Texas. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. See Index to Exhibits on page 30. (b) Reports on Form 8-K. On September 20, 1999, the Company filed a report on Form 8-K reporting that the Company had signed a credit agreement with Lucent Technologies, Inc. for up to $40 million in financing. 28 SIGNATURES In accordance with the requirements of the Exchange Act, the issuer has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TELSCAPE INTERNATIONAL, INC. (Registrant) By: /s/ E. SCOTT CRIST ----------------------------------------- E. Scott Crist Date: November 15, 1999 CEO AND PRINCIPAL EXECUTIVE OFFICER By: /s/ TODD M. BINET ----------------------------------------- Todd M. Binet PRESIDENT, CFO Date: November 15, 1999 PRINCIPAL FINANCIAL OFFICER By: /s/ PAUL FREUDENTHALER ----------------------------------------- Paul Freudenthaler CHIEF ACCOUNTING OFFICER Date: November 15, 1999 PRINCIPAL ACCOUNTING OFFICER
29 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)
30
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.7 Form of Series A Common Stock Warrant dated May 17, 1996 between the Company and Manuel Landa, Ricardo Orea Gudino, Oscar Garcia Mora and Christopher Efird (filed as Exhibit 10.1 to the Company's Report on Form 8-K dated June 3, 1996 and incorporated herein by reference) 10.8 Employment Agreement for E. Scott Crist (filed as Exhibit 10.1 to the Company's Report on Form 10-QSB for the quarter ended September 30, 1996 and incorporated herein by reference) 10.9 Employment agreement for Todd Binet (filed as Exhibit 10.29 to the Company's Report on Form 10-KSB for the year ended December 31, 1996 and incorporated herein by reference) 10.10 Form of Promissory Note dated July 1, 1997, between Telereunion and Jose Luis Apan Wong, Raul de la Parra Zavala and Alejandro Apan Wong (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated August 5, 1997 and incorporated herein by reference) 10.11 Form of Common Stock Warrant dated July 1, 1997, between the Company and Jose Luis Apan Wong, Raul de la Parra Zavala and Alejandro Apan Wong (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated August 5, 1997 and incorporated herein by reference) 10.12 Stock Purchase Agreement dated July 1, 1997, by and among the Company, Telscape USA, Inc., Telereunion and Jose Luis Apan Wong, Raul de la Parra Zavala and Alejandro Apan Wong (filed as Exhibit 10.4 to the Company's Current Report on Form 8-K dated August 5, 1997 and incorporated herein by reference) 10.13 Stock Purchase Agreement dated October 1, 1997, by and among Telscape USA, Inc., Telereunion, Inc. and Jose Martin Pena Nunez, Carlos Joaquin De Lara Y Campos, Jorge Pena Nunez, Martha Teresita Martin Del Campo Gutierrez (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated October 15, 1997 and incorporated herein by reference) 10.14 Stock Purchase Agreement dated January 22, 1998, by and among the Company; MSN Communications, Inc.; Stuart Newman and Michael Newman, together with Form of Promissory Note dated January 23, 1998 in the principal amount of $375,000 payable to Stuart Newman attached as Exhibit B-1 and Form of Promissory Note dated January 23, 1998 in the principal amount of $375,000 payable to Michael Newman attached as Exhibit B-2 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K dated February 6, 1998 and incorporated herein by reference) 10.15 Stock Purchase Agreement dated May 18, 1998, by and among Telscape International, Inc., California Microwave, Inc. and California Microwave Services Divisions, Inc. together with a Form of Supply Agreement between California Microwave, Inc. and California Microwave Services Division, Inc. as Exhibit B (Incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated June 9, 1998)
31
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.16 Securities Purchase Agreement between Deere Park Capital Management, LLC and Telscape International, Inc. dated as of May 1, 1998; Registration Rights Agreement dated as of May 1, 1998 between Telscape International, Inc. and Deere Park Capital Management, LLC; Form of Convertible Debenture for $3,000,000 dated May 1, 1998; Form of Stock Purchase Warrant to Purchase 8,952 shares of Common Stock of Telscape International, Inc. dated May 12, 1998 (all filed as Exhibit 4.4 to the Company's Report on Form 10Q for the quarter ended March 31, 1998 and incorporated herein by reference) 10.17 Form of Convertible Debenture in the principal amount of $1,000,000 between Deere Park Capital Management, LLC and Telscape International, Inc. dated as of May 28, 1998 and a form of Stock Purchase Warrant to Purchase 2,427 shares of Common Stock of Telscape International, Inc. dated May 28, 1998 (Incorporated herein by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K dated June 9, 1998) 10.18 Securities Purchase Agreement dated May 29, 1998 by and between Telscape International, Inc. and Gordon Brothers Capital, LLC; together with a Form of Convertible Debenture in the principal amount of $5,000,000 payable to Gordon Brothers Capital, LLC attached as Exhibit A; a Form of Stock Purchase Warrant for Gordon Brothers, LLC for 12,136 shares of Common Stock of Telscape International, Inc. attached as Exhibit B; and a Registration Rights Agreement by and between Gordon Brothers Capital, LLC and Telscape International, Inc. attached as Exhibit C (Incorporated herein by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K dated June 9, 1998) 10.19 Equity Purchase Agreement by and between INTERLINK Communications Holding Co., Inc. and each of Telscape International, Inc., E. Russell Hardy, Stephen Strohman, Monty J. Moore, and Salvador Giblas dated as of May 19, 1998 (Incorporated herein by reference to Exhibit 10.5 to the Company's Current Report on Form 8-K dated June 9, 1998) 10.20 Form of Employment Agreement by and between California Microwave Services Division, Inc. and E. Russell Hardy dated as of May 18, 1998 (Incorporated herein by reference to Exhibit 10.6 to the Company's Current Report on Form 8-K dated June 9, 1998) 10.21 Form of Employment Agreement by and between California Microwave Services Division, Inc. and Stephen Strohman dated as of May 18, 1998 (Incorporated herein by reference to Exhibit 10.7 to the Company's Current Report on Form 8-K dated June 9, 1998) 10.22 Form of Employment Agreement by and between California Microwave Services Division, Inc. and Monty J. Moore dated as of May 18, 1998 (Incorporated herein by reference to Exhibit 10.8 to the Company's Current Report on Form 8-K dated June 9, 1998) 10.23 Form of Consulting Agreement by and between California Microwave Services Division, Inc. and Salvador Giblas dated as of May 18, 1998 (Incorporated herein by reference to Exhibit 10.9 to the Company's Current Report on Form 8-K dated June 9, 1998) 10.24 Loan Agreement between Telscape USA, Inc. and MSN Communications, Inc. and Southwest Bank of Texas dated May 19, 1998 (Incorporated herein by reference to Exhibit 10.24 to the Company's Registration Statement No. 333-60271)
32
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ 10.25 Outside Directors Stock Option Plan of the Polish Telephones and Microwave Corporation (Incorporated herein by reference to Exhibit 10.24 to the Company's Registration Statement No. 333-60271) 10.26 Form of Financing Agreement by and between the Company and Newbridge Financial Services Networks dated as of December 7, 1998 (Incorporated herein by reference to Exhibit 10.26 to the Company's Report on Form 10-K for the year ended December 31, 1998) 10.27 Form of Financing Agreement by and between the Company and NTFC Capital Corporation dated as of January 11, 1999 (Incorporated herein by reference to Exhibit 10.27 to the Company's Report on Form 10-K for the year ended December 31, 1998) 10.28 Form of Securities Purchase Agreement by and between the Company and Kendu Partners and MDNH Partners, L.P. dated as of December 18, 1998, and Exhibit B to this agreement representing the Form of Registration Rights Agreement (Incorporated herein by reference to Exhibit 10.28 to the Company's Report on Form 10-K for the year ended December 31, 1998) 10.29 Form of Securities Purchase Agreement by and between Telscape International, Inc., INTERLINK Communications, Inc. and Cahill, Warnock, Strategic Partners Fund, L.P. dated as of May 5, 1999, Exhibit A representing the form of the Increasing Rate Secured Promissory Note, Exhibit B representing the form of Warrant, and Exhibit C representing the Security Agreement. (Incorporated herein by reference to Exhibit 10.29 to the Company's Report on Form 10-Q for the quarter ended March 31, 1999) 10.30 Form of Securities Purchase Agreement by and between Telscape International, Inc., INTERLINK Communications, Inc. and Cahill, Warnock, Strategic Partners Fund, L.P. dated as of June 18, 1999, Exhibit A representing the form of the Increasing Rate Secured Promissory Note, Exhibit B representing the form of Warrant, and Exhibit C representing the Security Agreement and Amendment No. 1 to Securities Purchase Agreement. (Incorporated herein by reference to Exhibit 10.30 to the Company's Report on form 10-Q for the quarter ended June 30, 1999) 10.31 Securities Purchase Agreement dated July 19, 1999 by and between Telscape International, Inc., Telscape USA, Inc., TSCP International, Inc., MSN Communications, Inc. and Lucent Technologies Inc., together with a Form of Demand Note in the principal amount of $3,000,000 payable to Lucent Technologies Inc. attached as Exhibit A; a Form of Stock Purchase Warrant for Lucent Technologies Inc. for 85,000 shares of Common Stock of Telscape International, Inc. attached as Exhibit B; and a Security Agreement by and between Telscape International, Inc., Telscape USA, Inc., MSN Communications, Inc., TSCP International, Inc. and State Street Bank and Trust Company attached as Exhibit C. (Incorporated herein by reference to Exhibit 10.31 to the Company's Report on form 10-Q for the quarter ended June 30, 1999) 10.32 Credit Agreement dated August 27, 1999 by and between Telscape International, Inc., Telereunion S.A. de C.V., Telereunion International, S.A. de C.V., Telereunion, Inc., Telscape USA, Inc., MSN Communications, Inc., Interlink Communications, Inc., TSCP International, Inc., Vextro de Mexico S.A. de C.V., Servicios Corporativos, Telscape de Mexico S.A. de C.V., N.S.I. S.A de C.V., Lan and Wan S.A. de C.V., MS Noticias y Telecomunicaciones, S.A. de C.V., and Lucent Technologies Inc. (Incorporated herein by reference to Exhibit 10.1 to the Company's Report on Form 8-K dated September 20, 1999)
33
EXHIBIT NO. DESCRIPTION - --------------------- ------------------------------------------------------------ *10.33 Loan Agreement dated October 22, 1999 by and between Telscape International, Inc. and Lennox Invest Ltd. Promissory Note dated October 22, 1999 in the principal amount of $1,060,000 payable to Lennox Invest, Ltd., Stock Pledge Agreement dated October 22, 1999, and Warrant Certificate issued to Lennox Invest, Ltd. To purchase 35,714 shares of Common Stock of Telscape International, Inc. dated October 22, 1999. *27.1 Financial Data Schedule 1999
- ------------------------ * Filed herewith 34 EX-10.33 2 EXHIBIT 10.33 LOAN AGREEMENT This Loan Agreement is made and entered into as of the 22nd day of October, 1999, by and between Lennox Investment Ltd., a BVI Corporation ("Lender") and Telscape International Inc., a Texas corporation ("Borrower"). RECITALS WHEREAS, Lender has agreed to loan Borrower the sum of Ten Million and no/100 ($10,000,000.00) Dollars; and, WHEREAS, in consideration of the loan, Borrower has agreed to grant certain rights to Lender and to pledge certain stock and Warrants as security for the repayment of the Loan all as set forth herein; and, WHEREAS, the parties wish to set forth their understanding and agreement. NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. LOAN Lender hereby agrees to loan and advance to Borrower, and Borrower hereby borrows from Lender, the sum of Ten Million Dollars ($10,000,000.00) (the Loan). The proceeds of the Loan shall be advanced in accordance with the scheduled attached hereto. Upon each advance, all representations, warranties, covenants and other obligations of Borrower hereunder and in other documents delivered in connection herewith, shall automatically be incorporated and be deemed confirmed as of the date thereof. The obligation to repay the Loan shall be evidenced by the attached Promissory Note (the Note), which shall be executed and delivered to Lender contemporaneously with the execution and delivery of this Agreement. 2. CONVERSION OPTION (a) Notwithstanding the provisions of the Note, the Parties may elect to convert the outstanding principal balance of the Note to a Debenture at terms to be mutually agreed to by the Parties (Conversion Event). (b) If the Conversion Event occurs, Borrower agrees to: (i) Cause whatever action is necessary to convert the note to a mutually agreed upon Debenture instrument; (ii) Take such other actions as Lender may reasonably request to convert the Note to a Debenture. (c) Upon the Conversion Event and delivery of the Debenture to Lender (or his designees), the Loan and Obligations shall be deemed satisfied in full. Lender shall return the Note marked "Cancelled" and execute such additional documents as Borrower may reasonably request in connection therewith. 4. INTEREST AND REPAYMENT The Loan shall bear interest and be repayable in accordance with the terms of the Note. 5. REPRESENTATIONS AND WARRANTIES (a) Borrower hereby represents and warrants and covenants to Lender, his successors, heirs and assigns, that the following are true, correct and complete as of the date hereof and will remain 35 true, correct and complete so long as any amounts remain owing to Lender under the Note, this Agreement, or otherwise: (i) Borrower is duly organized, validly existing and in good standing under the laws of the Texas and has the power and authority to enter into this Agreement and all agreements pursuant hereto and carry out its obligations hereunder and thereunder. (ii) The execution and delivery of this Agreement, the Note and any other documents in connection herewith (together, the Transaction Documents) and the consummation of the transactions contemplated hereby have been duly and validly authorized. (iii) Each of the Transaction Documents constitutes the valid and binding obligations and agreements of Borrower, and is enforceable against it in accordance with their terms. (iv) The execution, delivery and performance of the Transaction documents and the transactions contemplated hereby will not result in any violation of, be in conflict with, result in a breach of, or constitute a default under the terms of any agreement or instrument to which Borrower is a party, or by which it is bound; and there is no such term which materially adversely affects the business, operations, affairs, condition (financial or otherwise) properties, or assets of Borrower. (v) Except as is set forth in the Disclosure Schedules attached hereto, there are no unpaid assessments for additional taxes in any jurisdiction in which Borrower holds assets for any period or any basis for any such assessment. (vi) Except as is set forth in the Disclosure Schedules attached hereto and the Company's filings with the Securities and Exchange Commission which have been provided to the Lender, Borrower is unaware of any fact that could reasonably be expected to materially or adversely affect or threaten the assets, business, prospects, financial condition or results of operations of the Borrower or its ability to repay the Loan that has not been fully disclosed to Lender. Lender acknowledges that Borrower has disclosed the Borrower's current financial difficulties, including, but not limited to the shortfall in funding the Borrower's business plan. The Lender also represents that it is a "sophisticated investor" as such term is defined in the Securities Act of 1933, as amended. (b) The foregoing representations and warranties shall survive execution hereof and continue until such time as the Loan is satisfied in full. 6. INDEMNITY Borrower shall, and hereby does, indemnify, defend and hold Lender, his successors, heirs and assigns harmless from and against any damage, liability, loss, cost, expense (including attorneys fees), claim or cause of action suffered or incurred by him arising from or as a result of the breach of any representation or warranty or the default of any covenant hereunder, and the business and operations of Borrower generally prior to and following the date hereof. 7. FURTHER ASSURANCES Each of the parties hereto will, at such times as another party may request, without any cost or expense to the party so requesting, execute and deliver or cause to be execute and delivered to such other party such further instruments of transfer and conveyance and will take such other actions as may reasonably be requested to more effectively consummate the transactions contemplated by this Agreement. 36 8. GOVERNING LAW; CONSENT TO JURISDICTION This Agreement will be governed by, and construed and enforced in accordance with the Laws of the District of Columbia, in the United States. Each party irrevocably consents that any legal action or proceeding to enforce this Agreement or any term hereof shall be brought in the courts of the District of Columbia, and each further agrees to the jurisdiction of such courts in the event of any dispute hereunder. The foregoing shall not be interpreted to limit or restrict the ability of Lender to institute an action to collect amounts due hereunder in any jurisdiction. 9. LEGAL COUNSEL; DRAFTING Each party has had such review of this Agreement and all other agreements executed incident hereto by its counsel as it has determined necessary, having been advised that such documents have substantial legal consequences. No inference shall be drawn against the drafter of the documents. 10. THIRD PARTY BENEFICIARIES No other party shall be treated as a beneficiary of the terms hereof or entitled to enforce any of the provisions hereof. 11. WARRANTS For each $1,000,000 advanced hereunder by the Lender to the Borrower, Borrower shall issue to Lender a three year warrant to acquire 35,714 common shares of Borrower at an exercise price of $7.00 per share in the form attached hereto. For each thirty days that expire after the date of the Note, Borrower shall issue to Lender an additional warrant to acquire 35,714 common shares of Borrower up to a total amount of 107,142. 12. MISCELLANEOUS (a) The provisions hereof shall survive execution of this Agreement. (b) This Agreement may be changed only in writing signed by the party against whom the enforcement is sought. (c) All notices and other items sent to any party hereto shall be sent to the addresses set forth below, unless a different address shall be provided, in writing; notices shall be effective upon receipt. (d) This Agreement may be executed in counterpart originals, each of which shall constitute an original and all of which together shall constitute a single document and shall be effective upon execution by both parties. The parties intend that facsimile signatures shall be good and sufficient evidence of signature on all documents and authorizations unless such facsimile shall expressly provide that only the original signature shall be binding. (e) This Agreement shall be binding upon the parties hereto and their respective successors and assigns. (f) If any provision of this Agreement is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Agreement will remain in full force and effect. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. (g) The Recitals and attachments hereto are incorporated herein in their entirety by this reference. (h) It is acknowledged and agreed by the Parties that after the initial Three Million ($3,000,000) Dollars is advanced either Party may terminate this agreement as to the remaining Seven Million ($7,000,000) Dollars or any part of it without any further liability. In the event this Agreement is terminated prior to the advance of all funds called for hereunder, Lender shall be repaid with all accrued interest no later than one hundred eighty (180) days after the date of each Note. 37 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the date first above written. ATTEST: TELSCAPE INTERNATIONAL, INC. By: Todd M. Binet Its: President Dated: ATTEST: LENNOX INVESTMENT, LTD. By: Its: Dated:
10/19/99 38 PROMISSORY NOTE DATE: October 22, 1999 US $1,060,000.00 For Value Received, the undersigned, TELSCAPE INTERNATIONAL "Inc. a Texas corporation ("Borrower"), promises to pay to the order of Lennox Investment, Ltd., a BVI corporation ("Holder"), at the address set forth below, the principal sum of One Million Sixty Thousand and no/100 ($1,060,000.00) Dollars together with interest thereon at the rate of ten percent (10%) per annum. The principal amount of this Promissory Note shall be subject to advance to Borrower in accordance with the terms of that certain Loan Agreement of even date herewith between, inter alia, Borrower and Lender (the "Loan Agreement"). Interest shall accrue on principal from the date of its first advance by Holder. 1. Interest Payments Interest shall accrue and be payable on the Maturity Date. 2. Maturity Date The entire unpaid principal balance, all accrued but unpaid interest and all fees, charges, costs and expenses, if any, shall be due upon the first to occur of the following (the "Maturity Date"): (i) one hundred eighty (180) days from the date of this Promissory Note; (ii) the failure of Borrower to make any payment due hereunder within five (5) days; (iii) any default or breach by Borrower under the terms of the Loan Agreement which is not fully cured within thirty (30) days of default or breach; (iv) the conversion of the note into a debenture in form and substance to be mutually agreed upon by the Borrower and Lender; and On the Maturity Date, Borrower shall make such payments without further notice or demand by Holder to Borrower or any other party. 3. Prepayment Borrower shall have the right to prepay all or any portion of this Promissory Note at any time or from time to time without penalty. 4. Default In the event Borrower fails to pay the principal sum due following demand within the time period set forth above, Borrower shall be in default and Holder may pursue all legal and equitable remedies that may be available, This Note shall thereafter bear interest at the lesser of (i) the highest rate permitted by law; or (ii) fourteen (14%) percent. Such interest accrued pursuant to this Section shall be due and payable to Holder on demand. 5. Application of Payments/Expenses All payments received by Holder shall be applied to the payment of accrued fees, charges, costs and expenses payable hereunder, to any interest due hereunder, or to the outstanding principal balance, as determined by Holder in his sole discretion, Borrower shall be responsible for and hereby agrees to pay, on demand, all costs and expenses of enforcement and/or collection of this Promissory Note, including reasonable attorney's fees, whether or not any suit or other legal proceedings be instituted hereon. 39 6. Waiver Borrower waives demand, presentment for payment, protest, notice of nonpayment, notice of protest, and notice of dishonor as well as any exemptions that may be available to it under any homestead, insolvency or similar laws. 7. Miscellaneous (i) This Promissory Note shall be governed by and construed in accordance with the laws of the District of Columbia, (ii) If any provision is held to be invalid or unenforceable the other provisions of this Promissory Note shall be deemed severable and shall remain in full force and effect, (iii) No modification or amendment of any term or terms of this Promissory Note shall be effective unless in writing and signed by the parties hereto, (iv) This Promissory Note shall be binding upon, and inure to the benefit of and be enforceable by, the parties hereto and their respective personal representatives, heirs, successors and assigns of the parties hereto. (v) All notices required or permitted under this Promissory Note shall be in writing and shall be sufficient if given personally or by certified mail to the addresses set forth below (or such other address as is indicated in writing). IN WITNESS WHEREOF, the undersigned has executed this Promissory Note under seal and on the day and year first above written. ATTEST: Telscape International, Inc. By: Todd M. Binet Its: President Holder Address: Borrower Address:
40 STOCK PLEDGE AGREEMENT THIS AGREEMENT, made and entered into this 22nd day of October, 1999, by and between E. Scott Crist, Todd Binet, Manuel Landa, Forest International, Ltd., Ricardo Orea, Cloud International, Ltd., Oscar Garcia, and Sky Associates, Ltd., hereinafter Collectively referred to as "Pledgor", and Lennox Invest, Ltd. a BVI corporation, hereinafter, referred to as "Pledgee". RECITALS (A) Pledgor is the owner of approximately 31% of the stock of Telscape International, Inc., a Texas Corporation ("Telscape"). Contemporaneous with the execution of this Agreement, Pledgor and Pledgee have executed a loan agreement ("Loan Agreement"), in the amount of Ten Million and no/100 ($10,000,000.00) Dollars. Each draw against this Loan Agreement will be evidenced by a Promissory Note, a copy of which is attached hereto as Exhibit "A" and incorporated herein by reference; and, (B) Pledgor is owner and holder of an aggregate of Two Million One Hundred Eighty Thousand Three Hundred Forty Seven (2,180,347) shares of common stock ($.001 par value) of Telscape; and, (C) In addition, Pledgor is in control of additional warrants to acquire shares of Telscape common stock ("Warrants") which they individually have the right to pledge as collateral for the loan; and (D) The Pledgor, as the owner of such issued and outstanding stock and Warrants have agreed that some or all of such stock and Warrants will be pledged as additional security for the repayment for any outstanding indebtedness under such Loan Agreement. NOW, THEREFORE, in consideration of the foregoing Recitals which shall be deemed an integral part of this Agreement and not merely as recitals thereto, and in consideration of the mutual agreements and covenants herein contained, the parties hereto, intending to be legally bound thereby, agree as follows: (1) PLEDGE For each $1,000,000 dollars borrowed under the Loan Agreement, the Pledgor agrees to pledge at least $2,000,000 worth of shares of unencumbered (i.e. no liens) Telscape common stock and/or Warrants. For the initial $3,000,000 borrowed, Pledgee will only accept and Pledgor has agreed to pledge unencumbered common stock and not Warrants, as collateral. The Pledgor herein delivers and conveys to the Pledgee to be held in escrow by Deutsche Banc Alex.Brown located at BT Alex Brown 1South Street, 23rd Floor Baltimore, Maryland, 21202 Attention: Mr. Geary Stonesifer, hereinafter referred to as the "Escrow Agent" the shares and/or Warrants of stock represented in Exhibit "B". (2) TERM Equitable title to such stock and or Warrants shall remain vested in the Pledgor and the Escrow Agent shall hold such stock and or Warrants only as security for the repayment of the indebtedness described in Exhibit "A" hereto, and shall not encumber or dispose of such stock except in accordance with the provisions of this Agreement. Such stock shall remain so pledged to the Pledgee until the said indebtedness is repaid in full with interest, in accordance with Exhibit "A" hereof. (3) VOTING During the term of this pledge and so long as the maker is not in default in the performance of any of the terms of the indebtedness described in Exhibit "A" hereof, then the Pledgor shall have the right to vote the pledged stock on all corporate questions and the Pledgee shall execute due and timely proxies in favor of the Pledgor as may be necessary to this end. (4) REPRESENTATIONS AS TO ABILITY TO PLEDGE STOCK The Pledgor warrants and represents that the Pledgor has the right to transfer the pledged securities subject to no encumbrances. 41 (5) STOCK ADJUSTMENTS, WARRANTS AND RIGHTS In the event that during the term of this pledge any stock dividend, reclassification, readjustment or other change is declared or made in the capital structure of the corporate issuer of any of the pledged stock, all new substituted and additional shares or other securities issued in respect to the pledged stock shall be held by the Escrow Agent under the terms of this Agreement in the same manner as the shares of stock originally pledged hereunder; and in the event that during the term of this pledge subscription warrants or any other rights or options shall be issued in connection with the pledged stock, such warrants, rights and options shall be immediately assigned by the Pledgee to the Pledgor, and if exercised by the Pledgor all new stock or other securities so acquired by the Pledgor shall be immediately assigned to the Pledgee to be held under the terms of this Agreement in the same manner as the shares of stock originally pledged hereunder. (6) RETURN OF STOCK Upon the pledge of stock and or Warrants, Pledgee shall deliver executed stock powers in blank to the Escrow Agent covering the pledged stock and/or Warrants. Upon the payment in full of the indebtedness in accordance with the terms of the Loan Agreement: (i) the Escrow Agent shall transfer to the Pledgor all of the stock and or Warrants pledged hereunder and (ii) any security interest of the Pledgee shall immediately and automatically terminate. (7) DOCUMENTARY STAMPS The Pledgor agrees to pay for any and all documentary stamps which maybe imposed on the transfer and delivery to Escrow Agent of the pledged stock and substitutions therefore and any additions thereto, and which may be imposed on the retransfer and redelivery of it to the Pledgor. (8) DEFAULT In the event the Pledgor defaults in the performance of any of the terms of this Agreement or in an event of default, as defined in the terms and conditions contained in the Loan Agreement, the Pledgee shall have the following rights, exercisable thirty (30) days after such event of default: (a) To direct the Escrow Agent to sell the whole or any part of the pledged stock and or exercise the Warrants and any substitutions therefore and any additions thereto, at public or private sale, at the option of the said Pledgee and from the proceeds derived from the said sale to pay first the cost and expenses of said sale, including a reasonable attorneys' fee for making said sale, and second, any interest which may then have accrued with respect thereto and accounting thereafter to the Pledgor for any surplus then remaining derived from said sale after making all the payments hereinabove set forth, such surplus, if any, to be paid over and delivered to Pledgor, and at such sale the Pledgee may be a bidder, and may purchase the pledged stock and or Warrant or any part thereof; provided, however, that ten (10) days notice of said sale and the time and place thereof shall be given to Pledgor by personal delivery or by certified or registered mail addressed to the Pledgor at Telscape International, Inc., 2700 Post Oak Blvd., Suite 1000, Houston, Texas 77056. It is further agreed that after a sale and purchase of the pledged stock or any part thereof there shall be no equity or right of redemption on the part of or by the Pledgor, as all rights of redemption are hereby expressly waived and released. It is further understood and agreed that the obligor of the aforesaid indebtedness shall remain liable for any deficiency that may arise after the sale or sales of the pledged stock and or exercise and sale of the Warrants. It is further agreed that no public advertisement of the sale of the stock and or Warrants so pledged hereunder shall be necessary, and that the Pledgee may at any sale sell all or any part of such stock and or Warrants hereby pledged and that a sale or a part of such stock and or Warrants shall not operate to prevent the sale at a later date of the remainder of such stock and or Warrants and that such sale may continue from day to day at the option of the Pledgee without further notice to the Pledgor. 42 (b) The right to vote the pledged stock on all corporate questions until such time as the default is cured shall vest in the Pledgee and the Pledgor shall execute due and timely proxies in favor of the Pledgee as may be necessary to this end. It is understood that the Pledgee may exercise either or both options to the extent that same, in his sole discretion, will most likely lead to the satisfaction of the indebtedness secured by this pledge; that the rights hereunder are in addition to any and all other rights which the Pledgee may have under any other agreements whatsoever; and further that Pledgee may exercise either or both of the above options whether or not he exercised any of such additional rights. (9) PROHIBITION OF SALE OR FURTHER ENCUMBRANCE OF STOCK During the term of this pledge, the Pledgor agrees not to sell, assign, dispose of or further encumber the shares of stock and or Warrants subject to this pledge, without the written consent of Pledgee, which consent shall be in the sole and exclusive discretion of the Pledgee. (10) CORPORATIONS PARTIES TO THIS AGREEMENT By being made a party to this Agreement, the corporations that are parties to this Agreement agree to the terms and conditions hereof and further agree that the execution and delivery of this Agreement shall be authorized by a meeting of the Board of Directors of the corporations which are parties to this Agreement to be held prior to or upon the consummation of this Agreement. (11) BENEFIT This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, beneficiaries, personal representatives, successors, or assigns, and it is particularly understood and agreed that whenever the term "Pledgee" is used in this Agreement, the said term shall include the Pledgee's successors and assigns. (12) This Agreement is being executed in connection with and simultaneously with the closing of a loan to Telscape by Pledgee. (13) Any modifications or changes in the terms of this Agreement shall be in writing and signed by all of the parties. 43 The parties hereto have executed this Agreement the day and year first above written. Telscape International, Inc. Lennox Invest, Ltd. By: By: Its: Its: Pledgee: E. Scott Crist, Pledgor Todd Binet, Pledgor Manuel Landa, Pledgor: Forest International, LLC By: Its: Pledgor: Ricardo Orea, Pledgor Cloud International, LLC By: Its: Pledgor: Oscar Garcia, Pledgor Sky Associates International, LLC By: Its: Pledgor:
44 EXHIBIT A Indebtedness in the amount of $1,000,000 represented by that certain Promissory Note, dated October 22, 1999, by and between Telscape International, Inc. as Maker and Lennox Investments, Ltd. as Payee. 45 EXHIBIT B
OWNER CERTIFICATE NUMBER NUMBER OF SHARES - ----- ------------------ ---------------- Ricardo Orea Gudino......................................... N1219 126,000 Manuel Landa Rangel......................................... N1212 126,000
(pledge.ag) 46 WARRANT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, TRANSFERRED OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. Warrant L-1 October 22, 1999 Warrant to Purchase 35,714 Shares of Common Stock of Telscape International, Inc. Telscape International, Inc., a Texas corporation (the "COMPANY"), hereby acknowledges that Lennox Investment, Ltd. ("INVESTOR"), or any other Warrant Holder is entitled, on the terms and conditions set forth below, to purchase from the Company, at any time after the date hereof and continuing for three years thereafter, the above number of fully paid and nonassessable shares of Common Stock, par value $0.001 per share, of the Company (the "COMMON STOCK") at the Purchase Price (hereinafter defined), as the same may be adjusted pursuant to Section 5 herein. 1. DEFINITIONS. All terms not otherwise defined herein shall have the meanings given such terms in the Agreement. (a) "AGREEMENT" shall mean the Loan Agreement of even date herewith between the Company and the Investor. (b) "INVESTOR" shall mean Lennox Investment, Ltd. (c) "PURCHASE PRICE" shall be $7.00 per share. (d) "WARRANT HOLDER" shall mean the Investor or any permitted assignee of all or any portion of this Warrant. (e) "WARRANT SHARES" shall mean the shares of Common Stock or other securities issuable upon exercise of this Warrant. (f) Other capitalized terms used herein which are defined in the Agreement shall have the same meanings herein as therein. 2. EXERCISE OR EXCHANGE OF WARRANT. (a) This Warrant may be exercised by the Warrant Holder, in whole or in part, at any time and from time to time by surrender of this Warrant, together with the form of exercise attached hereto as Exhibit A (the "EXERCISE FORM") duly executed by Warrant Holder, together with the full Purchase Price (as defined in SECTION 1) for each share of Common Stock as to which this Warrant is exercised, to the Company at the address set forth in SECTION 15 hereof. At the option of the Warrant Holder, payment of the Purchase Price may be made either by (i) certified check payable to the order of the Company, (ii) surrender of certificates then held representing, or deduction from the number of shares issuable upon exercise of this Warrant, of that number of shares which has an aggregate fair market value (as defined below) on the date of exercise equal to the aggregate Purchase Price for all shares to be purchased pursuant to this Warrant or (iii) by any combination of the foregoing methods. In the event that the Warrant is not exercised in full, the number of Warrant Shares shall be reduced by the number of such Warrant Shares for which this Warrant is exercised, and the Company, at its expense, shall forthwith issue and deliver to or upon the order of the Warrant Holder a new 47 Warrant of like tenor in the name of the Warrant Holder or as the Warrant Holder may request, reflecting such adjusted Warrant Shares. (b) The "DATE OF EXERCISE" of the Warrant shall be the date that the completed Exercise Form is delivered to the Company, together with the original Warrant and payment in full of the Purchase Price. 3. DELIVERY OF STOCK CERTIFICATES. (a) Subject to the terms and conditions of this Warrant, as soon as practicable after the exercise of this Warrant in full or in part, and in any event within five (5) Business Days (as defined in the Securities Purchase Agreement) thereafter, the Company at its expense (including, without limitation, the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Warrant Holder, or as the Warrant Holder may lawfully direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock to which the Warrant Holder shall be entitled on such exercise, together with any other stock or other securities or property (including cash, where applicable) to which the Warrant Holder is entitled upon such exercise in accordance with the provisions hereof. (b) This Warrant may not be exercised as to fractional shares of Common Stock. In the event that the exercise of this Warrant, in full or in part, would result in the issuance of any fractional share of Common Stock, then in such event the Warrant Holder shall be entitled to cash equal to the fair market value of such fractional share. For purposes of this Warrant, "FAIR MARKET VALUE" shall equal the closing bid price of the Common Stock on the Nasdaq National Market or Small-Cap Market, the American Stock Exchange or the New York Stock Exchange, whichever is the principal trading exchange or market for the Common Stock (the "PRINCIPAL MARKET") on the date of exercise hereof, or if the Common Stock is not listed or admitted to trading on any national securities exchange or quoted on the Nasdaq National Market or Small-Cap Market, the closing bid price on the over-the-counter market as furnished by any New York Stock Exchange member firm that makes a market in the Common Stock reasonably selected from time to time by the Company for that purpose, or, if the Common Stock is not traded over-the-counter and the average price cannot be determined as contemplated above, the fair market value of the Common Stock shall be as reasonably determined in good faith by the Company's Board of Directors. 4. COVENANTS OF THE COMPANY. (a) The Company shall take all necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, including, without limitation, the notification of the Principal Market, for the legal and valid issuance of this Warrant and the Warrant Shares to the Warrant Holder. (b) From the date hereof through the last date on which this Warrant is exercisable, the Company shall take all steps necessary and within its control to insure that the Common Stock remains listed or quoted on the Principal Market and shall not amend its Articles of Incorporation or By-Laws so as to adversely affect any rights of the Warrant Holder under this Warrant; provided, however, that increasing the number of authorized shares shall not be deemed a material adverse effect. (c) The Company shall at all times reserve and keep available, solely for issuance and delivery as Warrant Shares hereunder, such shares of Common Stock as shall from time to time be issuable as Warrant Shares. (d) The Warrant Shares, when issued in accordance with the terms hereof; will be duly authorized and, when paid for or issued in accordance with the terms hereof, shall be validly issued, 48 fully paid and non-assessable. The Company has authorized and reserved for issuance to the Warrant Holder the requisite number of shares of Common Stock to be issued pursuant to this Warrant. (e) With a view to making available to the Warrant Holder the benefits of Rule 144 promulgated under the Securities Act ("RULE 144") and any other rule or regulation of the Securities and Exchange Commission (the "SEC"), that may at any time permit Warrant Holder to sell securities of the Company to the public without registration, the Company agrees to use its best efforts to: (i) make and keep public information available, as those terms are understood and defined in Rule 144, at all times; and (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act. 5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The number of and kind of securities purchasable upon exercise of this Warrant and the Purchase Price shall be subject to adjustment from time to time as follows: (a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the Company shall at any time after the date hereof but prior to the expiration of this Warrant subdivide its outstanding securities as to which purchase rights under this Warrant exist, by split-up, spin-off, or otherwise, or combine its outstanding securities as to which purchase rights under this Warrant exist, the number of Warrant Shares as to which this Warrant is exercisable as of the date of such subdivision, split-up, spin-off or combination shall forthwith be proportionately increased in the case of a subdivision, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the Purchase Price, but the aggregate purchase price payable for the total number of Warrant Shares purchasable under this Warrant as of such date shall remain the same. (b) STOCK DIVIDEND. If at any time after the date hereof the Company declares a dividend or other distribution on Common Stock payable in Common Stock or other securities or rights convertible into or exchangeable for Common Stock ("COMMON STOCK EQUIVALENTS"), without payment of any consideration by holders of Common Stock for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon exercise or conversion thereof), then the number of shares of Common Stock for which this Warrant may be exercised shall be increased as of the record date (or the date of such dividend distribution if no record date is set) for determining which holders of Common Stock shall be entitled to receive such dividends, in proportion to the increase in the number of outstanding shares (and shares of Common Stock issuable upon conversion of all such securities convertible into Common Stock) of Common Stock as a result of such dividend, and the Purchase Price shall be adjusted so that the aggregate amount payable for the purchase of all the Warrant Shares issuable hereunder immediately after the record date (or on the date of such distribution, if applicable), for such dividend shall equal the aggregate amount so payable). (c) OTHER DISTRIBUTIONS. If at any time after the date hereof the Company distributes to holders of its Common Stock, other than as part of a dissolution or liquidation or the winding up of its affairs, any shares of its capital stock, any evidence of indebtedness or any of its assets without payment of any consideration by holders of Common Stock (other than cash, Common Stock or securities convertible into or exchangeable for Common Stock), then, in any such case, the Warrant Holder shall be entitled to receive, upon exercise of this Warrant, with respect to each share of Common Stock issuable upon such exercise, the amount of cash or evidences of indebtedness or other securities or assets which such Warrant Holder would have been entitled to receive with respect to each such share of Common Stock as a result of the happening of such event had this Warrant been exercised immediately prior to the record date or other date determining the shareholders entitled to participate in such distribution (the "DETERMINATION DATE"). (d) MERGER, CONSOLIDATION, ETC. If at any time after the date hereof there shall be a merger or consolidation of the Company with or into, or a transfer of all or substantially all of the assets of the 49 Company to, another entity (a "CONSOLIDATION EVENT"), then the Warrant Holder shall be entitled to receive upon such transfer, merger or consolidation becoming effective, and upon payment of the aggregate Purchase Price then in effect, the number of shares or other securities or property of the Company or of the successor corporation resulting from such merger or consolidation, which would have been received by Warrant Holder for the shares of stock subject to this Warrant had this Warrant been exercised immediately prior to such transfer, merger or consolidation becoming effective or to the applicable record date thereof, as the case may be. The Company shall not effect any Consolidation Event unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Warrant Holder such shares of stock and/or securities as the Warrant Holder is entitled to receive had this Warrant been exercised in accordance with the foregoing. (e) RECLASSIFICATION, ETC. If at any time after the date hereof there shall be a reclassification of any securities as to which purchase rights under this Warrant exist, into the same or a different number of securities of any other class or classes, then the Warrant Holder shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Purchase Price then in effect, the number of shares or other securities or property resulting from such reorganization or reclassification, which would have been received by the Warrant Holder for the shares of stock subject to this Warrant had this Warrant at such time been exercised. (f) ADJUSTMENTS; ADDITIONAL SHARES, SECURITIES OR ASSETS. In the event that at any time, as a result of an adjustment made pursuant to this SECTION 5, the Warrant Holder shall, upon exercise of this Warrant, become entitled to receive shares and/or other securities or assets (other than Common Stock) then, wherever appropriate, all references herein to shares of Common Stock shall be deemed to refer to and include such shares and/or other securities or assets; and thereafter the number of such shares and/or other securities or assets shall be subject to adjustment from time to time in a manner and upon terms as nearly equivalent as practicable to the provisions of this SECTION 5. 7. NO IMPAIRMENT. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Warrant Holder against impairment. Without limiting the generality of the foregoing, the Company (a) will not increase the par value of any Warrant Shares above the amount payable therefor on such exercise, and (b) will take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares on the exercise of this Warrant. 8. NOTICE OF ADJUSTMENTS; NOTICES. Whenever the Purchase Price or number of Warrant Shares purchasable hereunder shall be adjusted pursuant to SECTION 5 hereof, the Company shall execute and deliver (by first class mail, postage prepaid) to the Warrant Holder a certificate setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated and the Purchase Price and number of shares purchasable hereunder after giving effect to such adjustment. 9. RIGHTS AS SHAREHOLDER. Prior to exercise of this Warrant, the Warrant Holder shall not be entitled to any rights as a shareholder of the Company with respect to the Warrant Shares, including (without limitation) the right to vote such shares, receive dividends or other distributions thereon or be notified of stockholder meetings. However, in the event of any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to each Warrant Holder, at least 10 days prior to the date specified 50 therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 10. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant and, in the case of any such loss, theft or destruction of the Warrant, upon delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 11. CONSENT TO JURISDICTION. THE PARTIES (I) HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT LOCATED IN THE CITY OF HOUSTON OR ANY STATE COURT LOCATED IN THE CITY OF HOUSTON, TEXAS FOR THE PURPOSES OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS WARRANT AND (II) HEREBY WAIVE, AND AGREE NOT TO ASSERT IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. THE PARTIES CONSENT TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS WARRANT AND AGREE THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 12. ENTIRE AGREEMENT; AMENDMENTS. This Warrant and the Agreement contain the entire understanding of the parties with respect to the matters covered hereby and thereby. No provision of this Warrant may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. 13. RESTRICTED SECURITIES. (a) REGISTRATION OR EXEMPTION REQUIRED. This Warrant has been issued in a transaction exempt from the registration requirements of the Securities Act in reliance upon the provisions of Section 4(2) of the Securities Act of 1933. This Warrant and the Warrant Shares issuable upon exercise of this Warrant may not be resold except pursuant to an effective registration statement or an exemption to the registration requirements of the Securities Act and applicable state laws. (b) LEGEND. The Warrant and any Warrant Shares issued upon exercise thereof (until a registration statement has been declared effective by the SEC with respect to the Warrant Shares, at which time, such legend shall be removed, and the Warrant Shares shall be freely tradeable), shall bear the following legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. (c) ASSIGNMENT. Assuming the conditions of (a) above regarding registration or exemption have been satisfied, the Warrant Holder may sell, transfer, assign, pledge or otherwise dispose of this Warrant, in whole or in part. The Warrant Holder shall deliver a written notice to Company, substantially in the form of the Assignment attached hereto as Exhibit B, indicating the person or persons to whom the Warrant shall be assigned and the respective number of warrants to be assigned to each assignee. The Company shall effect the assignment within ten (10) days, and shall deliver to 51 the assignee(s) designated by the Warrant Holder after delivery to the Company of the original Warrant or Warrants for cancellation, a Warrant or Warrants of like tenor and terms for the appropriate number of shares. 14. NOTICES. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or delivery by facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: to the Company: Telscape International, Inc. 2700 Post Oak Boulevard Suite 1000 Houston, Texas 77056 Attention: Todd M. Binet, President Facsimile No.: (713) 968-0930 to the Warrant Holder: [ ] Either party hereto may from time to time change its address or facsimile number for notices under this SECTION 14 by giving at least 10 days prior written notice of such changed address or facsimile number to the other party hereto. 15. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the laws of the State of Texas. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. TELSCAPE INTERNATIONAL, INC. By: __________________________________________ Todd M. Binet President 52 EXHIBIT A FORM OF WARRANT EXERCISE I/we hereby exercise Telscape International, Inc. (the "Company") Common Stock Purchases Warrant #________________. (a) Number of Shares of the Company common stock covered in Purchase Warrant #____________ ________________________________________ (b) Total Exercise price (____________ per share) ________________________________________ Signature Employment Identification Number
__________________________________________ Name (please print) ________________________________________________________________________________ Address ________________________________________________________________________________ __________________________________________ Telephone Number Signature Employment Identification Number
__________________________________________ Name (please print) ________________________________________________________________________________ Address ________________________________________________________________________________ __________________________________________ Telephone Number I wish to register my shares of the Company common stock as follows: a. ( ) Individual Ownership b. ( ) Husband and Wife as Community Property c. ( ) Joint Tenants w/Right to Survivorship (JTRS) d. ( ) Tenants in Common e. ( ) Other ___________________________________________ Dated: ___________________________________________, 19____. A-1 EXHIBIT B FORM OF ASSIGNMENT (To be executed by the registered Warrant Holder desiring to transfer the Warrant) FOR VALUED RECEIVED, the undersigned holder of the attached Warrant hereby sells, assigns and transfers unto the persons below named the right to purchase shares of the Common Stock of TELSCAPE INTERNATIONAL, INC. evidenced by the attached Warrant and does hereby irrevocably constitute and appoint attorney to transfer the said Warrant on the books of the Company, with full power of substitution in the premises. Dated: ________________________________________ Signature Fill in for new Registration of Warrant: ________________________________________ Name ________________________________________ Address ________________________________________ Please print name and address of assignee (including zip code number) NOTICE: The signature to the foregoing Assignment must correspond to the name as written upon the face of the attached Warrant in every particular, without alteration or enlargement or any change whatsoever. B-1 EX-27.1 3 EXHIBIT 27-1
5 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 6,040,000 0 14,915,000 (467,000) 4,724,000 34,094,000 58,136,000 (5,094,000) 121,416,000 61,096,000 28,829,000 0 0 7,000 31,484,000 121,416,000 83,341,000 83,341,000 (72,861,000) (72,861,000) (1,431,000) 0 (2,064,000) (13,176,000) 3,539,000 (9,637,000) (9,637,000) 0 0 0 (1.47) 0
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