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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
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Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
STAR TELECOMMUNICATIONS, INC.
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(Name of Registrant as Specified In Its Charter)
N/A
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(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment of Filing Fee (Check the appropriate box):
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/X/ No fee required.
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1),
14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[LOGO]
SPECIAL MEETING OF STOCKHOLDERS
PT-1 ASSET SALE--YOUR VOTE IS VERY IMPORTANT
Our board of directors has agreed to sell substantially all of the assets of
PT-1 Communications, Inc., our subsidiary, to Counsel Communications LLC. The
PT-1 asset sale is a closing condition to our merger with World Access, Inc. FOR
A DISCUSSION OF RISK FACTORS YOU SHOULD CONSIDER IN EVALUATING THE PT-1 ASSET
SALE SEE "RISK FACTORS" BEGINNING ON PAGE .
We cannot complete the PT-1 asset sale without the approval of our
stockholders. We have scheduled a special meeting to vote on the PT-1 asset sale
and to conduct any other business that is properly brought before the meeting. A
proxy statement accompanies this letter and provides detailed information about
the special meeting and the PT-1 asset sale. In addition, you may obtain
information about us from documents that we have filed with the Securities and
Exchange Commission. We urge you to read the proxy statement carefully.
The date, time and place of the special meeting for our stockholders is as
follows:
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, 2000
11:00 a.m., local time
Four Seasons Biltmore Hotel
1260 Channel Drive
Montecito, California
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Our board of directors recommends that you vote to approve the PT-1 asset
sale. Whether or not you plan to attend the special meeting in person, please
complete, sign and date the accompanying proxy card and return it in the
enclosed prepaid envelope. Your prompt cooperation will be greatly appreciated.
[/S/ MARY A. CASEY]
Mary A. Casey
President and Secretary
STAR Telecommunications, Inc.
Proxy statement dated , 2000 and first mailed to stockholders on or
about , 2000.
<PAGE>
[LOGO]
STAR TELECOMMUNICATIONS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
To the Stockholders of STAR Telecommunications, Inc.:
We have agreed to sell the assets of PT-1 Communications, Inc., our
subsidiary, to Counsel Communications LLC. The sale of the assets of PT-1
requires your approval.
We will hold a special meeting of stockholders on , , 2000
at 11:00 a.m., local time, at the Four Seasons Biltmore Hotel, 1260 Channel
Drive, Montecito, California, for the following purposes:
PROPOSAL 1. To adopt a resolution approving the terms of the Asset Purchase
Agreement, dated as of June 6, 2000, as amended August 30, 2000, among STAR,
PT-1 and Counsel and authorizing the sale of the assets of PT-1 pursuant to
the PT-1 asset purchase agreement.
At the special meeting, we will also transact any other business that is
properly brought before the special meeting, or any adjournment or postponement
of the special meeting.
The enclosed proxy statement describes the PT-1 asset sale agreement in
detail. The PT-1 asset sale agreement is attached as Annex A to this proxy
statement.
Only holders of record of STAR common stock on the close of business on
, 2000 are entitled to notice of and to vote at the special meeting. A
list of stockholders entitled to vote at the meeting will be available for
inspection at the meeting and for ten days prior to the meeting during regular
business hours at STAR's corporate headquarters in Santa Barbara, California.
Under Delaware law, you are not entitled to appraisal rights in connection with
the PT-1 asset sale.
We urge you to vote on the matters in the enclosed proxy statement and to
sign, date and promptly return the enclosed proxy in the envelope provided. It
is important for you to be represented at the meeting. You can revoke your proxy
at any time before the vote. If you execute and return your proxy, you can still
vote in person if you are present at the meeting. If your shares are held in
"street name" by your broker or other nominee, only that holder can vote your
shares. You should follow the directions provided by your broker or nominee
regarding how to instruct them to vote your shares.
[/S/ MARY A. CASEY]
Mary A. Casey
President and Secretary
, 2000
Santa Barbara, California
Requests for additional copies of proxy materials should be addressed to
Mary A. Casey, Secretary, at STAR's offices located at 223 East De La Guerra
Street, Santa Barbara, California 93101.
<PAGE>
TABLE OF CONTENTS
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PAGE
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WHERE YOU CAN FIND MORE INFORMATION ABOUT STAR.............. ii
INCORPORATION OF DOCUMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION BY REFERENCE.......................... ii
STAR ANNUAL REPORT TO STOCKHOLDERS.......................... ii
QUESTIONS AND ANSWERS ABOUT THE PT-1 ASSET SALE............. 1
SUMMARY TERM SHEET.......................................... 2
THE SPECIAL MEETING......................................... 4
RISK FACTORS................................................ 6
Risk factors concerning STAR in connection with the STAR
merger and the PT-1 asset sale.......................... 6
Risk factors concerning our financial condition........... 8
Risk factors concerning our business operations........... 9
Risk factors concerning our industry...................... 12
Risk factors concerning our common stock.................. 15
FORWARD-LOOKING STATEMENTS.................................. 16
PROPOSAL 1--DESCRIPTION OF THE PT-1 ASSET SALE.............. 17
Information regarding STAR and PT-1....................... 17
The merger between World Access and STAR.................. 17
Background of the PT-1 asset sale......................... 17
Reasons for the PT-1 asset sale........................... 19
Our board of directors' recommendation that our
stockholders approve the PT-1 asset sale................ 20
Opinion of STAR's financial advisor regarding the PT-1
asset sale.............................................. 20
Purchase price............................................ 25
Material federal income tax consequences of the PT-1 asset
sale.................................................... 25
Accounting treatment of the PT-1 asset sale............... 26
Regulatory filings and approvals required to complete the
PT-1 asset sale......................................... 26
Rights of dissenting stockholders......................... 26
STAR officer agreement to vote shares in favor of the PT-1
asset sale.............................................. 26
Interests of STAR's directors and financial advisors...... 27
Description of the PT-1 Asset Sale Agreement.............. 27
The PT-1 asset sale closing date........................ 27
Purchase price.......................................... 27
Assumption of liabilities............................... 27
Representations and warranties contained in the PT-1
asset sale agreement................................... 28
Conduct of business before completion of the PT-1 asset
sale................................................... 29
No other negotiations involving the PT-1 assets......... 29
Description of the management services agreement between
STAR, PT-1 and Counsel................................. 29
Conditions to completion of the PT-1 asset sale......... 30
Termination of the PT-1 asset sale agreement............ 30
Payment of termination fee.............................. 31
Extension, waiver and amendment of the PT-1 asset sale
agreement.............................................. 31
STAR LITIGATION............................................. 31
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT...... 32
PRO FORMA FINANCIAL INFORMATION............................. 33
OTHER MATTERS THAT MAY COME BEFORE THE STAR SPECIAL
MEETING................................................... 40
STOCKHOLDER PROPOSALS....................................... 40
PROXY CARD..................................................
ANNEX A THE PT-1 ASSET SALE AGREEMENT.................... A-1
ANNEX B OPINION OF STAR FINANCIAL ADVISOR REGARDING THE
PT-1 ASSET SALE........................................... B-1
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i
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION ABOUT STAR
Federal securities laws require us to file information with the Securities
and Exchange Commission concerning our business and operations. Accordingly, we
file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can read and copy
this information at the following Securities and Exchange Commission locations:
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Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. Seven World Trade Center Northwest Atrium Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661
</TABLE>
You can get additional information about the operation of the Securities and
Exchange Commission's public reference facilities by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission
also maintains a web site (HTTP://WWW.SEC.GOV) that contains our filings and the
reports, proxy and information statements and other information regarding us.
You can also inspect information about us at the offices of the Nasdaq Stock
Market, 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY
REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" the information we file with the Securities and Exchange Commission,
which means that we can disclose information to you by referring to those
documents. The information incorporated by reference is considered part of this
proxy statement until the date of the STAR special meeting.
We incorporate by reference the documents listed below and any future
filings made with the Securities and Exchange Commission under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the date of the completion of
the PT-1 asset sale (Commission File No. 000-22581):
- Quarterly Report on Form 10-Q for the quarter ended June 30, 2000;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2000; and
- Annual Report on Form 10-K for fiscal year ended December 31, 1999, as
amended by Form 10-K/A filed on September 11, 2000.
STAR ANNUAL REPORT TO STOCKHOLDERS
A copy of the STAR Annual Report on Form 10-K for the fiscal year ended
December 31, 1999, as amended, is included with this proxy statement.
Additional copies of documents incorporated by reference and listed above
may be obtained without charge by writing to us. To obtain copies from us, write
to: Investor Relations, STAR Telecommunications, Inc., 223 East De La Guerra
Street, Santa Barbara, California 93101, or by telephone request to
(805) 899-1962. IN ORDER TO OBTAIN THE DOCUMENTS IN TIME FOR THE STAR SPECIAL
MEETING, YOU MUST REQUEST THE DOCUMENTS BY , 2000, WHICH IS FIVE
BUSINESS DAYS PRIOR TO THE DATE OF THE STAR SPECIAL MEETING.
ii
<PAGE>
QUESTIONS AND ANSWERS
ABOUT THE PT-1 ASSET SALE
Q: WHAT IS THE PT-1 ASSET SALE?
A: Our board of directors has voted to sell the assets of PT-1, our wholly-owned
subsidiary, to Counsel. Counsel will purchase all of PT-1's assets that
relate to PT-1's debit card and long distance services accessible through a
dialed prefix for $150.0 million in cash. The purchase price is subject to
adjustment based on increases in the accounts payable or receivable of PT-1
and the net worth of the assets of PT-1 on the closing date. The PT-1 asset
sale is a condition to the close of our merger with World Access, Inc. Under
the STAR merger agreement with World Access, World Access is not obligated to
complete the STAR merger unless we complete the sale of PT-1 for net cash
proceeds of at least $150.0 million. However, the STAR merger agreement
provides that this condition will be satisfied if we sell the assets of PT-1
to Counsel for net cash proceeds of at least $120.0 million under the terms
of the PT-1 asset sale agreement.
Q: WHAT IS THE STAR MERGER?
A: Our board of directors has voted to combine our business with the business of
World Access. To combine the companies, we will merge with a subsidiary of
World Access, becoming a wholly-owned subsidiary of World Access. The PT-1
asset sale is a condition to the completion of the STAR merger.
Q: WHAT DO I NEED TO DO NOW?
A: Mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares will be represented at the special meeting. If
you do not include instructions on how to vote your properly signed proxy,
your shares will be voted for approval of the proposal.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE?
A: If you want to change your vote, send the secretary of STAR a later-dated,
signed proxy card before the special meeting or attend the meeting in person.
You may also revoke your proxy by sending written notice to the secretary of
STAR before the special meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how to
vote by following the information provided to you by your broker.
Q: WHEN DO YOU EXPECT THE STAR MERGER AND THE PT-1 ASSET SALE TO BE COMPLETED?
A: We are working toward completing the STAR merger and the PT-1 asset sale as
quickly as possible. However, the completion of the STAR merger and the PT-1
asset sale are subject to closing conditions, including stockholder approval.
We hope to complete the STAR merger and the PT-1 asset sale in the fourth
calendar quarter of 2000.
1
<PAGE>
SUMMARY TERM SHEET
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT. TO
UNDERSTAND THE PT-1 ASSET SALE FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE
TERMS OF THE PT-1 ASSET SALE YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND
THE DOCUMENTS TO WHICH WE HAVE REFERRED YOU.
THE COMPANY
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STAR Telecommunications, Inc. We provide telecommunications services on a world
223 East De La Guerra Street wide basis to the public, long distance carriers,
Santa Barbara, California 93101 corporations and Internet service providers. We also
(805) 899-1962 provide international and national long distance
www.startel.com calling services, international private telephone
lines, prepaid calling cards, long distance services
accessible through a dialed prefix and international
toll free services. Following the completion of the
PT-1 asset sale, we will no longer provide long
distance service to individual consumers and
businesses through prepaid calling cards, long
distance services accessible through a dialed prefix
and presubscribed domestic and international long
distance services.
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THE PT-1 ASSET SALE (SEE PAGE )
We have agreed to sell the assets of PT-1 to Counsel for $150.0 million,
subject to adjustment based on increases in the accounts payable or receivable
of PT-1 and the increases or decreases in the net worth of the assets of PT-1 on
the closing date.
World Access is not obligated to complete the STAR merger unless we sell
PT-1 for net cash proceeds of at least $150.0 million. However, the STAR merger
agreement provides that this condition will be satisfied if we sell the assets
of PT-1 to Counsel for net cash proceeds of at least $120.0 million under the
terms of the PT-1 asset sale agreement.
We intend to complete the PT-1 asset sale regardless of whether the STAR
merger is completed.
CONDITIONS TO COMPLETION OF THE PT-1 ASSET SALE (SEE PAGE )
Our obligation to complete the PT-1 asset sale and those of PT-1 and Counsel
are subject to the satisfaction or waiver of closing conditions. Any of the
closing conditions can be waived by the party that is not obligated to complete
the PT-1 asset sale if the condition is not satisfied.
If we waive any closing conditions, we will consider the facts and
circumstances at that time and determine whether a resolicitation of proxies
from our stockholders is appropriate. Our board of directors will resolicit
stockholder approval of the PT-1 asset sale if we waive a material closing
condition that our board of directors believes a reasonable investor would
consider important when deciding whether to approve the PT-1 asset sale.
VOTE REQUIRED FOR APPROVAL (SEE PAGE )
The holders of a majority of the outstanding shares of our common stock must
approve the PT-1 asset sale. Our stockholders are entitled to cast one vote per
share owned as of the record date.
TERMINATION OF THE PT-1 ASSET SALE AGREEMENT (SEE PAGE )
The PT-1 asset sale agreement may be terminated under limited circumstances
at any time before the completion of the PT-1 asset sale, including by PT-1 or
Counsel if the PT-1 asset sale is not completed on or before October 31, 2000.
2
<PAGE>
TERMINATION FEE (SEE PAGE )
If the PT-1 asset sale agreement is terminated for certain reasons, PT-1
will be required to pay Counsel a termination fee of $5.85 million. PT-1 will be
required to pay the termination fee if the PT-1 asset sale agreement is not
approved by the required vote of our stockholders and we sell the assets of PT-1
to another party within one year of the failed stockholder vote.
NO OTHER NEGOTIATIONS INVOLVING POTENTIAL ACQUIRORS OF PT-1 (SEE PAGE )
We have agreed not to discuss the sale of PT-1 with any potential acquiror
other than Counsel.
STAR OFFICER AGREEMENT TO VOTE SHARES IN FAVOR OF THE PT-1 ASSET SALE (SEE PAGE
)
Christopher E. Edgecomb, our chief executive offer, has agreed to vote all
of his shares of our common stock in favor of the approval of the PT-1 asset
sale. Mr. Edgecomb owns approximately % of the outstanding shares of our
common stock as of , 2000, the record date.
OPINION OF STAR'S FINANCIAL ADVISOR (SEE PAGE )
In deciding to approve the PT-1 asset sale, our board of directors
considered a fairness opinion from our financial advisor, Kaufman Bros., L.P.,
regarding the fairness, from a financial point of view, of the PT-1 asset sale
consideration.
ANTITRUST AND OTHER REGULATORY APPROVAL REQUIRED TO COMPLETE THE PT-1 ASSET SALE
(SEE PAGE )
The PT-1 asset sale is subject to antitrust laws. We, along with Counsel,
have made the required filings with the Department of Justice and the Federal
Trade Commission and the applicable waiting period has terminated. The PT-1
asset sale is also subject to approvals from the Federal Communications
Commission and certain state public utility commissions and the required filings
have been made.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE PT-1 ASSET SALE (SEE PAGE )
The PT-1 asset sale is expected to be a fully taxable transaction to STAR
which is expected to cause us to recognize taxable income for federal income tax
purposes. However, you will not recognize gain or loss for federal income tax
purposes as a result of the PT-1 asset sale.
RIGHTS OF DISSENTING STOCKHOLDERS (SEE PAGE )
You are not entitled to appraisal rights under Delaware law with respect to
the PT-1 asset sale.
FOR A MORE COMPLETE UNDERSTANDING OF THE PT-1 ASSET SALE, PLEASE READ THE
DOCUMENTS ATTACHED TO THIS PROXY STATEMENT, INCLUDING THE PT-1 ASSET SALE
AGREEMENT ATTACHED AS ANNEX A AND THE OPINION OF KAUFMAN BROS. ATTACHED AS ANNEX
B.
3
<PAGE>
THE SPECIAL MEETING
DATE, TIME AND PLACE OF THE SPECIAL MEETING.
, 2000
11:00 a.m., local time
Four Seasons Biltmore Hotel
1260 Channel Drive
Montecito, California
STAR BOARD OF DIRECTORS' RECOMMENDATION. Our board of directors approved
the PT-1 asset sale agreement and the transactions considered in the PT-1 asset
sale agreement, and recommends that you vote for the adoption of the following
resolution approving the terms of the PT-1 asset sale agreement and authorizing
the transactions considered in the PT-1 asset sale agreement:
RESOLVED, that the form, terms and provisions of the PT-1 asset sale
agreement attached to the proxy statement as Annex A, and the transactions
contemplated by the PT-1 asset sale agreement be, and the same hereby are
authorized, adopted and approved in all respects.
RECORD DATE. Our board of directors has fixed , 2000 as the
date for determination of holders of our common stock, who will be entitled to
notice of the special meeting and to vote at the special meeting.
STOCKHOLDERS ENTITLED TO VOTE. Our authorized capital stock consists of
100,000,000 shares of common stock, par value $0.001 per share. As of the close
of business on the record date, shares of our common stock were
outstanding, held by approximately holders of record. Each share of
our outstanding common stock is entitled to one vote.
Only STAR stockholders on the close of business on the record date are
entitled to notice of the special meeting and to vote at the special meeting, or
vote on any adjournment or postponement of the special meeting.
QUORUM AND VOTE REQUIRED. Each STAR stockholder on the record date is
entitled to cast one vote for each share of our common stock held by the
stockholder. The holders of a majority of the shares of our common stock issued
and outstanding and entitled to vote at the special meeting, who are present in
person or represented by proxy, will constitute a quorum for the transaction of
business at the special meeting. The approval of the PT-1 asset sale agreement
and the transactions considered in the PT-1 asset sale agreement require the
affirmative vote of a majority of the outstanding shares of our common stock.
Shares of our common stock that are voted "for," "against" or "withheld" at
the special meeting are treated as being present at such meeting for purposes of
establishing a quorum and are also treated as votes eligible to be cast by the
holders of our common stock present in person or represented by proxy at the
special meeting and entitled to vote on the subject matter. Abstentions are
counted for purposes of determining both the presence of a quorum for the
transaction of business and the total number of votes cast with respect to a
particular matter. Broker non-votes will be counted for purposes of determining
the presence of a quorum for the transaction of business but will not be counted
for purposes of determining the number of votes cast on the particular proposal
that the broker has expressly not voted. Because adoption and approval of the
PT-1 asset sale agreement and the transactions considered in the PT-1 asset sale
agreement require the affirmative vote of a majority of outstanding shares of
our common stock, abstentions and broker non-votes will have the same effect as
votes against the proposal.
4
<PAGE>
Mr. Edgecomb holds a total of % of the outstanding common stock of STAR as
of the record date and has agreed to vote in favor of the PT-1 asset sale.
SECURITY OWNERSHIP BY STAR DIRECTORS, EXECUTIVE OFFICERS AND THEIR
AFFILIATES. As of the close of business on the record date, directors and
executive officers of STAR and their respective affiliates were deemed to be the
owners of shares of our common stock representing approximately % of our
outstanding common stock.
SOLICITATION AND REVOCABILITY OF PROXIES. This proxy statement is being
provided to holders of our common stock in connection with the solicitation of
proxies by our board of directors for use at the special meeting. All shares of
our common stock entitled to vote and represented at the special meeting by
properly executed proxies received before or at the meeting and not duly and
timely revoked, will be voted at the meeting pursuant to the instructions on the
proxies. If the proxies do not have instructions, the proxies will be voted for
the adoption of a resolution approving the terms of the PT-1 asset sale
agreement and authorizing the transactions considered in the PT-1 asset sale
agreement.
If any other matters are properly presented for consideration at the special
meeting or any adjournment or postponement of the special meeting, including the
consideration of a motion to adjourn or postpone the special meeting to another
time and/or place, the persons named in the enclosed form of proxy will have the
right to vote on such matters. However, proxies voting against the proposals
presented in this proxy statement may not be voted for an adjournment or
postponement of the special meeting.
Any proxy given pursuant to this solicitation may be revoked by the
stockholder giving it any time before it is voted. Proxies may be revoked by:
- filing with the Secretary of STAR at or before the taking of the vote at
the special meeting a later dated written notice revoking the proxy;
- executing a later-dated proxy for the same shares and delivering it to the
Secretary of STAR before the vote is taken at the special meeting; or
- attending the special meeting and voting in person. However attendance at
the special meeting will not in and of itself constitute a revocation of a
proxy.
Any written notice of revocation or subsequent proxy should be sent to STAR
Telecommunications, Inc., 223 East De La Guerra Street, Santa Barbara, CA 93101,
Attention: Secretary, or hand delivered to the Secretary of STAR at or before
the taking of the vote at the special meeting.
COST OF SOLICITATION. All expenses of this solicitation, including the cost
of preparing and mailing this proxy statement to you, will be paid by us. In
addition to solicitation by mail, proxies may be solicited by our directors,
officers and employees in person or by telephone, telegram or other means.
Directors, officers and employees who aid in the solicitation will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses for the solicitation. Arrangements will also be made with custodians,
nominees and fiduciaries for forwarding proxy solicitation materials to
beneficial owners of shares held of record by such custodians, nominees and
fiduciaries, and we will reimburse such custodians, nominees and fiduciaries for
reasonable expenses for such solicitation.
MATTERS NOT REQUIRED TO BE SUBMITTED
Without regard to whether stockholder approval of the PT-1 asset sale is
required under Delaware law, we have decided to seek stockholder approval of the
PT-1 asset sale.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROXY STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS IN DECIDING WHETHER TO VOTE FOR THE PT-1 ASSET SALE.
RISKS FACTORS CONCERNING STAR IN CONNECTION WITH THE STAR MERGER AND THE PT-1
ASSET SALE
IF THE PT-1 ASSET SALE IS NOT COMPLETED, WE WILL NOT FULFILL THE CLOSING
CONDITION TO THE STAR MERGER AGREEMENT AND WE MAY NOT BE ABLE TO MEET OUR DEBT
OBLIGATIONS.
We believe that our current financial condition, including our cash flow,
debt level and debt maturity, requires the sale of certain non-core segments of
our operations. In addition, the STAR merger agreement requires us to sell PT-1
to Counsel for net cash proceeds of at least $120.0 million or to a purchaser
other than Counsel for net cash proceeds of at least $150.0 million. If the PT-1
asset sale is not completed, we will not fulfill the closing condition to the
STAR merger agreement and we may not be able to meet our debt obligations.
After due deliberation, our board of directors concluded that the PT-1 asset
sale was in our best interest, and that of our stockholders for, among other
things, the following reasons:
- the sale would help to improve our financial condition;
- the sale would fulfill a closing condition of the STAR merger; and
- the sale would enable us to focus on our core business.
We may not realize these benefits if the PT-1 asset sale is not completed.
The completion of the PT-1 asset sale is subject to, among other things, the
satisfaction of closing conditions, and our receipt of regulatory and
stockholder approvals, which we may not receive. In addition, the PT-1 asset
sale agreement provides that the PT-1 asset sale agreement can be terminated
under certain circumstances, including by PT-1 or Counsel if the PT-1 asset sale
is not completed on or before October 31, 2000.
IF THE SALE OF PT-1 IS NOT COMPLETED PRIOR TO THE CLOSING OF THE STAR MERGER, OR
IF WE DO NOT RECEIVE NET CASH PROCEEDS OF AT LEAST $120.0 MILLION FROM THE SALE
OF THE ASSETS OF PT-1 TO COUNSEL, WORLD ACCESS DOES NOT HAVE TO COMPLETE THE
STAR MERGER. WE MAY INCUR SIGNIFICANT COSTS IF EITHER THE PT-1 ASSET SALE OR THE
STAR MERGER IS NOT COMPLETED, AND WE WILL NEED TO OBTAIN ADDITIONAL CAPITAL.
World Access can terminate the STAR merger agreement if we do not sell PT-1,
if we sell the assets of PT-1 to Counsel for net cash proceeds of less than
$120.0 million, or if we sell PT-1 to a purchaser other than Counsel for net
cash proceeds of less than $150.0 million.
The completion of the PT-1 asset sale to Counsel for net cash proceeds of at
least $120.0 million is dependent, in part, on the results of a final audit to
be conducted after the close of the PT-1 asset sale. We may not receive net cash
proceeds of at least $120.0 million if the net value of the assets of PT-1 as of
the closing of the PT-1 asset sale are not greater than or equal to the net
value of those assets as of December 31, 1999 or if there are significant
increases in the accounts payable or receivable of PT-1. If we do not complete
the PT-1 asset sale with Counsel we may not be able to sell PT-1 or sell PT-1
for net cash proceeds of at least $150.0 million to another purchaser.
In the event that the STAR merger is not completed, we may face significant
costs associated with the failed STAR merger, including a termination fee of
$14.0 million, and will need to obtain additional capital. We are not certain
that we will be able to raise additional capital on favorable terms or at all.
If the PT-1 asset sale agreement is terminated, we may face significant
costs associated with the failed PT-1 asset sale, including a termination fee of
$5.85 million and we will need to obtain additional capital. In addition, PT-1
will be required to pay the termination fee if the PT-1 asset sale agreement is
6
<PAGE>
not approved by the required vote of the STAR stockholders and we sell the
assets of PT-1 to another party within one year of the failed stockholder vote.
INTEGRATING OUR OPERATIONS WITH THOSE OF WORLD ACCESS WILL BE A COMPLEX, TIME
CONSUMING AND EXPENSIVE PROCESS AND WE MAY NOT REALIZE THE ANTICIPATED BENEFITS
OF THE STAR MERGER.
We are seeking the approval of the PT-1 asset sale partly to facilitate the
close of the STAR merger. World Access may encounter difficulty when it tries to
merge our operations with its own. In addition, World Access is acquiring two
other companies, Communication Telesystems International, which does business as
WorldxChange Communications, and TelDaFax AG. We anticipate that the merger
process will be complex, time consuming and expensive. If World Access
experiences difficulty integrating our operations and those of WorldxChange with
its own, we may not achieve the anticipated benefits of the STAR merger. The
integration of our network with the World Access network may disrupt the
combined company's business, decrease revenues and damage relationships with key
customers. The combined company may also incur significant merger-related
expenses and suffer extended network downtime during this period. In addition,
the integration of the World Access, STAR and WorldxChange operations and
accounting, personnel, administrative, legal and other functions involves the
risk that key employees, who cannot easily be replaced, may leave even when
offered continuing employment. To the extent that management's attention is
diverted by these difficulties from the day-to-day operation of the combined
company's business, the combined company's revenues may decrease and the
combined company may lose key customers and employees. The occurrence of any of
the events described above could cause the combined company's stock price to
drop.
WE MAY SUSTAIN MATERIAL LIABILITY AS A RESULT OF STOCKHOLDER SUITS.
On February 14, 2000 and March 1, 2000, identical class action complaints
were filed against STAR and Christopher E. Edgecomb, Mary A. Casey, Mark
Gershein, Gordon Hutchins, Jr., John R. Snedegar, Arunas A. Chesonis and Samer
Tawfik. The complaints were consolidated and alleged causes of action for breach
of fiduciary duty arising from the approval of the STAR merger on the grounds
that the consideration to be received in the STAR merger was unfair,
unconscionable and grossly inadequate. On May 31, 2000, the Superior Court of
the State of California of the County of Santa Barbara granted our demurrer on
the grounds that the consolidated complaint was legally deficient, effectively
dismissing the lawsuits. On July 14, 2000, the plaintiff filed a notice of
appeal from that judgment. We may have to pay substantial damages if the
plaintiff is successful in this action. A judgment in favor of the plaintiff may
have a negative effect on our business operations and our ability to complete
the STAR merger and the PT-1 asset sale.
On March 11, 1999, a proceeding was commenced by PT-1 by notice of petition
following the election by a PT-1 stockholder to dissent from STAR's merger with
PT-1 and following a demand for payment of the fair value of approximately
2,731,330 shares of PT-1 stock held by the stockholder. The proceeding was
commenced in the Supreme Court of the State of New York. The PT-1 stockholder is
seeking damages in accordance with his appraisal rights under New York law.
Under New York law, the PT-1 stockholder has the right to receive, in cash, the
fair market value of his PT-1 shares as of the time of our acquisition of PT-1.
On July 26, 2000, the Supreme Court of the State of New York of the County of
Queens issued a temporary restraining order in favor of the stockholder which
prevents PT-1 from distributing any of the proceeds of the PT-1 asset sale to
STAR unless PT-1 has first set aside a reserve in the amount of $37,649,800 in
cash to satisfy the stockholder's claim. On August 15, 2000, the temporary
restraining order was modified to reduce the required reserve to $25,000,000. We
may sustain material liability if the PT-1 stockholder is successful in this
action which may have a negative effect on our business operations and our
ability to complete the STAR merger and the PT-1 asset sale.
7
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RISK FACTORS CONCERNING OUR FINANCIAL CONDITION
IF OUR LENDERS DO NOT EXTEND THE DUE DATE FOR CERTAIN DEBT, OR IF THEY SUE TO
COLLECT CERTAIN DEBT PRIOR TO COMPLETING THE PT-1 ASSET SALE, WE COULD BECOME
INSOLVENT OR BE FORCED TO FILE FOR BANKRUPTCY.
We are subject to certain restrictions under our financing arrangements,
including our financing arrangement with WorldCom Network Services, Inc. If we
violate any restrictions under our financing arrangements, our lenders may
accelerate payment of the amounts we owe them. If our lenders do not extend the
due date for our debt or if our lenders sue to collect on any of our debt, they
could force us to file for bankruptcy or reorganize our business.
If we violate any restrictions under our receivables sale agreement with RFC
Capital Corporation, RFC may declare an event of default and no longer purchase
receivables from us. If RFC does not continue to purchase our receivables, we
may be deprived of needed liquidity. RFC can refrain from purchasing additional
receivables from us if we are in default under any other financing arrangement.
We have entered into promissory notes with WorldCom Network Services in the
amounts of $56.0 and up to $30.0 million, both of which are due on the earlier
of termination of the STAR merger agreement, the consummation of the STAR merger
or October 31, 2000. In addition, we and certain of our subsidiaries owe Nortel
Networks, Inc. approximately $35.0 million. We intend to obtain payment terms
from Nortel. If we are unable to obtain an extension from WorldCom Network
Services and WorldCom Network Services seeks to collect its debt, or if Nortel
seeks to collect the sum we and our subsidiaries owe to it, we and certain of
our subsidiaries may need to seek the protection of the federal bankruptcy laws
to continue operating our business, unless the sale of PT-1 is completed before
these debts are sought to be collected.
DUE TO OUR LARGE AMOUNT OF DEBT PAYMENTS, WE WILL NOT HAVE SUFFICIENT CASH FLOW
FROM OUR INDEPENDENT BUSINESS OPERATIONS TO PAY OUR DEBT AND WE MAY NEED TO
RAISE ADDITIONAL CAPITAL TO PAY, OR WILL NEED TO RESTRUCTURE, OUR DEBT
OBLIGATIONS IF THE PT-1 ASSET SALE IS NOT COMPLETED.
The amount of our outstanding debt is large compared to our cash flow and
the net book value of our assets. We are required to make significant payments
under our outstanding debt. As of June 30, 2000, we had:
- total consolidated debt of approximately $178.1 million, including
$23.9 million outstanding under our receivables sale arrangement with RFC
and $57.7 million under our financing arrangement with WorldCom Network
Services, which is due on the earlier of termination of the STAR merger
agreement, the consummation of the STAR merger on October 31, 2000; and
- stockholders' equity of approximately $258.6 million.
The following chart shows the interest and principal payments due on all of
our currently outstanding debt for each of the next five fiscal years, assuming
our lenders do not require early payment of the amounts due under our credit
arrangements. Also, because the interest rates under some of our credit
arrangements are based upon variable market rates, the amount of these interest
payments could fluctuate in the future.
<TABLE>
<CAPTION>
SCHEDULED PAYMENTS
--------------------
INTEREST PRINCIPAL
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
For the year ending December 31:
2000.................................................... $10,012 $75,690
2001.................................................... 6,487 107,637
2002.................................................... 1,679 20,657
2003.................................................... 1,428 8,446
2004.................................................... 0 0
</TABLE>
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Due to the large amount of these principal and interest payments, we will
not generate enough cash from our operations to meet these obligations. If the
PT-1 asset sale is not completed, we will need to raise additional capital to
pay our debts, or we will need to restructure a substantial amount of these
obligations. We may not be able to raise additional capital or restructure our
debt obligations.
DECREASED CASH FLOW MAY LIMIT OUR ABILITY TO CONTINUE TO MAKE CAPITAL
EXPENDITURES FOR THE ACQUISITION AND DEVELOPMENT OF OUR INTERNATIONAL
TELECOMMUNICATIONS NETWORK, WHICH IS NECESSARY TO BE COMPETITIVE IN THIS
INDUSTRY.
We will need to enhance and expand our network and build out our
telecommunications network infrastructure in order to maintain a competitive
position and to meet the increasing demands for service quality, capacity and
competitive pricing. If our available cash flow substantially decreases as a
result of lower telecommunications prices or for other reasons, we may have
limited ability to continue to make capital expenditures for the acquisition and
development of our international telecommunications network. If cash flow from
operations is not sufficient to satisfy our capital expenditure requirements, we
will need to raise additional capital from equity or debt sources. Additional
debt or equity financing or other sources of capital may not be available to
meet our requirements.
AS WE EXPAND OUR FOCUS ON RETAIL CUSTOMERS AND EMERGING CARRIERS, OUR LEVEL OF
UNCOLLECTIBLE DEBT MAY INCREASE.
In our experience, a greater percentage of the revenues generated by retail
customers and from emerging carriers has been uncollectible as compared to
revenues generated by sales to established wholesale carriers and large
international carriers. Therefore, as we increase our focus on retail customers
and emerging carriers, our level of uncollectible debt may increase, which would
result in lower revenues and profits. In addition, we may expend considerable
resources to collect receivables from customers who fail to make timely
payments.
RISK FACTORS CONCERNING OUR BUSINESS OPERATIONS
WE MAY NOT BE ABLE TO OBTAIN TRANSMISSION CAPACITY AT HISTORICAL RATES, WHICH
MAY DECREASE OUR PROFITABILITY AND CAUSE A LOSS OF CUSTOMERS.
Our future profitability will be based in part upon our ability to transmit
long distance telephone calls over transmission facilities, also referred to in
the industry as network facilities, leased from others on a cost-effective
basis. Also, a substantial portion of our transmission capacity will be obtained
on a variable, per minute and short-term basis, subjecting us to the possibility
of unanticipated price increases and service cancellations. Since we will not
generally have long-term arrangements for the purchase or resale of
international long distance services, and since rates fluctuate significantly
over short periods of time, our gross margins are subject to significant
fluctuations. Decreased gross margins and competitive pricing pressures for
these facilities may decrease our profitability and cause a loss of customers.
WE MAY INCUR SIGNIFICANT EXPENSES, LOSS OF CUSTOMERS, AND ULTIMATELY BE
UNSUCCESSFUL IN EXPANDING OUR DATA TRANSMISSION BUSINESS, IN WHICH WE HAVE
LIMITED EXPERIENCE.
Our experience in providing data transmission services to date has been
limited and, consequently, we may not be successful in the data transmission
business. Our ability to enter the data transmission business successfully will
depend upon, among other things, our ability to:
- select new equipment and software and integrate these into our network;
- hire and train qualified personnel; and
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<PAGE>
- enhance our billing, back-office and information systems to accommodate
data transmission services and customer acceptance of our service
offerings.
In providing data transmission services, we will be dependent upon vendors
for assistance in the planning and deployment of our data product offerings, as
well as ongoing training and support. If we are not successful at entering the
data transmission business, we may suffer a loss of customers and incur
significant expenses without any increase in income to offset such expenses.
TECHNICAL DIFFICULTIES WITH OR FAILURES IN OUR TELECOMMUNICATIONS NETWORK COULD
RESULT IN DISSATISFIED CUSTOMERS AND LOST REVENUE.
In Europe, there are a number of different protocols for data transmission.
Our network will need to be able to handle all of these protocols, which will
pose technical difficulties. Technical difficulties with, or failures in, our
telecommunications network could result in dissatisfied customers and lost
revenue. For example, a failure in a portion of our network could prevent us
from delivering telephone calls initiated by our customers. Additionally,
technical difficulties with the network could cause the loss of call detail
record information, which is the basis for our ability to process and
substantiate customer billings. Components of our network have failed in the
past, which have resulted in lower billing collections. We can provide no
assurance that similar or other failures or technical difficulties will not
occur in the future, which could result in the loss of customers and revenue.
WE MAY SUFFER DECREASED REVENUES AND LOSS OF CUSTOMERS IF WE ARE UNABLE TO
INCREASE OUR NETWORK CAPACITY TO MEET CUSTOMER DEMANDS.
We are currently in the process of expanding our network. As we expand our
network and the volume of our network traffic, our cost of revenues will
increasingly consist of fixed costs arising from the ownership and maintenance
of switches and fiber optic cables. These costs may increase, and our operating
margins may decrease. If our traffic volume were to decrease, or fail to
increase to the extent expected or necessary to make efficient use of our
network, our costs as a percentage of revenues would increase significantly,
which could significantly decrease the revenues of our business operations.
In addition, our business depends in part on our ability to obtain
transmission facilities on a cost-effective basis. We may not be able to obtain
sufficient transmission facilities or access to undersea fiber optic cable on
economically viable terms. Our failure to obtain telecommunications facilities
that are sufficient to support our network traffic in a manner that ensures the
reliability and quality of our telecommunications services could increase our
operational costs, as well as cause a loss of customers due to poor quality or
unreliable service.
ANY SYSTEM OR NETWORK FAILURE THAT INTERRUPTS OUR OPERATION COULD CAUSE THE LOSS
OF CUSTOMERS, A REDUCTION IN REVENUES OR A DECREASE IN OUR STOCK PRICE.
Our operations are dependent on our ability to expand our network
successfully and integrate new and emerging technologies and equipment into our
network, which are likely to increase the risk of system failure and to cause
strain upon the networks. Our operations also depend on our ability to protect
our hardware and other equipment from damage from natural disasters such as
fires, floods, hurricanes and earthquakes, other catastrophic events such as
civil unrest, terrorism and war and other sources of power loss and
telecommunications failures. We cannot be certain that our switches will not
become disabled in the event of an earthquake, power outage or otherwise. A
network failure or a significant decrease in telephone traffic as a result of a
natural or man-made disaster could damage our relationships with our customers
and decrease our revenues and our operating results and result in a decrease in
our stock price.
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<PAGE>
WE MAY NOT BE ABLE TO CONTINUE OUR REVENUE GROWTH, WHICH MAY PREVENT US FROM
ACHIEVING OR MAINTAINING PROFITABILITY.
You should not consider our past growth indicative of our future revenue
growth or operating results. We cannot predict whether we will be able to
achieve or maintain profitability on a quarterly or annual basis in the future.
The expansion of our operations into foreign countries will lead to increased
financial and administrative demands, such as:
- increased operational complexity associated with expanded network
facilities;
- administrative burdens associated with managing an increasing number of
foreign subsidiaries and relationships with foreign partners; and
- expanded treasury functions to manage foreign currency risks.
If we are unable to manage our growth effectively, the quality of our
products and services and our ability to retain key personnel could be damaged.
If our revenue levels fall below expectations, our net loss is likely to
increase disproportionately because our operating expenses will not decrease at
the same rate. In our first two quarters of 1999, our operating results were
below the expectations of public market analysts and investors. In future
quarters we could have similar disappointments.
WE SELL A SIGNIFICANT PERCENTAGE OF OUR COMMERCIAL PRODUCTS ON CREDIT. IF WE
HAVE DIFFICULTY COLLECTING RISING ACCOUNTS RECEIVABLE OR IF WE FACE SIGNIFICANT
CREDIT LOSSES IT COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND CAUSE OUR
STOCK PRICE TO DROP.
We sell prepaid cards on terms ranging from cash on delivery to thirty days
credit. As accounts receivable balances grow and we extend credit to new
commercial customers, we may not be able to monitor and evaluate our accounts
receivable and credit risks adequately and we may not be able to collect all the
money we are owed. If we have difficulty collecting rising accounts receivable
or we face significant credit losses it could harm our business, financial
condition and cause our stock price to drop.
INCREASED COMPETITION IN THE PREPAID CARD BUSINESS MAY FORCE US TO LOWER OUR
PRICES AND IN TURN MAY DECREASE OUR PROFITABILITY AND CAUSE OUR STOCK PRICE TO
DROP.
We may not be able to continue to provide competitively priced prepaid cards
to our distributors. Lower prices in the prepaid card marketplace could decrease
our profitability and cause our stock price to drop. The lack of customer
loyalty to any particular prepaid card company and the increased entry into the
prepaid card market by various competitors, including companies larger than us,
could cause prices to drop throughout the prepaid card industry. Because we
depend on informal relationships with independent distributors to market and
sell our products, increased competition and lower prices could force us to
further lower our prices to continue to sell prepaid cards to these
distributors.
THE FEDERAL COMMUNICATIONS COMMISSION REQUIRES US TO PAY FEES TO PAY PHONE
OWNERS WHEN OUR CUSTOMERS USE PAY PHONES TO ACCESS OUR SERVICES. WE MAY HAVE
DIFFICULTY PASSING THESE FEES ON TO OUR CUSTOMERS RESULTING IN A DECREASE IN OUR
PROFITABILITY.
The Communications Act requires long distance carriers to compensate pay
phone owners when a pay phone is used to make a call through a toll-free number.
We may not be able to continue to pass these costs on to our prepaid card
customers. If we are unable to pass the costs on to our customers we must absorb
the cost which may reduce our profitability.
11
<PAGE>
WE ARE DEPENDENT ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL PERCENTAGE
OF OUR REVENUES. THE LOSS OF A SIGNIFICANT CUSTOMER COULD CAUSE A REDUCTION IN
OUR REVENUES AND RESULT IN A DECREASE IN OUR STOCK PRICE.
The loss of a significant customer could cause a reduction in our revenues
and result in a decrease in our stock price. While our most significant
customers vary from quarter to quarter, our five largest customers accounted for
approximately 17.4% of our revenues in 1999. We could lose a significant
customer for many reasons, including:
- the entrance into the market of significant new competitors with lower
rates than us;
- transmission quality problems;
- changes in U.S. or foreign regulations; or
- unexpected increases in our cost structure as a result of expenses related
to installing a global network or otherwise.
RISK FACTORS CONCERNING OUR INDUSTRY
WE MAY FACE SIGNIFICANT COMPETITION FROM INTERNATIONAL AND DOMESTIC CARRIERS,
WHICH MAY RESULT IN DOWNWARD PRESSURE ON PRICES AND COULD ADVERSELY AFFECT OUR
GROSS MARGINS.
The international telecommunications industry is intensely competitive and
subject to rapid change. We believe that competition will continue to increase,
placing downward pressure on prices. Such pressure could adversely affect our
gross margins if we are not able to reduce our costs commensurate with such
price reductions. Our competitors in the international wholesale switched long
distance market include large, facilities-based multinational corporations and
smaller facilities-based providers in the U.S. and overseas that have emerged as
a result of deregulation, switch-based resellers of international long distance
services and international joint ventures and alliances among such companies. We
also compete abroad with a number of dominant telecommunications operators that
previously held various monopolies established by law over the
telecommunications traffic in their countries. International wholesale switched
service providers compete on the basis of price, customer service, transmission
quality, breadth of service offerings and value-added services. Additionally,
the telecommunications industry is in a period of rapid technological evolution,
marked by the introduction of competitive product and service offerings, such as
the utilization of the Internet for international voice and data communications.
We are unable to predict which technological development will challenge our
competitive position or the amount of expenditures that will be required to
respond to a rapidly changing technological environment.
OUR RELIANCE ON INTERNATIONAL SALES IS SIGNIFICANT AND COULD RESULT IN LOST
REVENUE AND INCREASED COSTS BECAUSE OF INTERNATIONAL REGULATORY CHANGES,
POLITICAL AND ECONOMIC INSTABILITY AND DIFFICULTY IN COLLECTION EFFORTS.
Non-U.S. sales represented approximately 11.7% of our total sales in the
year ended December 31, 1999. We intend to increase our international sales. Our
international sales are subject to inherent risks, including:
- changes in regulatory requirements, tariffs or other barriers;
- difficulties in staffing and managing foreign operations;
- long payment cycles;
- unstable political and economic environments;
- potentially adverse tax consequences of international tax laws; and
- fluctuations in foreign currency values.
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OUR PLANNED ENTRY INTO THE INTERNET AND DATA BUSINESS IN EUROPE MAY BE
UNSUCCESSFUL DUE TO THE LEVEL OF COMPETITION AND OUR LACK OF EXPERIENCE IN THIS
NEW MARKET.
The market for Internet connectivity and related services is extremely
competitive. Our primary competitors will include other Internet service
providers that have a significant national or international presence, but soon
may also include competition from traditional telecommunications carriers that
expand into the market for Internet services. Many of these carriers have
substantially greater resources, capital and operational experience than we
have. We will require substantial additional capital to make investments in our
Internet operations, and may not be able to obtain that capital on favorable
terms or at all.
Even if we are able to establish and expand our Internet business, we will
face numerous risks, including:
- competition in the market for Internet services;
- our ability to adapt and react to rapid changes in technology related to
the Internet;
- vulnerability to unauthorized access, computer viruses and other
disruptive problems;
- adverse regulatory developments; and
- difficulties managing the growth of our Internet business, including the
need to enter into agreements with other providers of infrastructure
capacity and equipment and to acquire other Internet service providers and
Internet-related businesses on acceptable terms.
DELAYS AND INCONSISTENCIES IN IMPLEMENTATION OF THE WORLD TRADE ORGANIZATION
AGREEMENT AND OTHER COMPETITIVE DIRECTIVES MAY SLOW DOWN THE RATE OF OUR
EXPANSION IN SOME FOREIGN COUNTRIES.
Under the World Trade Organization Agreement, the U.S. and 68 other
countries agreed to open their telecommunications markets to competition and
foreign ownership starting in February, 1998. These World Trade Organization
member countries, which have increased to 72, represent approximately 90% of
worldwide telecommunications traffic. Although the World Trade Organization
Agreement has been implemented, to some degree, by most of the 72 signatory
countries, some signatory countries have not yet fully implemented their World
Trade Organization commitments. Our ability to expand our operations
internationally will be limited if any signatory country to the World Trade
Organization Agreement fails to implement its obligations on a timely basis.
The national governments of the European Union member states were required
to pass legislation to liberalize the telecommunications markets within their
countries to implement European Commission directives. Implementation has also
been slow in certain member states as a result of their failure to dedicate the
resources necessary to have a functioning regulatory body in place. The
legislation and/or its implementation have, in certain circumstances, imposed
significant obstacles on the ability of carriers to proceed with the licensing
process. These barriers include requirements that carriers:
- post significant bonds or make significant capital commitments to build
infrastructure;
- complete extensive application documentation; and
- pay substantial license fees.
These factors and slow implementation of legislation in connection with
deregulation of telecommunications services could slow down, and increase the
cost of, our rate of expansion.
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GOVERNMENT REGULATORY POLICIES AND INDUSTRY CONSOLIDATION IN EUROPE MAY DECREASE
PROFIT MARGINS AND INCREASE PRICING PRESSURES IN OUR INDUSTRY AND DECREASE
DEMAND FOR SERVICES AND PRODUCTS.
We expect that government regulatory policies, including the
Telecommunications Act of 1996, are likely to continue to have a major impact on
the pricing of both existing and new public network services and possibly
accelerate the entrance of new competitors and consolidation of the industry. In
addition, industry consolidation, especially in Europe, may decrease profit
margins. These trends may decrease demand for our services and products that
support these services. Lower prices may affect the cost effectiveness of our
deployment of public network services. User uncertainty regarding future
policies may also decrease demand for our telecommunications products and
services.
FOREIGN GOVERNMENTS MAY ATTEMPT TO PREVENT US FROM CONDUCTING OUR BUSINESS AND
FROM EXPANDING INTO THEIR RESPECTIVE COUNTRIES.
Governments of many countries exercise substantial influence over various
aspects of the telecommunications market. In some cases, the government owns or
controls companies that are or may become our competitors or on which we may
depend for required interconnections to local telephone networks and other
services. Accordingly, government actions in the future could block or impede
the operation of our business.
We desire to expand our foreign operations as these markets increasingly
permit competition. The nature, extent and timing of our foreign operations,
however, will be determined, in part, by the actions taken by foreign
governments to permit competition and the response of incumbent carriers to
these efforts. The regulatory authorities in these countries may not provide us
with practical opportunities to compete in the near future, or at all, and we
may not be able to take advantage of any liberalization in a timely manner.
RECENT FEDERAL COMMUNICATIONS COMMISSION ACTIONS MAY DAMAGE OUR OPERATIONS AND
DECREASE REVENUES BY INCREASING COMPETITION, WHICH MAY INCREASE PRICING
PRESSURES AND DECREASE DEMAND FOR OUR SERVICES.
Recent Federal Communications Commission rulemaking orders and other actions
have lowered the entry barriers for new carriers and resale international
carriers by streamlining the processing of new applications and by eliminating
the international settlements policy for arrangements with foreign carriers that
lack market power and on other selected routes. In addition, the Federal
Communications Commission's rules implementing the World Trade Organization
Basic Telecommunications Agreement presume that competition will be advanced by
the U.S. entry of carriers and resale carriers from World Trade Organization
member countries, thus further increasing the number of potential competitors in
the U.S. market and the number of carriers which may also offer end-to-end
services. Increased competition may increase pricing pressures, reduce our
margins and decrease demand for our services.
FEDERAL COMMUNICATIONS COMMISSION INTERVENTION REGARDING THE SETTLEMENT RATES
CHARGED BY FOREIGN CARRIERS MAY DISRUPT OUR TRANSMISSION ARRANGEMENTS TO CERTAIN
COUNTRIES AND DECREASE OUR REVENUES.
The Federal Communications Commission recently has sought to reduce the
foreign routing costs of U.S. international carriers by prescribing maximum or
benchmark settlement rates which foreign carriers may charge U.S. carriers for
routing telecommunications traffic. The Federal Communications Commission's
benchmarks order was recently upheld by the U.S. Court of Appeals for the
District of Columbia circuit. The Federal Communications Commission's action may
reduce our settlement costs, although the costs of other U.S. international
carriers also may be reduced in a similar fashion. The Federal Communications
Commission has not stated how it will enforce the new settlement benchmarks if
U.S. carriers are unsuccessful in negotiating settlement rates at or below the
prescribed benchmarks. Any future Federal Communications Commission intervention
could disrupt our
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transmission arrangements to certain countries or require us to modify our
existing arrangements, which could decrease our revenues.
A RECENT FEDERAL COMMUNICATIONS COMMISSION ORDER DIRECTING ALL DOMESTIC
INTERSTATE CARRIERS TO DE-TARIFF THEIR SERVICES MAY DECREASE OUR ABILITY TO
COMPETITIVELY PRICE OUR SERVICE OFFERINGS.
The Telecommunications Act of 1996 permits the Federal Communications
Commission to forbear enforcement of tariff provisions, which apply to all
interstate and international carriers, and the U.S. Court of Appeals for the
District of Columbia Circuit recently upheld the Federal Communications
Commission's order directing all domestic interstate carriers to de-tariff their
offerings. The Federal Communications Commission's order only applies to
domestic services. However, the Federal Communications Commission may forbear
its current tariff rules for U.S. international carriers such as the combined
company, or order these carriers to de-tariff their services. Any Federal
Communications Commission action would likely afford non-dominant international
carriers greater flexibility in pricing service offerings, which would increase
our competition. The Federal Communications Commission routinely reviews the
contribution rate for various levels of regulatory fees, including the rate for
fees levied to support universal service, which fees may be increased in the
future for various reasons, including the need to support the universal service
programs mandated by the Telecommunications Act of 1996, the total costs for
which are still under review by the Federal Communications Commission.
RISK FACTORS CONCERNING OUR COMMON STOCK
SIGNIFICANT VARIANCE IN OUR QUARTERLY OPERATING RESULTS COULD CAUSE THE PRICE OF
OUR COMMON STOCK TO DROP.
In future quarters, our results of operations may fail to meet the
expectations of market analysts and investors, which may cause the price of our
common stock to drop. Our quarterly operating results have varied significantly
in the past, and our quarterly operating results are expected to do so in the
future. Our revenues, costs and expenses have fluctuated significantly in the
past and are likely to continue to fluctuate significantly in the future. Our
revenues in any given period can vary due to factors such as:
- call volume fluctuations, particularly in regions with relatively high
per-minute rates;
- the addition or loss of major customers, whether through competition or
merger;
- the loss of economically beneficial routing options for the termination of
traffic; and
- technical difficulties with or failures of portions of our network that
impact our ability to provide service to or bill customers.
Our cost of services and operating expenses in any given period can vary due
to factors such as:
- fluctuations in rates charged by carriers to terminate traffic;
- increases in bad debt expense and reserves;
- the timing of capital expenditures, and other costs associated with
acquiring or obtaining other rights to switching and other transmission
facilities;
- changes in sales incentive plans; and
- costs associated with changes in staffing levels of sales, marketing,
technical support and administrative personnel.
In addition, our operating results can vary due to factors such as:
- changes in routing due to variations in the quality of vendor transmission
capability;
- the amount of, and the accounting policy for, return traffic under
operating agreements;
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- actions by domestic or foreign regulatory entities;
- the level, timing and pace of our expansion in international and retail
markets; and
- general domestic and international economic and political conditions.
In response to competitive pressures or new product and service
introductions, we may take certain pricing or marketing actions that could
damage our quarterly operating results. We currently base our expense levels, in
part, on our expectations of future sales. If future sales levels are below
expectations, then we may be unable to adjust spending sufficiently in a timely
manner to compensate for the unexpected sales shortfall. Historically, we have
generated a disproportionate amount of our operating revenues toward the end of
each quarter, making precise prediction of revenues and earnings particularly
difficult and resulting in risk of variance of actual results from those
forecast at any time.
FORWARD-LOOKING STATEMENTS
This proxy statement and the documents incorporated by reference in this
proxy statement contain certain information regarding our plans and strategies
that are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
When used in this proxy statement or in the documents incorporated by reference,
the words "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan" and similar terms and/or expressions are
intended to identify forward-looking statements. These statements reflect our
assessment of a number of risks and uncertainties, and our actual results could
differ materially from the results anticipated in these forward-looking
statements. Important factors that could cause actual results to differ
materially from estimates or projections contained in the forward-looking
statements include, without limitation, the issues discussed above in the Risk
Factors section. We caution you not to place undue reliance on these
forward-looking statements, which speak only as of the date they were made.
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PROPOSAL 1
DESCRIPTION OF THE PT-1 ASSET SALE
This section of the proxy statement describes our proposed sale of the
assets of our wholly-owned subsidiary, PT-1, to Counsel.
INFORMATION REGARDING STAR AND PT-1
We provide high-quality, competitively priced, long distance
telecommunication services to consumer and commercial retail customers as well
as to other telecommunications carriers located within the U.S. and Europe. In
Germany, we offer Internet service providers wholesale dial-up services along
with a range of support services including dedicated facilities for secured
storage of data and servers, which includes resources such as a secure cage,
regulated power, dedicated Internet connection, security and support. In
Germany, STAR also offers Internet service providers the ability to increase or
decrease the amount of data they transfer in a fixed amount of time. We seek to
capitalize on the increasing demand for high-quality international
communications services which is being driven by the globalization of the
world's economies, the worldwide trend toward telecommunications deregulation,
and the growth of voice, data and Internet traffic.
We acquired PT-1 on February 4, 1999 through the issuance of 15.3 million
shares of our common stock and a payment of $19.5 million to the PT-1
stockholders. PT-1 provides international long distance services to individual
consumers and businesses through prepaid calling cards, long distance services
accessible through a dialed prefix and presubscribed domestic and international
long distance services. PT-1 markets its long distance services through
advertising, sales agents and through a network of wholesale distributors.
Counsel will acquire all of the assets and properties of PT-1 and each of
its subsidiaries owned, held or used by PT-1 to conduct business, including the
entirety of PT-1's long distance services operations.
We were incorporated in Delaware on September 13, 1996. Additional
information regarding us is contained in our filings with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934. See "Where
You Can Find More Information About STAR" on the inside front cover page of this
proxy statement.
THE MERGER BETWEEN WORLD ACCESS AND STAR
Our board of directors and the board of directors of World Access have
agreed on a merger that will combine our business with that of World Access. To
combine the companies, we will merge with a subsidiary of World Access, becoming
a wholly-owned subsidiary of World Access. Each outstanding share of our common
stock will be converted into the right to receive, at the election of World
Access, either 0.386595 shares of World Access common stock or a combination of
shares of World Access common stock and cash. Assuming World Access chooses to
pay all of the consideration in stock, World Access will issue a total of
approximately 22.7 million shares of World Access common stock, assuming World
Access chooses to pay all of the consideration in stock. The completion of the
STAR merger is conditioned on the sale of PT-1 by us for net cash proceeds of
$150.0 million or for net cash proceeds of $120.0 million if sold to Counsel.
Unless World Access waives this condition, World Access will be merging with us
minus our PT-1 operations if we complete the STAR merger. We cannot complete the
STAR merger or the PT-1 asset sale without the approval of our stockholders.
BACKGROUND OF THE PT-1 ASSET SALE
PT-1 constitutes 90% of the net book value of STAR. As a condition to World
Access' obligation to complete the STAR merger, we are required to sell PT-1 for
net cash proceeds of at least
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$150.0 million or complete the sale of the assets of PT-1 to Counsel pursuant to
the PT-1 asset sale agreement for net cash proceeds of at least $120.0 million.
We have entered into an agreement with Counsel to sell to Counsel, or one of its
affiliates, the assets of PT-1, including the assumption of certain liabilities,
for cash proceeds of $150.0 million, subject to adjustment based on increases or
decreases in the accounts payable or receivable of PT-1 and the net worth of the
assets of PT-1 on the closing date.
On February 14, 2000, STAR and World Access issued a joint press release
announcing the STAR merger agreement and indicating that the sale of certain
STAR assets would be required. After the announcement, we began to receive
inquiries from potential purchasers regarding PT-1, including an inquiry from
Counsel. Following a series of preliminary discussions between our
representatives and representatives of Counsel, on February 22, 2000, one of our
representatives met with representatives of Counsel at an industry conference in
California to discuss the potential acquisition of the PT-1 assets by Counsel.
On February 29, 2000, we engaged Kaufman Bros. to act as our exclusive
financial and merger advisor and investment banker in connection with the PT-1
asset sale. Kaufman Bros. reviewed the inquiries from potential acquirors of
PT-1 received after the February 14, 2000 press release and familiarized itself
with PT-1's operations. We received three offers for the sale of some or all of
the assets of PT-1 by the end of March, 2000. One offer was for the separate
acquisition of the portion of PT-1's business providing long distance services
accessible through a dialed prefix, the second offer was for PT-1's prepaid
calling card operations, and the third offer was made by Counsel for the entire
operations of PT-1. Working with Kaufman Bros., we evaluated each offer
carefully and determined that the offers for the individual component businesses
of PT-1 were not attractive because we believed there was more value in PT-1 as
a whole company. As evidence of this, our board of directors considered that the
combined value of the two offers for the component businesses of PT-1 was less
than the offer we had received from Counsel for PT-1 as a whole company. We were
particularly concerned that the combined offers for the separate component
businesses of PT-1 would not provide net cash proceeds of at least
$150.0 million as required by the STAR merger agreement.
On March 8, 2000, we met with Counsel in New York to discuss Counsel's
interest in PT-1. Our representatives and financial advisors and those of
Counsel attended the meeting. At the meeting, Counsel indicated that it was
serious about the acquisition, that it was interested in moving quickly to close
the deal and that it wanted us to enter into an exclusive arrangement with
Counsel. We were unwilling to commit to an exclusive arrangement at that time,
but permitted Counsel to begin due diligence. On March 18, 2000, we met with
Counsel in Toronto, Canada, to continue discussions. After the March 18, 2000
meeting, formal discussions on the letter of intent began. Our board of
directors held a meeting on March 24, 2000 to discuss the terms of the letter of
intent and considered the proposal at length. Our board of directors decided to
continue negotiations with Counsel and to obtain World Access' approval as
required by the STAR merger agreement. We executed the letter of intent, along
with Counsel, on March 29, 2000.
On May 25, 2000, our board of directors received an opinion from Kaufman
Bros. that the consideration to be paid by Counsel to PT-1 in connection with
the PT-1 asset sale was fair, from a financial point of view, to STAR's
stockholders. On June 6, 2000, our board of directors met to consider the
definitive PT-1 asset sale agreement and review the previously delivered opinion
from Kaufman Bros. Our board of directors also received advice from Delaware
legal counsel on the board's obligations regarding its duty of care and its duty
to exercise informed business judgment. At the meeting, our board of directors
concluded that the PT-1 asset sale was fair to and in the best interests of STAR
and its stockholders. Our board of directors considered many factors in making
its decision, including the need to complete the PT-1 asset sale prior to and in
connection with the close of the STAR merger and our financial condition and the
need to raise funds to pay debt and fund operations. Our board of directors also
considered the potential benefits and the potential risks of the PT-1 asset
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sale, including all material business, financial, legal and market factors
discussed below under the heading "Reasons for the PT-1 asset sale." Our board
of directors voted to approve the PT-1 asset sale agreement and the transactions
contemplated by the PT-1 asset sale agreement and voted to recommend that our
stockholders vote for the approval and adoption of the PT-1 asset sale agreement
and the transactions contemplated by the PT-1 asset sale agreement.
On June 7, 2000, the parties announced the execution of the PT-1 asset sale
agreement.
REASONS FOR THE PT-1 ASSET SALE
In approving the PT-1 asset sale, our board of directors considered the
potential benefits of the PT-1 asset sale and the risks associated with the PT-1
asset sale. All material business, financial, legal and market factors are
discussed below.
After due deliberation, our board of directors concluded that the PT-1 asset
sale was fair to and in the best interests of STAR and its stockholders based on
all of the following material factors:
THE SALE OF PT-1 IS A CONDITION TO THE CLOSE OF THE STAR MERGER. The
STAR merger agreement requires that we sell PT-1 for net cash proceeds of at
least $150.0 million or complete the sale of the assets of PT-1 to Counsel
for net cash proceeds of at least $120.0 million. If we fail to sell PT-1
for net cash proceeds of at least $150.0 million or fail to complete the
sale of the assets of PT-1 to Counsel for net cash proceeds of at least
$120.0 million, then World Access does not have to complete the STAR merger.
Our board of directors has voted to approve the STAR merger and has
determined that the completion of the STAR merger is fair to and in the best
interests of STAR and its stockholders.
THE FINANCIAL CONDITION OF STAR. Our board of directors examined our
current financial condition and determined that our cash flow situation and
debt levels and debt maturities required the sale of certain non-core
segments of our operations. The PT-1 asset sale is a condition to the close
of the STAR merger and we entered into the STAR merger agreement partly to
alleviate our cash flow situation. In the event that the STAR merger does
not close, and should we elect to proceed with the PT-1 asset sale, we
expect that the sale of the assets of PT-1 will provide needed cash to allow
us to continue our operations and growth.
IMPROVED FOCUS ON STAR'S CORE BUSINESS. Historically, we have focused
our operations on the wholesale international long distance market. Through
acquisitions, including the acquisition of PT-1, we expanded our operations
into the consumer and commercial retail long distance markets. If the STAR
merger does not close, the PT-1 asset sale would enable us to focus on our
wholesale international long distance business and continue to expand our
network in order to improve operating margins.
Our board of directors also considered the material risks associated with
completing the PT-1 asset sale, including the following, but concluded that the
advantages of the PT-1 asset sale far outweighed these risks:
- the risk that Counsel might not have sufficient funds available to finance
the purchase of PT-1's assets, though our board of directors considered
that at the time of its approval of the PT-1 asset sale, Counsel
represented that it had sufficient resources; and
- the risk that we may not receive net cash proceeds of $120.0 million from
Counsel as required in the STAR merger agreement, though our board of
directors considered that at the time of its approval of the PT-1 asset
sale, the PT-1 asset sale consideration would generate the necessary net
cash proceeds.
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The above discussion of the information and factors considered by our board
of directors sets forth the material factors considered by our board of
directors. Our board of directors considered many factors when evaluating the
PT-1 asset sale agreement and the PT-1 asset sale. Our board of directors did
not quantify, rank or attempt to assign relative weights to the factors
considered in reaching its determination. In addition, our board of directors
conducted an overall analysis of the above factors, including a thorough
discussion with and questioning of our management. Our board of directors also
considered management's analysis of the PT-1 asset sale based on information
received from our legal, financial and accounting advisors. Our board of
directors considered all these factors as a whole, and considered the factors
overall to be favorable to STAR and to support its determination.
OUR BOARD OF DIRECTORS' RECOMMENDATION THAT OUR STOCKHOLDERS APPROVE THE PT-1
ASSET SALE
Our board of directors has carefully considered the advisability of the PT-1
asset sale and believes that the terms of the PT-1 asset sale agreement and the
transactions contemplated by the PT-1 asset sale agreement are fair to and in
the best interests of STAR and its stockholders. Our board of directors approved
the PT-1 asset sale agreement and the transactions contemplated by the PT-1
asset sale agreement. Our board of directors recommends that the stockholders of
STAR vote for the adoption of a resolution approving the terms of the PT-1 asset
sale agreement and authorizing the transactions contemplated by the PT-1 asset
sale agreement.
OPINION OF STAR'S FINANCIAL ADVISOR REGARDING THE PT-1 ASSET SALE
In connection with its consideration of the proposed PT-1 asset sale, we
requested that Kaufman Bros. advise our board of directors with respect to the
fairness to our stockholders, from a financial point of view, of the
consideration to be paid by Counsel to PT-1 in the PT-1 asset sale.
We selected Kaufman Bros. for a number of reasons, including its familiarity
with STAR and PT-1 and its experience and reputation in the areas of valuation
and financial advice, particularly in relation to transactions of the size and
nature of the PT-1 asset sale. Kaufman Bros. is an investment banking firm which
is regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, private placements and valuations for corporate and other
purposes. In the normal course of its business, Kaufman Bros. trades our common
stock for its own account or for the account of its customers and, accordingly,
may, from time to time, hold long or short positions in our common stock.
On May 25, 2000, Kaufman Bros. reviewed with our board of directors the
financial analyses performed by Kaufman Bros. and delivered to our board of
directors an oral opinion. The oral opinion was subsequently confirmed by
delivery of a written opinion, dated May 25, 2000, to the effect that, based
upon and subject to the considerations and limitations set forth in the opinion,
as of May 25, 2000, the consideration to be paid by Counsel to PT-1 in the PT-1
asset sale was fair, from a financial point of view, to our stockholders.
The following summary of the Kaufman Bros. opinion may not include all of
the information important to you. The full text of the opinion letter, dated
May 25, 2000, delivered by Kaufman Bros. to our board of directors, which sets
forth fully the assumptions made, general procedures followed, matters
considered and limits on the scope of review undertaken, is included as Annex B
to this proxy statement and is incorporated herein by reference. Kaufman Bros.
has consented to the inclusion of the full text of its opinion as Annex B to
this proxy statement. Holders of our common stock are urged to read the Kaufman
Bros. opinion carefully and in its entirety.
STAR did not place any limitation upon Kaufman Bros. with respect to the
procedures to be followed or factors to be considered in rendering its opinion.
In conducting its investigation and analysis and in arriving at its opinion,
Kaufman Bros. reviewed information and took into account the
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financial and economic factors it deemed relevant and material under the
circumstances. In connection with its analysis, Kaufman Bros., among other
things:
- reviewed the PT-1 asset sale agreement in the form available to our board
of directors on May 25, 2000;
- reviewed internal financial information concerning the business and
operations of PT-1 furnished to Kaufman Bros. for purposes of its
analysis, as well as publicly available information, such as our recent
filings with the Securities and Exchange Commission;
- reviewed forecasts and projections of PT-1 prepared or supplied by the
management of STAR and PT-1 for the fiscal years ending December 31, 2000
through December 31, 2005;
- held discussions with executives of PT-1 and STAR concerning PT-1's
historical and current financial condition, operating results, and future
prospects;
- visited PT-1's facility in Flushing, New York;
- compared the financial position and operating results of PT-1 with those
of other publicly traded companies Kaufman Bros. deemed reasonably
comparable to PT-1;
- compared the proposed financial terms of the PT-1 asset sale with the
financial terms of other business combinations Kaufman Bros. deemed
reasonably comparable to the proposed PT-1 asset sale; and
- performed such other financial studies, analyses, inquiries and
investigations as it deemed appropriate.
In addition, Kaufman Bros. took into account the manner in which the
financial terms of the PT-1 asset sale were negotiated by STAR and Counsel, the
terms of the STAR merger as they relate to the PT-1 asset sale and the results
of the various discussions held by STAR and Kaufman Bros. with persons with a
possible interest in acquiring PT-1.
In arriving at its opinion, Kaufman Bros. assumed and relied upon, without
independent verification, the accuracy and completeness of all of the financial
and other information provided to it by or on behalf of PT-1, or obtained by
Kaufman Bros. from publicly available sources and upon the assurance of the
management of STAR and PT-1 that they were not aware of any information or facts
that would make any of this information incomplete or misleading. In conducting
its review, Kaufman Bros. did not conduct or obtain an independent evaluation or
appraisal of any of the assets or liabilities, contingent or otherwise, of PT-1,
nor was it furnished with any evaluation or appraisal. Kaufman Bros. assumed,
with our consent, that:
- the sale of PT-1 will be consummated in accordance with the terms set
forth in the form of PT-1 asset sale agreement presented to Kaufman Bros.
on or around May 25, 2000, without any amendments and without waiver by
the parties thereto of any of the conditions to their respective
obligations under the agreement; and
- all regulatory and other approvals and third party consents required for
consummation of the PT- 1 asset sale will be obtained without material
cost to STAR or PT-1.
Kaufman Bros. assumed that the financial forecasts examined by it were
reasonably prepared, at the time of their delivery to Kaufman Bros., based upon
the best available estimates and good faith judgments of PT-1's and STAR's
respective senior managements as to the future performance of PT-1. In the
course of analyzing the PT-1 projections, Kaufman Bros. performed certain
sensitivity analyses to incorporate the results of the quarter ended March 31,
2000 and other information available since the time the projections were
delivered to Kaufman Bros. and prior to the date of the Kaufman Bros. opinion.
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Kaufman Bros. noted that its opinion was necessarily based upon the
financial, economic, market and other conditions as they existed and could be
evaluated by Kaufman Bros. on, and the information made available to it as of,
the date of its opinion. Kaufman Bros. has disclaimed any undertaking or
obligation to advise any person of any change in any fact or matter affecting
its opinion that is brought to its attention after the date of its opinion.
Although Kaufman Bros. evaluated the consideration to be paid by Counsel to PT-1
in the PT-1 asset sale from a financial point of view, Kaufman Bros. was not
asked to, and did not, recommend the specific consideration payable in the PT-1
asset sale, which was determined through negotiations between us and Counsel.
The Kaufman Bros. opinion is addressed to our board of directors and relates
solely to the fairness, from a financial point of view, to our stockholders of
the consideration to be paid by Counsel to us in the PT-1 asset sale. The
opinion does not constitute a recommendation as to any action our board of
directors or any of our stockholders should take in connection with the PT-1
asset sale or any aspect of the transaction. The Kaufman Bros. opinion is not an
opinion as to the structure, terms or effect of any other aspect of the PT-1
asset sale or any transaction contemplated in connection with the PT-1 asset
sale or as to the merits of the underlying decision of us to enter into the PT-1
asset sale agreement or any other transaction.
In preparing its opinion, Kaufman Bros. performed a variety of financial and
comparative analyses, including those described below. The summary of these
analyses does not purport to be a complete description of the analyses
underlying the Kaufman Bros. opinion or of the presentation by Kaufman Bros. to
our board of directors. The preparation of a fairness opinion is a complex
analytical process involving various determinations as to the most appropriate
and relevant methods of financial analyses and the application of those methods
to the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Kaufman Bros. did not attribute particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. Accordingly, Kaufman Bros. believes
that its analysis must be considered as a whole and that selecting portions of
its analyses and factors, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the preparation
of its opinion. In its analysis, Kaufman Bros. made numerous assumptions with
respect to the company, industry performance, general business, economic, market
and financial conditions and other matters, many of which are beyond PT-1's and
STAR's control. The estimates contained in its analyses and the valuation ranges
resulting from any particular analysis are not necessarily indicative of the
actual values or predictive of future results or values, which may be
significantly more or less favorable than those suggested by the analyses. In
addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
securities actually may be sold. Accordingly, these analyses and estimates are
inherently subject to substantial uncertainty.
The Kaufman Bros. opinion and analyses were only one of many factors
considered by our board of directors in its evaluation of the PT-1 asset sale
and should not be viewed as determinative of the view of our board of directors
or our management with respect to the PT-1 asset sale or the consideration to be
paid by Counsel in the PT-1 asset sale.
The following is a summary of the material financial analyses performed by
Kaufman Bros. in connection with rendering its opinion.
ANALYSIS OF SELECTED COMPARABLE ACQUISITION TRANSACTIONS
Using publicly available information, Kaufman Bros. analyzed certain
financial and operating information relating to the following ten selected
merger and acquisition transactions in the calling card and dial-around
telecommunications sector each of which were consummated in calendar years 1997
through 2000. The comparable transactions were chosen based on a review of
acquired companies that possessed general business, operating and financial
characteristics representative of companies in the
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industry in which PT-1 operates. Kaufman Bros. noted that none of the comparable
transactions reviewed was exactly comparable to the PT-1 asset sale and that the
range of information available for each comparable transaction varied from
detailed information relating to publicly registered companies, to limited and
summary information contained in public press releases relating to private
companies. The comparable transactions reviewed by Kaufman Bros. were (the
purchaser is listed first and is followed by the acquired company):
FISCAL YEAR 2000
EGlobe/Trans Global Communications
FISCAL YEAR 1999
DCI Telecommunications/Wavetech International
Viatel/Destia Communications
EGlobe/Coast International Telecom
World Access/Comm/Net Holdings Corporation
AT&T/Smartalk Teleservices
EGlobe/TeleKey
FISCAL YEAR 1998
Teleglobe/Excel Communications
Primus Telecommunications/Trescom International
FISCAL YEAR 1997
LCI International/USLD Communications
For each comparable transaction, Kaufman Bros. calculated multiples of:
- the market value of common equity plus book value of total debt and
preferred stock minus total cash, referred to as Enterprise Value, of the
acquired company to its last twelve months EBIT. EBIT is earnings before
interest and taxes; and
- Enterprise Value to the last twelve-month EBITDA. EBITDA is earnings
before interest, taxes, depreciation and amortization.
The last twelve-month earnings and balance sheet data items were based upon the
most recent quarterly publicly available information prior to the closing of the
respective comparable transaction. Kaufman Bros. then applied these multiples to
the last twelve-month financial results of PT-1 for the period ended March 31,
2000, to determine PT-1's Enterprise Value. Kaufman Bros. selected the median
multiple, which represents the middle value of a set of numbers, as the
appropriate statistical choice for measuring sets of numbers that contain widely
dispersed values. The use of the median multiple in calculating an implied
Enterprise Value of PT-1 shows how the actual purchase price for PT-1 compares
to an implied Enterprise Value based upon the middle of the set of multiples
derived from the comparison group of companies. Comparing multiples of
Enterprise Value to last twelve months EBIT and last twelve months EBITDA are
traditional methods used by investment banking firms to value companies based
upon the value attributed to other companies in comparable transactions. Based
upon these analyses:
- The median multiple of Enterprise Value to last twelve-month EBIT for the
comparable transactions is 17.4x;
- The median multiple of Enterprise Value to last twelve-month EBITDA for
the comparable transactions is 10.1x;
- The implied Enterprise Value of PT-1, based upon applying these median
multiples to PT-1's financial data, falls within the range of
$151.2 million to $159.2 million. Kaufman Bros. noted
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that the consideration to be paid by Counsel to PT-1 in the PT-1 asset
sale was close to this range.
ANALYSIS OF SELECTED PUBLICLY TRADED COMPANIES
Kaufman Bros. reviewed publicly available financial information, as of the
most recently reported period, and stock market information as of May 24, 2000,
for the following six publicly traded companies that Kaufman Bros. deemed
reasonably comparable based upon their general business and operating and
financial characteristics to PT-1:
- Global Telecom Solutions;
- Tricom SA;
- IDT Corporation;
- RSL Communications, LTD.;
- Pacific Gateway Exchange; and
- Dial-Thru International.
Kaufman Bros. noted that none of the comparable companies is directly
comparable to PT-1.
For each comparable company, Kaufman Bros. calculated multiples of
Enterprise Value to last twelve-month EBIT, last twelve-month EBITDA and to
total assets. Kaufman Bros. then applied these multiples to the last
twelve-month financial results of PT-1 for the period ended March 31, 2000,
furnished to Kaufman Bros.. Kaufman Bros. selected the median multiple, which
represents the middle value of a set of numbers, as the appropriate statistical
choice for measuring sets of numbers that contain widely dispersed values. The
use of the median multiple in calculating an implied Enterprise Value of PT-1
shows how the actual purchase price for PT-1 compares to an implied Enterprise
Value based upon the middle of the set of multiples derived from the comparison
group of companies. Comparing multiples of Enterprise Value to last twelve
months EBIT, last twelve months EBITDA and total assets are traditional methods
used by investment banking firms to value companies based upon the value
attributed to other selected comparable companies. Based upon these analyses:
- the median multiple of Enterprise Value to last twelve-month EBIT for the
comparable companies is 6.8x;
- the median multiple of Enterprise Value to last twelve-month EBITDA for
the comparable companies is 6.7x;
- the median multiple of Enterprise Value to the total assets for the
comparable companies is 1.2x; and
- the implied Enterprise Value of PT-1 based upon these median multiples of
PT-1's financial data falls within the range of $61.5 million to
$161.8 million. Kaufman Bros. noted that the consideration to be paid by
Counsel to PT-1 in the PT-1 asset sale fell within this range.
DISCOUNTED CASH FLOW ANALYSIS
Kaufman Bros. performed a discounted cash flow analysis of PT-1, on a
stand-alone-basis, using the PT-1 projections for the fiscal years 2000 through
2005. In addition, Kaufman Bros. performed certain sensitivity analyses based
upon the PT-1 projections to incorporate the results of the quarter ended
March 31, 2000 and certain other information available since the time the PT-1
projections were delivered to Kaufman Bros. and prior to the date of the Kaufman
Bros. opinion. A discounted cash flow analysis is a traditional valuation
methodology used to derive a valuation of a corporate entity by calculating the
estimated future free cash flows of the entity and discounting the cash flow
results back
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to the present. Free cash flows means earnings before interest, taxes,
depreciation and amortization less taxes, capital expenditures and changes in
working capital.
In its discounted cash flow analyses, Kaufman Bros. estimated a terminal
value of free cash flow in 2005 using a perpetual annual growth rate of 3% and
discounted the stream of free cash flows during the forecast period together
with the estimated terminal value back to March 31, 2000 at discount rates
ranging from 23.0% to 26.0%. Selection of an appropriate discount rate is an
inherently subjective process and is affected by numerous factors. The discount
rates used by Kaufman Bros. were selected based upon PT-1's recent historical
financial results, current financial condition and the risk associated with PT-1
achieving its financial projections. This range of discount rates also reflects
an estimate of the cost of capital for PT-1, and the rates of return for
comparable public companies adjusted for market capitalization and industry.
This analysis produced Enterprise Values for PT-1 ranging from $149.7 million to
$182.0 million. Kaufman Bros. noted that the consideration to be paid by Counsel
to PT-1 in the PT-1 asset sale fell within this range.
COMPENSATION
Pursuant to the terms of Kaufman Bros.' engagement, we have paid to Kaufman
Bros. the sum of $50,000 and have agreed to pay Kaufman Bros. a cash fee of 1%
of the consideration paid by Counsel to us upon closing of the PT-1 asset sale
less any amounts previously paid. We have also agreed to reimburse Kaufman Bros.
for its reasonable out-of-pocket expenses incurred in performing its services,
including the reasonable fees and expenses of its legal counsel, and to
indemnify Kaufman Bros. and related persons against certain liabilities relating
to or arising out of its engagement, including certain liabilities under the
federal securities laws.
PURCHASE PRICE
Counsel will purchase all of PT-1's assets that relate to PT-1's debit card
and long distance services accessible through a dialed prefix for
$150.0 million in cash, subject to an audited adjustment upward or downward to
the extent that the net value of the purchased assets, less the liabilities of
PT-1 being assumed as of the closing date, is greater or less than $47,589,862.
In addition, the purchase price is subject to adjustment to the extent that
PT-1's accounts payable and accounts receivable for the 30 days prior to close
differ materially from the figures for the 30 days prior to December 31, 1999.
Counsel will only assume some liabilities, including those liabilities itemized
on PT-1's balance sheet as accounts payable and accrued expenses, accrued taxes
payable, short-term debt, deferred revenue and long-term debt. On the closing
date, Counsel will pay us $150.0 million in cash, subject to adjustment as
indicated above and less $22.5 million which will be held in escrow pursuant to
an escrow agreement between us and Counsel. One quarter of the escrow amount of
$22.5 million, less any amounts paid to Counsel in connection with
indemnification claims made by Counsel, will be released to us on each six month
anniversary of the closing date of the PT-1 asset sale. Counsel must pay us 100%
of the escrow amount, less any amounts paid to Counsel in connection with
indemnification claims made by Counsel, when the STAR merger closes and when
World Access assumes our obligations and PT-1's obligations under the PT-1 asset
sale agreement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE PT-1 ASSET SALE
CONSEQUENCES TO STAR
STAR and PT-1 are members of a "consolidated group" that files a
consolidated federal income tax return. Accordingly, the tax consequences of the
PT-1 asset sale will be reflected on the STAR consolidated group's consolidated
federal income tax return. References to "STAR" in the paragraph below refer to
the STAR consolidated group.
25
<PAGE>
The PT-1 asset sale is expected to be a fully taxable transaction to STAR.
We expect that the amount realized from the PT-1 asset sale for federal income
tax purposes, which will be the sum of the net cash proceeds received from
Counsel and the aggregate amount of the liabilities assumed by Counsel or to
which the PT-1 assets sold are subject, will be substantially greater than our
adjusted tax basis of the PT-1 assets. Accordingly, STAR will recognize
substantial taxable income from the PT-1 asset sale for federal income tax
purposes, which will only be partially offset by our net operating loss
carryovers. We anticipate that STAR will have a federal income tax liability
from the PT-1 asset sale of approximately $19 million.
CONSEQUENCES TO STAR'S STOCKHOLDERS
You will not recognize gain or loss for federal income tax purposes as a
result of the PT-1 asset sale.
ACCOUNTING TREATMENT OF THE PT-1 ASSET SALE
We intend to account for the PT-1 asset sale as a sale of assets in
accordance with United States generally accepted accounting principles. We
expect to record a loss on our financial statements for the difference between
the total proceeds from the sale of the PT-1 assets and the net book value of
those assets, even though for tax purposes, we will have income tax due from the
sale of the assets.
REGULATORY FILINGS AND APPROVALS REQUIRED TO COMPLETE THE PT-1 ASSET SALE
The PT-1 asset sale is subject to the requirements of the Hart-Scott-Rodino
Act. The Hart-Scott-Rodino Act prevents the completion of transactions until
required information and materials are furnished to the Antitrust Division of
the Department of Justice and the Federal Trade Commission and the appropriate
waiting periods end or expire. We have filed, along with Counsel, the required
information and materials with the Antitrust Division of the Department of
Justice and the Federal Trade Commission. The Department of Justice and Federal
Trade Commission granted an early termination of the waiting period, effective
July 10, 2000. No further action under the Hart-Scott-Rodino Act is required, as
long as the PT-1 asset sale is completed by July 10, 2001.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the PT-1 asset sale on antitrust grounds either before
or after expiration of the waiting period. Other persons could take action under
the antitrust laws, to enjoin the PT-1 asset sale. Additionally, at any time
before or after the completion of the PT-1 asset sale or the expiration of the
waiting period, any state could take action under the antitrust laws.
The PT-1 asset sale is also subject to obtaining authorizations, consents,
certifications or other approvals from the Federal Communications Commission and
the state public utility commissions in the states of New York, California,
Florida, New Jersey and Texas. The required filings have been made and we are
waiting for comments and approvals from the applicable governmental agencies.
Other than the approvals described above and compliance with the applicable
corporate laws of Delaware, we are not aware of any other material governmental
or regulatory approval required for completion of the PT-1 asset sale.
RIGHTS OF DISSENTING STOCKHOLDERS
You will not be entitled to dissenters' rights under Delaware law in
connection with the PT-1 asset sale.
STAR OFFICER AGREEMENT TO VOTE SHARES IN FAVOR OF THE PT-1 ASSET SALE
Mr. Edgecomb has agreed to vote all of his shares of our common stock in
favor of the PT-1 asset sale. Mr. Edgecomb held approximately % of our
outstanding common stock as of the record date
26
<PAGE>
representing approximately % of the combined voting power for the PT-1 asset
sale. Because Mr. Edgecomb holds a significant number of shares of our common
stock, there is a greater likelihood that the PT-1 asset sale will be approved
by the required vote of our stockholders.
INTERESTS OF STAR'S DIRECTORS AND FINANCIAL ADVISORS
The PT-1 asset sale agreement requires us and PT-1 to take such steps
necessary to cause Gordon Hutchins, Jr., one of our directors, to be named the
managing director of PT-1 with the same power and authority as a chief executive
officer would have.
Kaufman Bros., STAR's financial advisor, has issued a fairness opinion to
our board of directors in connection with the PT-1 asset sale. After the PT-1
asset sale is completed, Kaufman Bros. will be paid a transaction fee of 1% of
the PT-1 asset sale price. Regardless of whether the PT-1 asset sale is
completed, we will reimburse Kaufman Bros. for reasonable fees and expenses of
Kaufman Bros.' counsel and all of Kaufman Bros.' reasonable travel and other
out-of-pocket expenses incurred in connection with the PT-1 asset sale.
DESCRIPTION OF THE PT-1 ASSET SALE AGREEMENT
This section of the proxy statement is a summary of the material terms of
the PT-1 asset sale agreement and does not contain all of the information that
is important to you. We urge you to read the PT-1 asset sale agreement
carefully.
THE PT-1 ASSET SALE CLOSING DATE
The closing of the PT-1 asset sale shall take place as soon as possible
after all required regulatory approvals are obtained, but no later than five
days after satisfaction of the conditions in the PT-1 asset sale agreement or at
a later time agreed to by the parties.
PURCHASE PRICE
For a description of the consideration that we will receive in the PT-1
asset sale please see "Purchase Price" on page .
ASSUMPTION OF LIABILITIES
Counsel will assume liabilities that:
- are itemized on the balance sheet of PT-1 as of the closing date, as
accounts payable and accrued expenses, accrued taxes payable (other than
accrued taxes for certain debit card sales and use), short-term debt,
deferred revenue and long-term debt;
- are liens for PT-1 taxes not yet due and payable;
- relate to claims for payphone compensation to the extent it is accrued and
itemized on the balance sheet of PT-1 as of the closing date; and
- arose after the closing date under the agreements, contracts, leases,
licenses and other arrangements included in the assets being acquired by
Counsel.
Counsel will not assume, and PT-1 will retain, liabilities:
- itemized on the balance sheet of PT-1 as of the closing date, as
liabilities due to carriers, intercompany payables and deferred tax
liability;
- for taxes for periods prior to the closing date and income taxes in
connection with this sale of assets;
27
<PAGE>
- related to employee, post-employment or retiree benefits or compensation
arrangements existing prior to the closing date;
- generated by any action, lawsuit, investigation or proceeding relating to
PT-1 that is pending as of the closing date of the PT-1 asset sale, or
arises from the acts or omissions of PT-1 or from strict liability or
liability under law or contract imposed on PT-1 or the assets being
purchased by Counsel prior to the closing date, other than the liabilities
for payphone compensation to the extent they are assumed by Counsel as
described above; and
- related to any deferred tax asset or PT-1's satellite offices.
REPRESENTATIONS AND WARRANTIES CONTAINED IN THE PT-1 ASSET SALE AGREEMENT
STAR and PT-1 made representations and warranties in the PT-1 asset sale
agreement regarding aspects of their businesses, financial condition, structure
and other facts pertinent to the PT-1 asset sale, including:
- corporate existence, organization, standing, authority and capitalization;
- ownership of shares of their capital stock;
- authorization, execution, delivery and enforceability of the PT-1 asset
sale agreement and related transactions;
- absence of violations and consents;
- required governmental authorizations;
- absence of pending or threatened lawsuits, or other proceedings not
already disclosed in the PT-1 asset sale agreement;
- validity of proxy statement information;
- validity of financial statements and reports;
- absence of material changes in business or the occurrence of certain
events since December 31, 1999;
- retirement and other employee plans and matters related to compliance with
the Employee Retirement Income Security Act of 1974, as amended;
- absence of material environmental violations, actions or liabilities;
- real estate leases;
- quality of title to real and personal property;
- the filing of tax returns and payment of taxes;
- ownership of proprietary property;
- labor matters;
- maintenance of adequate insurance;
- validity of material contracts;
- transactions with affiliated parties;
- accounts receivable; and
- inventory.
Counsel made representations and warranties in the PT-1 asset sale agreement
regarding:
- corporate existence, organization and good standing;
28
<PAGE>
- authorization, execution, delivery and enforceability of the PT-1 asset
sale agreement and related transactions;
- absence of pending or threatened suits, actions, or other legal
proceedings; and
- adequate financing.
CONDUCT OF BUSINESS BEFORE COMPLETION OF THE PT-1 ASSET SALE
Unless they obtain Counsel's prior written consent, PT-1 and STAR have
agreed that until the closing date, PT-1 will conduct its business in the
ordinary course, consistent with past practices. PT-1 must also use reasonable
efforts to preserve its business and the goodwill of customers and other
business relationships.
PT-1 and STAR have also agreed that until the closing date PT-1 will conduct
its business in compliance with specific restrictions relating to the following:
- declaration or making of any dividend payments, intercompany payments,
loans, advances and other distributions;
- the entering into of any material contracts, except that we have agreed,
along with PT-1, to make advertising expenditures with respect to our long
distance services accessible through a dialed prefix in an amount not less
than (a) $2 million for the fiscal quarter ending June 30, 2000,
(b) $1.5 million for the month of July, 2000, (c) $1.5 million for the
month of September, 2000 and (d) $1 million for the month of October,
2000.
- the maintenance of real and personal properties;
- modification of leases, contracts, government licenses, permits or other
authorizations or agreements;
- the release of debts;
- modification of accounting policies and procedures;
- notification of any material adverse changes; and
- the representations and warranties of PT-1.
NO OTHER NEGOTIATIONS INVOLVING THE PT-1 ASSETS
STAR and PT-1 have agreed that they will not, and they will not permit any
of their representatives or agents to, directly or indirectly take any of the
following actions:
- solicit, discuss or encourage any inquiries, offers or proposals, which
constitute or are reasonably likely to lead to an acquisition proposal; or
- accept or entertain an offer by, enter into discussions with, or provide
information to any person other than Counsel concerning an acquisition
proposal.
STAR and PT-1 have also agreed that they will keep Counsel informed of any
acquisition proposal.
An "acquisition proposal" is any proposal or offer to acquire an equity
interest in, or a substantial portion of, PT-1, the business of PT-1 or the
assets of PT-1, whether by merger, sale of equity interests, asset purchase or
other transaction, other than by the PT-1 asset sale agreement.
DESCRIPTION OF THE MANAGEMENT SERVICES AGREEMENT BETWEEN STAR, PT-1 AND COUNSEL
We, along with PT-1 and Counsel intend to enter into a management agreement
under which Counsel would provide management services to us and to PT-1 pending
the completion of the PT-1 asset sale. The parties have not yet determined the
scope, nature or pricing of management services that will be provided.
29
<PAGE>
CONDITIONS TO COMPLETION OF THE PT-1 ASSET SALE
The obligations of each of PT-1 and Counsel to complete the PT-1 asset sale
are subject to the satisfaction or waiver of the following material conditions
before completion of the PT-1 asset sale:
- no injunction or restraining order challenging the PT-1 asset sale may be
pending or seriously threatened against the PT-1 asset sale;
- the necessary regulatory approval, consents and authorizations must be
obtained;
- the waiting period applicable to the PT-1 asset sale under the
Hart-Scott-Rodino Act must have terminated or expired;
- the PT-1 asset sale agreement and the PT-1 asset sale must be approved by
the requisite vote of our stockholders;
- STAR and Counsel must have entered into a shared network services
agreement and a switch partition services agreement;
- each party must comply in all material respects with all of its material
agreements and covenants required by the PT-1 asset sale agreement to be
performed or complied with before completion of the PT-1 asset sale;
- each party's representations and warranties must be true as of June 6,
2000, and as of the date of completion of the PT-1 asset sale; and
- each party must have received the escrow agreement and the bill of sale
pursuant to the PT-1 asset sale agreement.
Counsel's obligations to complete the PT-1 asset sale are subject to the
satisfaction or wavier of each of the following additional conditions before
completion of the PT-1 asset sale:
- Counsel must have received any third party consents required to transfer
to Counsel all rights and benefits relating to certain material contracts
and proprietary property;
- Counsel must have received written evidence from the distributors under
certain agreements that the accounts receivable on the financial
statements of PT-1 are accurate, valid and fully-collectible, net of
reserves set forth on such financial statements;
- Counsel must have received from us and from PT-1 copies of our best
estimates of the cash, accounts payable and accounts receivable of PT-1 as
of the date of the close of the PT-1 asset sale; and
- STAR, PT-1 and Counsel must have determined the amount of any related
purchase price adjustment.
If we waive any closing conditions, or if Counsel waives any closing
conditions, we will each consider the facts and circumstances at that time and
determine whether a resolicitation of proxies from stockholders is appropriate.
Our board of directors will resolicit the approval of stockholders if a material
closing condition is waived. A material closing condition is one that our board
of directors believes a reasonable investor would consider important when
deciding to approve the PT-1 asset sale.
TERMINATION OF THE PT-1 ASSET SALE AGREEMENT
The PT-1 asset sale agreement may be terminated at any time prior to the
close of the PT-1 asset sale by PT-1 or Counsel if:
- the PT-1 asset sale has not closed by October 31, 2000, unless the failure
to close is because a required regulatory approval has not been received;
or
- at any time prior to the closing of the PT-1 asset sale, there is any
injunction, law, regulation, or ruling that makes consummation of the PT-1
asset sale illegal or otherwise prohibited.
30
<PAGE>
No party to the PT-1 asset sale agreement will have the right to terminate
the agreement if the terminating party has failed to perform its obligations
under the PT-1 asset sale agreement, unless such party obtains the prior written
consent of the non-breaching party.
PAYMENT OF TERMINATION FEE
STAR and PT-1 have agreed that PT-1 will be required to pay Counsel a
termination fee of $5.85 million in cash if PT-1 fails or refuses to complete
the transactions contemplated by the PT-1 asset sale agreement for any reason
other than the following:
- the failure, after good faith efforts, to obtain necessary regulatory
approval for the transaction;
- the failure, after good faith efforts by our board of directors, to obtain
the approval of the PT-1 asset sale agreement by a majority of our
stockholders, unless the PT-1 assets are sold to a third party within
12 months of the stockholder vote;
- Counsel's failure to comply with the material terms and conditions of the
PT-1 asset sale agreement; or
- the mutual written consent of Counsel, PT-1 and STAR.
EXTENSION, WAIVER AND AMENDMENT OF THE PT-1 ASSET SALE AGREEMENT
STAR, PT-1 and Counsel may by written agreement signed by all parties:
- amend the PT-1 asset sale agreement;
- modify any of the covenants of the PT-1 asset sale agreement; or
- extend the time for performance of any party's obligations under the PT-1
asset sale agreement.
STAR LITIGATION
On February 14, 2000 and March 1, 2000, identical class action complaints
were filed against STAR and directors Christopher E. Edgecomb, Mary A. Casey,
Mark Gershein, Gordon Hutchins, Jr., John R. Snedegar, Arunas A. Chesonis and
Samer Tawfik. The complaints were consolidated and alleged causes of action for
breach of fiduciary duty arising from approval of the STAR merger on the grounds
that the consideration to be received in the STAR merger was unfair,
unconscionable and grossly inadequate. On May 31, 2000, the Superior Court of
the State of California of the County of Santa Barbara granted our demurrer on
the grounds that the consolidated complaint was legally deficient, effectively
dismissing the lawsuit. On July 14, 2000, the plaintiff filed a notice of appeal
from that judgment.
On March 11, 1999, a proceeding was commenced by PT-1 by notice of petition
following the election by a PT-1 stockholder to dissent from STAR's merger with
PT-1 and following a demand for payment of the fair value of approximately
2,731,330 shares of PT-1 held by the stockholder. The proceeding was commenced
in the Supreme Court of the State of New York. Under New York law, the PT-1
stockholder has the right to receive, in cash, the fair market value of his PT-1
shares as of the time of our acquisition of PT-1. The PT-1 stockholder is
seeking damages in accordance with his appraisal rights under New York law. On
July 26, 2000, the Supreme Court of the State of New York of the County of
Queens issued a temporary restraining order in favor of the stockholder which
prevents PT-1 from distributing any of the proceeds of the PT-1 asset sale to
STAR unless PT-1 has first set aside a reserve in the amount of $37,649,800 in
cash to satisfy the stockholder's claim. On August 15, 2000, the temporary
restraining order was modified to reduce the required reserve to $25,000,000. We
believe that the PT-1 stockholder's claim for any amount above his pro rata
share of the consideration paid by us for PT-1 is without merit and we will seek
to minimize his recovery.
From time to time, we are party to various legal proceedings, including
billing disputes and collection matters and actions brought by certain
terminated employees that arise in the ordinary course of business.
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<PAGE>
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to us regarding
beneficial ownership of our common stock as of September , 2000 by (i) each
person who is known by us to own beneficially more than five percent of our
common stock, (ii) each of our directors, (iii) each of our named officers, and
(iv) all current officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
----------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(2)
------------------------------------ --------- ----------
<S> <C> <C>
West Highland Capital(3).................................... 7,737,660 %
Samer Tawfik(4)............................................. 6,708,717 %
Gotel Investments Ltd.(5)................................... 4,192,296 %
DSAM Global Value Fund(6)................................... 3,163,081 %
Gordon Hutchins, Jr.(7)..................................... %
John R. Snedegar(8)......................................... %
Christopher E. Edgecomb(9).................................. %
Mary A. Casey............................................... %
David Vaun Crumly(10)....................................... %
All directors and executive officers as a group (five
persons)(11).............................................. %
</TABLE>
--------------------------
* Represents beneficial ownership of less than 1% of the outstanding shares of
our common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power
with respect to securities. The address for each listed director and officer
is c/o STAR Telecommunications, Inc., 223 East De La Guerra Street, Santa
Barbara, California 93101. To our knowledge, except as indicated in the
footnotes to this table and pursuant to applicable community property laws,
the persons named in the table have sole voting and investment power with
respect to all shares of our common stock.
(2) Percentage of beneficial ownership is based on shares of our common
stock outstanding as of September , 2000. The number of shares of our
common stock beneficially owned includes the shares issuable pursuant to
stock options and warrants that are exercisable within sixty days of
September , 2000.
(3) Represents 2,079,500 shares of our common stock held by West Highland
Capital, Inc., 1,789,330 shares of our common stock held by Estero Partners,
LLC, 2,079,500 shares of our common stock held by Lang H. Gerhard, 1,539,790
shares of our common stock held by West Highland Partners, L.P., and 249,540
shares of our common stock held by Buttonwood Partners, L.P., as reported by
West Highland Capital, Inc. in its Schedule 13G filed with the Securities
and Exchange Commission on February 11, 1999.
(4) The number of shares of our common stock held by Samer Tawfik is as reported
by Mr. Tawfik in his Schedule 13D filed with the Securities and Exchange
Commission on July 7, 2000.
(5) Represents 1,397,432 shares of our common stock held by Gotel
Investments Ltd., 1,397,432 shares of our common stock held by Global
Investments Trust, and 1,397,432 shares of our common stock held by
Intertrust (Guernsey) Limited, as reported by Gotel Investments Ltd. in its
Schedule 13G filed with the Securities and Exchange Commission on
February 9, 1999.
(6) The number of shares of our common stock held by DSAM Global Value Fund is
as reported by DSAM Global Value Fund in its Schedule 13G filed with the
Securities and Exchange Commission on July 25, 2000.
(7) Consists of shares of our common stock and shares of our common
stock issuable upon the exercise of stock options exercisable within sixty
days of September , 2000.
(8) Consists entirely of shares of our common stock issuable upon the exercise
of stock options exercisable within sixty days of September , 2000.
(9) Mr. Edgecomb disclaims beneficial ownership with respect to shares of
our common stock.
(10) Consists of shares of our common stock, and shares of our
common stock issuable upon the exercise of stock options exercisable within
sixty days of September , 2000.
(11) Consists of shares of our common stock issuable upon the exercise of
stock options exercisable within sixty days of September , 2000.
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<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Condensed Financial Statements give effect
to the PT-1 asset sale. The Pro Forma Condensed Statement of Operation for the
year ended December 31, 1999 gives effect to the PT-1 asset sale as if the
transaction occurred on January 1, 1999. The Unaudited Pro Forma Condensed
Balance Sheet as of June 30, 2000 gives effect to the PT-1 asset sale as if it
had occurred on June 30, 2000. The Unaudited Pro Forma Condensed Statement of
Operations for the six months ended June 30, 2000 also gives effect to the PT-1
asset sale as if it had occurred on January 1, 1999. For pro forma purposes, we
have assumed that the net cash proceeds of the PT-1 asset sale will be equal to
$120 million, of which $25 million will be restricted (see note 3 below) and
$22.5 million will be placed in escrow (see note 4 below) resulting in net
unrestricted cash of $72.5 million
The pro forma adjustments are based on currently available information and
upon certain assumptions that we believe are reasonable. There can be no
assurance that the actual adjustments will not differ significantly from the pro
forma adjustments reflected in the Unaudited Pro Forma Condensed Financial
Statements.
The Unaudited Pro Forma Condensed Financial Statements are not necessarily
indicative of the financial position of the future results of operations or
results that might have been achieved if the PT-1 asset sale had been
consummated as of the indicated dates. The Unaudited Pro Forma Condensed
Financial Statements should be read in connection with our historical
consolidated financial statements and the related notes. See "Incorporation of
Certain Documents by Reference" and "Available Information."
33
<PAGE>
STAR UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PT-1 PRO FORMA
STAR ADJUSTMENTS EXCLUDING PT-1
---------- ----------- --------------
<S> <C> <C> <C>
Cash and equivalents................................. $ 16,844 $ (4,960)(1) $ 84,384
72,500 (2)
Restricted cash...................................... -- 25,000 (3) 25,000
Short-term investments............................... 1,756 -- (1) 1,756
Accounts and notes receivable........................ 161,169 (61,359)(1) 122,310
-- 22,500 (4) --
Prepaid expenses and other current assets............ 46,552 (24,529)(1) 22,023
-------- --------- --------
Total Current Assets............................. 226,321 29,152 255,473
-------- --------- --------
Property and equipment, net.......................... 304,314 (39,934)(1) 264,380
Goodwill and other tangibles......................... 193,316 (189,348)(1) 3,968
Other assets......................................... 5,838 (1,071)(1) 4,767
-------- --------- --------
Total Assets..................................... $729,789 $(201,201) $528,588
======== ========= ========
Short-term debt...................................... $ 88,709 $ (2,029)(1) $ 86,680
Accounts payable..................................... 126,292 (21,785)(1) 104,507
Other accrued liabilities............................ 163,182 (55,493)(1) 107,689
-------- --------- --------
Total Current Liabilities........................ 378,183 (79,307) 298,876
Long-term debt....................................... 59,403 (4,005)(1) 55,398
Other long-term liabilities.......................... 33,634 (890)(1) 32,744
-------- --------- --------
Total Liabilities................................ 471,220 (84,202) 387,018
-------- --------- --------
Total Stockholders' Equity....................... 258,569 (116,999)(5) 141,570
-------- --------- --------
Total Liabilities and Stockholders' Equity....... $729,789 $(201,201) $528,588
======== ========= ========
</TABLE>
------------------------
(1) Represents the historical asset and liability amounts for PT-1, including
PT-1 goodwill recorded by us. It does not include certain liabilities that
Counsel will not assume in connection with the PT-1 purchase. These
liabilities consist primarily of income taxes, certain network operating
costs and litigation matters that have been managed on a consolidated basis
and historically accounted for on our balance sheet. There are no
significant liabilities on PT-1's balance sheet that are not being assumed
by Counsel.
(2) Represents the net cash proceeds expected to be received from the sale of
PT-1 to Counsel, estimated as follows:
<TABLE>
<S> <C>
Gross purchase price........................................ $150,000
Net assets adjustment....................................... (8,000)
Fees and expenses........................................... (2,100)
STAR income taxes........................................... (19,000)
Other costs................................................. (900)
--------
Net cash proceeds....................................... 120,000
Escrowed cash............................................... (22,500)
Restricted cash............................................. (25,000)
--------
$ 72,500
========
</TABLE>
The gross PT-1 purchase price will be adjusted upward or downward to the
extent the net assets of PT-1 as of the closing date differ from the net
assets of PT-1 as of December 31, 1999. We currently estimate that the net
assets of PT-1 will be approximately $8.0 million lower on the closing date.
34
<PAGE>
(3) Currently, under court order, PT-1 is prevented from distributing any of
the proceeds of the PT-1 asset sale to us unless PT-1 has first set aside a
reserve in the amount of $25 million in cash to satisfy a stockholders'
claim.
(4) $22.5 million will be held in escrow pursuant to an escrow agreement
between STAR and Counsel. One quarter of the escrow amount of
$22.5 million, less any amounts paid to Counsel in connection with
indemnification claims made by Counsel, will be released to us on each six
month anniversary of the closing date of the PT-1 asset sale. Counsel must
pay us 100% of the escrow amount, less any amounts paid to Counsel in
connection with indemnification claims made by Counsel, when the STAR
merger closes and when World Access assumes STAR's and PT-1's obligations
under the PT-1 asset sale agreement. We anticipate closing the STAR merger
by the end of 2000 and as a result it is included as a current receivable.
(5) Represents the assumed loss on the PT-1 asset sale.
35
<PAGE>
STAR UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PT-1 PRO FORMA
STAR ADJUSTMENTS EXCLUDING PT-1
---------- ----------- --------------
<S> <C> <C> <C>
Revenues............................................. $497,400 $(260,485)(1) $236,915
Operating Expenses:
Cost of services................................... 433,657 (224,354)(1) 209,303
Selling, general and administrative expenses....... 48,768 (15,050)(1) 33,718
Provision for doubtful accounts.................... 12,413 (7,013)(1) 5,400
Depreciation and amortization...................... 26,128 (8,059)(1) 18,069
-------- --------- --------
520,966 (254,476) 266,490
-------- --------- --------
Income (loss) from operations.................... (23,566) (6,009) (29,575)
-------- --------- --------
Other Income (Expenses):
Interest and other income.......................... 7,819 (132)(1) 7,687
Interest expense................................... (7,742) 588 (1) (7,154)
-------- --------- --------
77 456 533
-------- --------- --------
Income (loss) before provision [benefit] for
income taxes................................... (23,489) (5,553) (29,042)
Provision (Benefit) for Income Taxes................. (5,706) (1,571)(1) (7,277)
-------- --------- --------
Net Income (Loss).................................... (17,783) $ (3,982) $(21,765)
======== ========= ========
Basic and diluted income (loss) per share............ $ (0.30) $ (0.37)
======== ========
Weighted average shares outstanding: basic and
diluted............................................ 58,609 58,609
======== ========
</TABLE>
------------------------
(1) Represents the historical revenue and expense amounts for PT-1 and includes
the effect of PT-1 goodwill amortization recorded by us of approximately
$5,094.
36
<PAGE>
STAR UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PT-1 PRO FORMA
STAR ADJUSTMENTS EXCLUDING PT-1
---------- ----------- --------------
<S> <C> <C> <C>
Revenues........................................... $1,061,774 $(445,305)(1) $616,469
Operating Expenses:
Cost of services................................. 925,206 (387,311)(1) 537,895
Selling, general and administrative expenses..... 136,942 (43,773)(1) 93,169
Provision for doubtful accounts.................. 25,003 (8,059)(1) 16,944
Depreciation and amortization.................... 44,236 (14,601)(1) 29,635
---------- --------- --------
1,131,387 (453,744) 677,643
---------- --------- --------
Income (loss) from operations.................. (69,613) 8,439 (61,174)
---------- --------- --------
Other Income (Expenses):
Interest and other income........................ 3,565 (335)(1) 3,230
Interest expense................................. (9,895) 1,281 (1) (8,614)
---------- --------- --------
(6,330) 946 (5,384)
---------- --------- --------
Income (loss) before provision benefit for
income taxes................................. (75,943) 9,385 (66,558)
Provision (Benefit) for Income Taxes............... (12,096) 1,055 (1) (11,041)
---------- --------- --------
Net Income (Loss).................................. $ (63,847) $ 8,330 $(55,517)
========== ========= ========
Basic and Diluted Income (Loss) Per Share.......... $ (1.12) $ (0.97)
========== ========
Weighted Average Shares Outstanding: Basic and
Diluted.......................................... 57,036 57,036
========== ========
</TABLE>
------------------------
(1) Represents the historical revenue and expense amounts for PT-1 and includes
the effect of PT-1 goodwill amortization recorded by us of approximately
$9,340.
STAR NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
Counsel will purchase all of PT-1's assets that relate to PT-1's debit card
and long distance services accessible through a dialed prefix for
$150.0 million in cash, subject to adjustment upward or downward to the extent
that the net value of the purchased assets, less the liabilities being assumed
of PT-1 as of the closing date, is greater or less than $47,589,862. Counsel
will only assume some liabilities, including those liabilities itemized on
PT-1's balance sheet as accounts payable and accrued expenses, accrued taxes
payable, short-term debt, deferred revenue and long-term debt. On the closing
date, Counsel will pay us $150.0 million in cash, subject to adjustment as
indicated above and less $22.5 million which will be held in escrow pursuant to
an escrow agreement between STAR and Counsel. One quarter of the escrow amount
of $22.5 million, less any amounts paid to Counsel in connection with
indemnification claims made by Counsel, will be released to us on each six month
anniversary of the closing date of the PT-1 asset sale. Counsel must pay us 100%
of the escrow amount, less any amounts paid to Counsel in connection with
indemnification claims made by Counsel, when the STAR merger closes and when
World Access assumes STAR's and PT-1's obligations under the PT-1 asset sale
agreement.
Based on our assumed net proceeds of the PT-1 asset sale of $120 million, we
estimate a loss on disposal of approximately $117 million as if it had occurred
on June 30, 2000, which has been reflected in the accompanying Unaudited Pro
Forma Condensed Balance Sheet as of June 30, 2000. We have not included the
estimated loss on disposal in the accompanying Unaudited Pro Forma Condensed
Statements of Operations as our objective is to show how the PT-1 asset sale
might have impacted our historical statements of operations and to include the
loss on the sale would distort those statements.
37
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The selected financial information for each of the five years in the period
ended December 31, 1999 set forth below has been derived from and should be read
in conjunction with our audited consolidated financial statements. The financial
information for the six month periods ended June 30, 1999 and 2000 have been
derived from our unaudited consolidated financial statements, which, in the
opinion of our management, include all the significant normal and recurring
adjustments necessary for fair presentation of the financial position and
results of operations for such unaudited periods (in thousands, except per share
data).
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------ -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $66,964 $283,450 $434,086 $619,220 $1,061,774 $500,478 $497,400
Operating expenses:
Cost of services(1).............................. 50,300 244,153 374,504 523,621 925,206 441,503 433,657
Selling, general and administrative.............. 13,356 41,804 48,906 66,140 160,067 77,053 61,181
Depreciation and amortization...................... 952 2,343 5,650 15,054 44,236 19,640 26,128
Loss on impairment of goodwill..................... -- -- -- 2,604 -- -- --
Merger expense..................................... -- -- 286 1,026 1,878 1,872 --
------- -------- -------- -------- ---------- -------- --------
Total operating expenses........................... 64,608 288,300 429,346 608,445 1,131,387 540,068 520,966
------- -------- -------- -------- ---------- -------- --------
Income (loss) from operations...................... 2,356 (4,850) 4,740 10,775 (69,613) (39,590) (23,566)
Other income (expenses):
Interest income.................................. 65 138 464 4,469 2,192 1,675 265
Interest expense................................. (214) (1,270) (2,617) (3,386) (9,895) (3,532) (7,742)
Legal settlements and expense.................... -- (100) (1,653) -- -- -- --
Other............................................ (97) 186 208 (304) 1,373 (1,923) 7,554
------- -------- -------- -------- ---------- -------- --------
Income (loss) before provision for income
taxes.......................................... 2,110 (5,896) 1,142 11,554 (75,943) (43,370) (23,489)
Provision (benefit) for income taxes............... 66 577 2,905 9,923 (12,096) (7,886) (5,706)
------- -------- -------- -------- ---------- -------- --------
Net income (loss).................................. $ 2,044 $ (6,473) $ (1,763) $ 1,631 $ (63,847) $(35,484) $(17,783)
======= ======== ======== ======== ========== ======== ========
Pro forma net income (loss)(unaudited)(2).......... $ 478 $ (7,416) $ (1,958)
======= ======== ========
Income (loss) per common share(3)
Basic and Diluted................................ $ 0.10 $ (0.27) $ (0.06) $ 0.04 $ (1.12) $ (0.64) $ (0.30)
======= ======== ======== ======== ========== ======== ========
Pro forma income (loss) per common share
(unaudited)(3)
Basic and Diluted................................ $ 0.02 $ (0.31) $ (0.06)
======= ======== ========
Weighted average number of common shares
outstanding--basic(3)
Basic............................................ 19,916 24,076 31,101 40,833 57,036 55,541 58,609
Diluted.......................................... 19,916 24,076 31,101 42,434 57,306 55,541 58,609
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- --------- --------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)...................... $(1,065) $(10,913) $ 4,692 $ 46,698 $(197,921) $ (123,597) $(151,862)
Total assets................................... 37,169 76,250 130,382 374,651 807,754 672,826 729,789
Total long-term liabilities, net of current
portion...................................... 2,980 8,834 14,800 33,048 96,693 41,685 93,037
Accumulated deficit............................ (6,294) (12,077) (13,737) (12,106) (75,953) (47,590) (93,736)
Stockholders' equity........................... 6,614 9,986 40,615 195,591 278,054 306,625 258,569
OTHER FINANCIAL DATA:
EBITDA from continuing operations(4)........... $ 3,308 $ (2,507) $ 10,390 $ 25,829 $ (25,377) $ (19,950) $ 2,562
Cash flows (used in) provided by operating
activities................................... 2,076 (2,847) 11,476 (12,379) 40,138 13,365 11,357
Cash flows (used in) provided by investing
activities................................... (1,123) (10,403) (31,157) (100,986) (58,297) (63,331) 8,326
Cash flows used in (provided by) financing
activities................................... (839) 14,721 19,174 158,526 (991) (11,860) 28,728
Capital expenditures(5)........................ 2,922 14,810 26,584 147,236 150,588 56,015 5,678
North American wholesale billed minutes of
use(6)....................................... 38,106 479,681 1,034,187 1,657,523 2,129,296 1,102,804 921,885
North American wholesale revenue per billed
minute of use(7)............................. $0.4102 $ 0.4288 $ 0.3612 $ 0.3145 $ 0.2084 $ 0.2256 $ 0.1670
</TABLE>
------------------------------
(1) Cost of services is exclusive of depreciation and amortization related to
the services network which is shown separately below.
(2) The pro forma net income or loss per share assumes that STAR and CEO
Telecommunications, Inc., which we acquired in a pooling of interests
transaction on November 30, 1997, were C-corporations for all periods
presented.
(3) See Note 2 of Notes to Consolidated Financial Statements set forth in our
annual report on Form 10-K for the fiscal year ended December 31, 1999, as
amended, and incorporated by reference herein, for an explanation of the
method used to determine the number of shares used in computing basic and
diluted income (loss) per common share and pro forma basic and diluted
income (loss) per common share.
(4) EBITDA from continuing operations as used in this proxy statement is
earnings (loss) before net interest expense (income), income taxes, foreign
exchange gains or losses, deprecation and amortization and is presented
because we believe that such information is commonly used in the
telecommunications industry as one measure of a company's operating
performance and historical ability to service debt. EBITDA from continuing
operations is not determined in accordance with generally accepted
accounting principles, is not indicative of cash provided by operating
activities, should not be used as a measure of operating income and cash
flows from operations as determined under generally accepted accounting
principles and should not be considered in isolation or as an alternative
to, or to be more meaningful than, measures of performance determined in
accordance with generally accepted accounting principles. EBITDA, as
calculated by us, may not be comparable to similarly titled measures
reported by other companies and could be misleading unless all companies and
analysts calculate EBITDA in the same manner.
(5) Includes assets financed with capital leases, notes and vendor financing
arrangements.
(6) Does not include wholesale billed minutes of use from T-One Corporation, a
former subsidiary, prior to the year ended December 31, 1997. Includes
wholesale billed minutes of use attributable to ALLSTAR Telecom, formerly
known as United Digital Network, Inc., a subsidiary, for all years
presented.
(7) Represents wholesale gross call usage revenue per billed minute. Amounts
exclude other revenue related items such as finance charges. This data does
not include wholesale billed minutes of use from T-One prior to the year
ended December 31, 1997.
The following table reconciles our income (loss) from continuing operations
to EBITDA from continuing operations (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations....... $2,044 $(6,473) $(1,763) $ 1,631 $(63,847) $(35,484) $(17,783)
Net interest expense (income).................. 149 1,132 2,153 (1,083) 7,703 1,857 7,477
Income tax expense (benefit)................... 66 577 2,905 9,923 (12,096) (7,886) (5,706)
Other.......................................... 97 (86) 1,445 304 (1,373) 1,923 (7,554)
Depreciation and amortization.................. 952 2,343 5,650 15,054 44,236 19,640 26,128
------ ------- ------- ------- -------- -------- --------
EBITDA from continuing operations.............. $3,308 $(2,507) $10,390 $25,829 $(25,377) $(19,950) $ (2,562)
====== ======= ======= ======= ======== ======== ========
</TABLE>
39
<PAGE>
OTHER MATTERS THAT MAY COME BEFORE THE STAR SPECIAL MEETING
Our board of directors does not know of any other matters which may come
before the special meeting. If any other matters are properly presented at the
special meeting, it is the intention of the persons named in the accompanying
proxy to vote, or otherwise act, in accordance with their best judgment on such
matters.
STOCKHOLDER PROPOSALS
Stockholder proposals submitted pursuant to Rule 14a-8 of the Exchange Act
for inclusion in the proxy statement for the 2000 annual meeting of stockholders
must be received by us at our principal executive offices at 223 East De La
Guerra Street, Santa Barbara, California 93101 a reasonable time before we begin
to print and mail the proxy materials for our 2000 annual meeting of
stockholders.
40
<PAGE>
ANNEX A
ASSET PURCHASE AGREEMENT dated as of June 6, 2000 among Counsel
Communications LLC, a Delaware limited liability company (the "PURCHASER"), PT-1
Communications, Inc., a New York corporation (the "SELLER" or the "COMPANY") and
STAR Telecommunications, Inc., a Delaware corporation and the sole shareholder
of the Seller (the "PARENT").
WHEREAS, the Purchaser desires to purchase the Assets (as defined below) and
to assume the Assumed Liabilities (as defined below) from the Seller, on the
following terms and conditions;
WHEREAS, the Seller desires to sell the Assets and to assign the Assumed
Liabilities to the Purchaser (the "ASSET SALE"), on the following terms and
conditions; and
WHEREAS, the Parent is being merged (the "PARENT MERGER") into a
wholly-owned subsidiary of World Access, Inc., a Delaware corporation ("WAXS")
and, as a condition precedent thereto, desires that the Seller sell the Assets
and assign the Assumed Liabilities.
NOW, THEREFORE, in consideration of the premises and the respective
agreements hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
DEFINED TERMS
Section 1.01 DEFINED TERMS. The following terms, not defined elsewhere in
this Agreement, shall have the following meanings:
"ASSETS" shall mean all assets and properties of the Seller and each of
its Subsidiaries, of every kind and description, wherever located, real,
personal or mixed, tangible or intangible, owned, held or used in the
conduct of the Business by Seller (excluding the Excluded Assets),
including, without limitation:
(a) all Balance Sheet Assets;
(b) all real property, if any, and leases of, and other interests in,
real property, in each case together with all buildings, fixtures, and
improvements erected thereon, including without limitation the items
listed on Schedule 5.13;
(c) all personal property and interests therein, including machinery,
equipment, switches, furniture, office equipment (including without
limitation computers, software codes and servers), communications
equipment, vehicles, storage tanks, spare and replacement parts, fuel and
other tangible property;
(d) all raw materials, work-in-process, finished goods, supplies and
other inventories;
(e) all rights under all Contracts;
(f) all accounts, notes and other receivables (including Liens in
respect thereof, but excluding intercompany receivables);
(g) all prepaid expenses, including but not limited to ad valorem
taxes, leases and rentals;
(h) all petty cash located at operating facilities of the Business;
(i) all of Seller's rights, claims, credits, causes of action or
rights of set-off against third parties relating to the Assets,
including, without limitation, unliquidated rights under
A-1
<PAGE>
manufacturers' and vendors warranties (excepting any of the foregoing to
the extent related to Excluded Assets or Excluded Liabilities);
(j) all Proprietary Property, including without limitation the items
listed on Schedule 5.16;
(k) all bank accounts used exclusively in the Business or in the name
of the Company;
(l) all transferable licenses, permits or other governmental
authorization, including without limitation the items listed on
Schedule 5.06 (except to the extent not transferable as indicated on such
Schedule);
(m) all books, records, files and papers, whether in hard copy or
computer format, including, without limitation, engineering information,
sales and promotional literature, software documentation, manuals and
data, sales and purchase correspondence, lists of present and former
suppliers, lists of present and former customers, personnel and
employment records, and copies of any information relating to any Tax
imposed on the Assets (but excluding the corporate charter,
qualifications to conduct business as a foreign corporation and
arrangements with agents with respect thereto, taxpayer and other
identification numbers, tax returns, tax records, seals, minute books,
stock transfer books, blank stock certificates and other documents
relating to the organization, maintenance and existence of the Company
and each Subsidiary as a corporation or other entity and any records or
documents relating to any Excluded Asset or Excluded Liability, provided
that the Company shall provide copies of the foregoing if reasonably
requested by the Purchaser);
(n) to the extent provided in Schedule 5.11, all assets and rights
relating to Seller's employee benefit arrangements, plans or other
arrangements in respect of Transferred Employees;
(o) all rights and Contracts of the Seller and the Parent relating to
the Feature Group D network; and
(p) all goodwill associated with the Business or the Assets, together
with the right to represent to third parties that the Purchaser is the
successor to the Business.
"ASSUMED LIABILITIES" shall mean only those liabilities (i) itemized on
the Closing Balance Sheet as accounts payable and accrued expenses, accrued
taxes payable (other than accrued taxes payable set forth as "TRANSACTION
TAXES PAYABLE" with respect to any debit card sales and use tax as set forth
on the general ledger of the Seller), short-term debt, deferred revenue and
long-term debt; (ii) for Permitted Encumbrances to the extent specifically
set forth in this Agreement; (iii) relating to actions or claims for
payphone compensation but only to the extent of the amount accrued and set
forth on the Closing Balance Sheet (the "PAYPHONE COMPENSATION"); and
(iv) obligations arising after the Closing Date under the agreements,
contracts, leases, licenses and other arrangements included in the Assets
being acquired by the Purchaser (other than obligations or liabilities
attributable to any failure by the Company or the Parent to comply with the
terms of such agreements, contracts, leases, licenses and other arrangements
prior to the Closing Date). Reference is hereby made to Section 3.01 for
certain clarifications regarding the manner of assuming Assumed Liabilities
constituting accrued taxes and accrued Payphone Compensation.
"ASSET SALE" shall have the meaning set forth in the preamble hereto.
"BALANCE SHEET" shall mean the balance sheet of the Company as of
December 31, 1999.
"BALANCE SHEET ASSETS" shall mean all of the assets set forth on the
Closing Balance Sheet other than the Excluded Assets, including, without
limitation: current assets (cash and cash equivalents, short-term
investments, gross trade accounts receivable, allowance for doubtful
A-2
<PAGE>
accounts, due from carriers, inventory and prepaid expenses), investments,
operating equipment, furniture and equipment, leasehold improvements,
accumulated depreciation, deposits, officer loans receivable, intangible
assets, Star cable asset and deferred offering costs.
"BASE NET ASSETS" shall have the meaning set forth in Section 2.04(a).
"BUSINESS" shall mean the debit-card and dial-around telecom businesses
of the Company and its Subsidiaries.
"BUSINESS CORPORATION LAW" shall mean the New York Business Corporation
Law.
"BUSINESS DAY" shall mean any day other than a Saturday, Sunday or other
day on which banks are authorized to be closed in New York City.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"CLOSING" shall mean the closing of the Asset Sale contemplated by this
Agreement.
"CLOSING BALANCE SHEET" shall have the meaning set forth in
Section 2.03(b).
"CLOSING DATE" shall mean the date of Closing.
"COMPANY TAXES" shall mean all federal, state, local, foreign or other
governmental income, excise, franchise, payroll, F.I.C.A., unemployment,
withholding, real property, personal property, sales, payroll, disability
and all other taxes imposed on the Company or any Subsidiary or with respect
to any of their respective properties, or otherwise payable by them,
including interest and penalties, if any, in respect thereof.
"CONTRACTS" shall mean all contracts, agreements, leases, licenses
(other than regulatory licenses and licenses set forth in the definition of
Proprietary Property), commitments, sales and purchase orders and other
instruments, including without limitation the items listed on
Schedule 5.19.
"DAYS ACCOUNTS PAYABLE AND RECEIVABLE" shall mean, for any period
(i) the days accounts payable of the Seller for such period (calculated by
multiplying (x) the quotient of (A) accounts payable at the end of such
period divided by (B) net purchases for such period by (y) the number of
days in such period) and (ii) the days accounts receivable of the Seller for
such period (calculated by multiplying (x) the quotient of (A) net accounts
receivable at the end of such period divided by (B) net sales for such
period by (y) the number of days in such period); provided that any
adjustment to the accounts receivable of the Seller as a result of any
credit or settlement of the Seller with its distributor TSI shall not affect
the foregoing calculation of days accounts receivable.
"DEFERRED TAX ASSETS" shall mean those assets itemized on the Closing
Balance Sheet under the line item "DEFERRED TAX ASSET."
"ENCUMBRANCES" shall mean all liens (including liens for Company Taxes),
mortgages, security interests, charges, claims, leases, survey exceptions,
options, rights of first refusal or first offer, easements, restrictions,
rights-of-way or other similar encumbrances of any nature whatsoever.
"ESCROW AMOUNT" shall mean $22,500,000.
"EXCLUDED ASSETS" shall mean (i) the Deferred Tax Assets; and (ii) all
real property leases, employees and other obligations with respect to the
Satellite Offices.
A-3
<PAGE>
"EXCLUDED LIABILITIES" shall mean each and every liability and
obligation of the Seller except for the Assumed Liabilities, including,
without limitation:
(a) any obligation or liability for Company Taxes with respect to
periods prior to the Closing Date (except to the extent expressly
included in the Assumed Liabilities and accrued on the Closing Balance
Sheet) and/or Company Income Taxes in connection with the transaction
contemplated hereby (provided that, for the avoidance of doubt, the
Purchaser shall pay the sales and transfer taxes contemplated by
Section 11.01);
(b) any liabilities or obligations relating to employee,
post-employment or retiree benefits or compensation arrangements existing
on or prior to the Closing Date, including, without limitation, any
liabilities or obligations under any of Seller's employee benefit
agreements, plans or other arrangements listed on Schedule 5.11 and any
retention bonus payments in respect of the transactions contemplated
hereby;
(c) all obligations and liabilities arising from any action, suit,
investigation, or proceeding relating to or arising out of the Business
or the Assets that are pending on the Closing Date, or arise from the
acts or omissions of Seller, or strict liability or liability under law
or contract imposed on Seller, prior to the Closing Date, against Seller
or any Asset before any court or arbitrator or any governmental body,
agency or official, including but not limited to any liability under any
Environmental Law and/or any and all litigation listed on Schedule 5.07
or arising after the Closing Date but relating to actions of the Business
prior to the Closing Date (but excluding the Payphone Compensation only
to the extent accrued and set forth on the Closing Balance Sheet); and
(d) any liability or obligation relating to an Excluded Asset.
"GAAP" means generally accepted accounting principles as in effect in
the United States from time to time; provided that for comparative purposes
any reference to GAAP shall require consistent application.
"INCOME TAXES" shall mean all Company Taxes on or measured by net
income, gross profits or net profits, together with any interest and any
penalties, additions to tax or additional amounts imposed by any taxing
authority, domestic or foreign.
"INDEPENDENT PUBLIC ACCOUNTANTS" shall mean Arthur Andersen LLP.
"INDEPENDENT THIRD PARTY" shall mean any nationally recognized
accounting firm jointly selected by the Purchaser and the Parent.
"NET ASSETS" shall have the meaning set forth in Section 2.03(b).
"PERMITTED ENCUMBRANCES" shall mean, to the extent applicable,
Encumbrances which (a) are liens for Company Taxes not yet due and payable
or (b) are liens such as materialsman and workman liens for work not yet due
and payable which do not, individually or in the aggregate, materially
detract from the value of the individual property or Asset subject thereto
or interfere with the present or future use or disposition thereof.
"PERSON" shall mean any natural person, corporation, association,
partnership, joint venture or other entity.
"PROPRIETARY PROPERTY" shall mean all trade names, trademarks, service
marks, copyrights, trade names, brand names, software and proprietary and
other technical information, including all contracts, agreements and
licenses relating thereto, owned by the Company or the Subsidiaries or in
which any of them has any rights.
"REQUIRED REGULATORY APPROVALS" shall have the meaning set forth in
Section 7.03.
A-4
<PAGE>
"SATELLITE OFFICES" shall mean those certain satellite distribution
centers operated by the Company and, not less than 10 days prior to Closing,
identified and requested by the Purchaser to be closed at the Seller's
expense.
"SUBSIDIARY" shall mean all direct and indirect domestic and foreign
subsidiaries of the Company.
"TRANSFERRED EMPLOYEES" shall mean all employees of the Seller
transferred to the Purchaser as described in Section 2.07.
Section 1.02 ACCOUNTING TERMS. Any accounting terms used in this Agreement
shall, unless otherwise specifically provided, have the meanings given them in
accordance with, and all financial computations hereunder shall, unless
otherwise specifically provided, be computed in accordance with GAAP.
Section 1.03 OTHER RULES OF CONSTRUCTION. References in this Agreement to
sections, schedules and exhibits are to sections of, and schedules and exhibits
to, this Agreement unless otherwise indicated. Words in the singular include the
plural and in the plural include the singular. The word "OR" is not exclusive.
The words "INCLUDING", "INCLUDES", "INCLUDED" and "INCLUDE", when used, are
deemed to be followed by the words "WITHOUT LIMITATION".
ARTICLE II
PURCHASE AND SALE
Section 2.01 PURCHASE AND SALE. Upon the terms and subject to the
conditions set forth in this Agreement, the Seller agrees to, and to cause each
of its Subsidiaries to, sell, assign, transfer, convey and deliver the Assets to
the Purchaser or its designated affiliates, and the Purchaser agrees to purchase
and accept the Assets from the Seller and such Subsidiaries, on the Closing
Date.
Section 2.02 DELIVERY OF INSTRUMENTS OF TRANSFER. (a) On the Closing Date,
the Seller and each of its relevant Subsidiaries shall deliver to the Purchaser
such specific assignments, bills of sale, endorsements, leases and other good
and sufficient instruments of conveyance and transfer, in form and substance
satisfactory to the Purchaser, the Seller and their respective counsel, as shall
be reasonably requested by the Purchaser to effectively vest in the Purchaser
title to all the Assets, including, but not limited to the bill of sale and
assignment and assumption agreement (including, without limitation, appropriate
assignments of trademarks, copyrights and patents, if applicable), dated the
Closing Date, substantially in the form of Exhibit A (the "BILL OF SALE")
(provided that, for the avoidance of doubt, the third-party consents set forth
on Schedule 8.05 shall be the only third-party consents with respect to Material
Contracts required for Closing, provided further that the Seller and the Parent
shall use best efforts consistent with Section 2.02(b) to obtain any other
third-party consents following Closing). Simultaneously with the delivery of
such instruments and agreements, the Parent and Seller shall put the Purchaser
in actual possession and operating control of the Assets, free and clear of all
Encumbrances, except Permitted Encumbrances.
(b) Anything in this Agreement to the contrary notwithstanding, this
Agreement shall not constitute an agreement to assign any Asset or any claim or
right or any benefit arising thereunder or resulting therefrom if such
assignment, without the consent of a third party thereto, would constitute a
breach or other contravention of such Asset or in any way adversely affect the
rights of the Purchaser or the Seller thereunder. The Purchaser, the Seller and
the Parent shall use their best efforts (but without the payment of money by the
Seller, the Parent or the Purchaser) to obtain the consent of the other parties
to any such Asset or claim or right or any benefit arising thereunder for the
assignment thereof to the Purchaser as the Purchaser may request. If such
consent is not obtained, or if an attempted assignment thereof would be
ineffective or would adversely affect the rights of the Seller thereunder so
that the Purchaser would not in fact receive all such rights, the Seller, the
Parent and the
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Purchaser shall cooperate in a mutually agreeable arrangement under which the
Purchaser would obtain the benefits and assume the obligations thereunder in
accordance with this Agreement, including subcontracting, sublicensing, or
subleasing to the Purchaser, or under which the Seller would enforce for the
benefit of the Purchaser, with the Purchaser assuming the Seller's obligations,
any and all rights of the Seller against a third party thereto. The Seller and
the Parent shall promptly pay to the Purchaser when received all monies received
by the Seller or the Parent under any Asset or any claim or right or any benefit
arising thereunder.
Section 2.03 PURCHASE PRICE; ESCROW AMOUNT. (a) The consideration (the
"PURCHASE PRICE") to be paid to the Parent by the Purchaser for the Assets shall
be $150,000,000, which shall be paid, less the Escrow Amount and the Closing
Reduction Amount (if any), on the Closing Date in cash by wire transfer of
immediately available funds to a bank account of the Seller designated by the
Seller to the Purchaser in writing not less than two Business Days prior the
Closing. The Purchase Price is subject to adjustment as set forth in
Section 2.03(b) and Section 2.04. On the Closing Date the Purchaser shall
deposit the Escrow Amount into escrow pursuant to a mutually agreed-upon escrow
agreement (the "ESCROW AGREEMENT"). The Escrow Amount, less any amounts thereof
that are subject to, or previously paid to the Purchaser in respect of, claims
for indemnification by the Purchaser hereunder, shall be released to the Seller
as to 25% thereof on each 6-month anniversary of the Closing; provided that 100%
of the Escrow Amount, less any amounts thereof that are subject to, or
previously paid to the Purchaser in respect of, claims for indemnification that
have been made by the Purchaser under this Agreement, shall be released to the
Seller upon the closing of the Parent Merger and the express written assumption
by Waxs of the Seller's and the Parent's indemnification and other obligations
hereunder.
(b) (i) Five Business Days prior to Closing the Parent and the Seller shall
deliver to the Purchaser their best estimate of the cash, accounts payable and
accounts receivable (together with an estimate of sales and purchases of the
Company for the thirty days prior to Closing and such information reasonably
necessary for the Purchaser to evaluate all of the foregoing items) (the
"ESTIMATED CLOSING STATEMENT") of the Company as of such date. During the three
Business Days commencing with the delivery of the Estimated Closing Statement
the parties shall, together with their respective accountants, work together to
agree upon the calculation set forth in the Estimated Closing Statement and
whether the Days Accounts Payable and Receivable for the 30 days prior to
Closing vary materially from the Days Accounts Payable and Receivable for the
30 days prior to December 31, 1999. If the parties reach agreement as to the
foregoing calculation and agree that the respective Days Accounts Payable and
Receivable for the foregoing periods vary materially, the Purchase Price shall
be automatically reduced to the extent such variance would result in lower
accounts receivable being purchased and/or higher accounts payable being assumed
by the Purchaser, such reduction to be calculated based on the accounts
receivable and accounts payable of the Seller that would have existed at Closing
had such variance not existed, and such amount shall be deemed the "CLOSING
REDUCTION AMOUNT". If the parties are unable to reach agreement by the date that
is two Business Days prior to Closing, the parties shall submit the matter for
resolution by an Independent Third Party, together with the parties' respective
calculations. The Independent Third Party shall be instructed to render its
determination of the correct Estimated Closing Statement and the amount, if any,
by which the Purchase Price should be reduced (such amount then being deemed the
"CLOSING REDUCTION AMOUNT") within such two Business Day period and by Closing,
and such determination shall be binding on the parties at Closing. The costs and
expenses of the Independent Third Party hereunder shall be borne equally by the
parties hereto.
(ii) As promptly as practicable, but no later than 60 days, after the
Closing Date, the Parent will cause to be prepared and delivered to the
Purchaser the Closing Balance Sheet (as defined below), and a certificate
signed by the Controller or Chief Financial Officer of Seller based on such
Closing Balance Sheet setting forth the Parent's calculation of Net Assets
(as defined below).
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The Closing Balance Sheet (the "CLOSING BALANCE SHEET") shall (x) fairly
present the Assets and Assumed Liabilities as at the close of business on
the Closing Date in accordance with GAAP applied on a basis consistent with
those used in the preparation of the Balance Sheet, any (y) include line
items substantially consistent with those in the Balance Sheet. "NET ASSETS"
shall mean an amount equal to (i) the Assets minus (ii) the Assumed
Liabilities.
(c) If the Purchaser disagrees with the Parent's calculation of Net Assets
delivered pursuant to Section 2.03(b)(ii) the Purchaser may, within 60 days
after delivery of the documents referred to in Section 2.03(b)(ii), deliver a
notice to the Parent disagreeing with such calculation and setting forth the
Purchaser's calculation of such amount. Any such notice of disagreement shall
specify those items or amounts as to which the Purchaser disagrees.
(d) If a notice of disagreement shall be duly delivered pursuant to
Section 2.03(c), the Purchaser and the Parent shall, during the 30 days
following such delivery, use their best efforts to reach agreement on the
disputed items or amounts in order to determine, as may be required, the amount
of Net Assets, which amount shall not be more than the amount thereof shown in
the Parent's calculations delivered pursuant to Section 2.03(b)(ii) nor less
than the amount thereof shown in the Purchaser's calculation delivered pursuant
to Section 2.03(c). If during such period, the Purchaser and the Parent are
unable to reach such agreement, they shall promptly thereafter cause the
Independent Third Party promptly to review this Agreement and the disputed items
or amounts for the purpose of calculating Net Assets. In making such
calculation, the Independent Third Party shall consider only those items or
amounts in the Closing Balance Sheet or the Parent's calculation of Net Assets
as to which the Purchaser has disagreed as specified in the notice delivered
pursuant to Section 2.03(c). The Independent Third Party shall deliver to the
Purchaser and the Parent, as promptly as practicable, a report setting forth
such calculation. Such report shall be final and binding upon the Purchaser and
the Parent and the Seller. The cost of such review and report shall be borne
(i) by the Parent if the difference between Final Net Assets (as defined in
Section 2.04(a)) and Net Assets as set forth in the Parent's calculation of Net
Assets delivered pursuant to Section 2.03(b)(ii) is greater than the difference
between Final Net Assets and Net Assets as set forth in the Purchaser's
calculation of Net Assets delivered pursuant to Section 2.03(c), (ii) by the
Purchaser if the first such difference is less than the second such difference
and (iii) otherwise equally by the Purchaser and the Parent.
(e) The Purchaser, the Parent and the Seller agree that they will, and agree
to cause their respective independent accountants to, cooperate and assist in
the preparation of the Closing Balance Sheet and the calculation of Net Assets
and in the conduct of the audits and reviews referred to in this Section 2.03,
including without limitation, the making available to the extent necessary of
books, records, work papers and personnel.
Section 2.04 ADJUSTMENT OF PURCHASE PRICE. (a) If Base Net Assets exceeds
Final Net Assets, the Parent shall pay to the Purchaser, as an adjustment to the
Purchase Price, in the manner and with interest as provided in Section 2.04(b),
the amount of such excess. If Final Net Assets exceeds Base Net Assets, the
Purchaser shall pay to the Parent, in the manner and with interest as provided
in Section 2.04(b), the amount of such excess. "BASE NET ASSETS" means
$47,589,862 (i.e., the sum of (i) $37,223,490 plus (ii) $10,366,372), and has
been calculated as set forth on Schedule 2.04(a). "FINAL NET ASSETS" means Net
Assets (i) as shown in the Parent's calculation delivered pursuant to
Section 2.03(b) if no notice of disagreement with respect thereto is duly
delivered pursuant to Section 2.03(c); or (ii) if such a notice of disagreement
is delivered, (A) as agreed by the Purchaser and the Parent pursuant to
Section 2.03(d) or (B) in the absence of such agreement, as shown in the
Independent Third Party's calculation delivered pursuant to Section 2.03(d);
provided that in no event shall Final Net Assets be more than the Parent's
calculation of Net Assets delivered pursuant to Section 2.03(b) or less than the
Purchaser's calculation of Net Assets delivered pursuant to Section 2.03(c); and
provided further that the Parent shall receive a credit for any payments to be
made by it under this Section 2.04(a) of up to $10,366,372 (the amount of
transaction taxes payable in
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respect of debit-card sales and use taxes included in the Balance Sheet and not
assumed by the Purchaser), it being understood that (x) the Closing Reduction
Amount shall be recalculated pursuant to the terms hereof and any increase
thereto shall reduce Final Net Assets dollar for dollar to the extent of such
increase and the foregoing credit shall not be applied against any such
reduction, (y) any decrease in the Closing Reduction Amount pursuant to such
recalculation shall increase Final Net Assets dollar for dollar to the extent of
such decrease (but not above the original Closing Reduction Amount determined at
Closing) and (z) any unused portion of such credit shall not be applied against
any other payments to be made by the Seller or the Parent under any other
provision of this Agreement.
(b) Any payment pursuant to Section 2.04(a) shall be made at a mutually
convenient time and place within 10 days after Final Net Assets has been
determined by delivery by the Purchaser or the Parent, as the case may be, of a
certified or official bank check payable in immediately available funds to the
other party or by causing such payments to be credited by wire transfer to such
account of such other party as may be designated by such other party.
(c) Notwithstanding anything in this Agreement to the contrary, the
Purchaser, the Parent and the Seller agree that the Purchase Price shall not be
adjusted in connection with, and the Purchaser shall not have the right to
disagree with, the financial accounting used by the Company with respect to the
two DS-3s on undersea cable Atlantic Crossing--1 ("AC-1").
Section 2.05 THE CLOSING. The Closing shall take place at 10:00 a.m. at
the offices of Wollmuth Maher & Deutsch LLP, 500 Fifth Avenue, New York, New
York 10110, as soon as possible after all Required Regulatory Approvals are
obtained, but in no event later than 5 Business Days after satisfaction of the
conditions set forth in Articles VIII and IX, or at such other time or place as
may be mutually agreed by the parties.
Section 2.06 FURTHER ASSURANCES. From and after the Closing, upon written
request from any party to this Agreement, the requested party shall execute,
acknowledge and deliver all such further acts, assurances, deeds, assignments,
transfers, conveyances and other instruments and papers as may be reasonably
required to sell, assign, transfer, convey and deliver the Assets to the
Purchaser and for the Purchaser to assume the Assumed Liabilities and the Seller
to retain the Excluded Liabilities.
Section 2.07 EMPLOYEES. As of the Closing Date, the Purchaser shall hire
(or make offers to hire) all or substantially all of the Seller's employees as
employees of the Purchaser (the "TRANSFERRED EMPLOYEES"). The Purchaser shall
take all such reasonable actions as are necessary to allow the Transferred
Employees, as of the Closing Date and to the extent such employees are eligible,
to participate in the benefit programs of the Purchaser, and shall use
reasonable efforts to ensure that such benefit plans are substantially similar
to those of the Seller.
ARTICLE III
ASSUMPTION OF LIABILITIES
Section 3.01 ASSUMED LIABILITIES; MANNER OF ASSUMPTION OF ACCRUED TAXES AND
ACCRUED PAYPHONE COMPENSATION. In addition to the payment of the Purchase
Price, the Purchaser shall, subject to the provisions hereof, assume at the
Closing the Assumed Liabilities. Notwithstanding any provision in this Agreement
or any other writing to the contrary, the Purchaser is assuming only the Assumed
Liabilities and is not assuming the Excluded Liabilities including any other
liability or obligation of Seller (or any predecessor of Seller or any prior
owner of all or part of its businesses and assets) of whatever nature, whether
presently in existence or arising hereafter. All such other liabilities and
obligations shall be retained by and remain obligations and liabilities of
Seller. The parties hereto acknowledge and agree that any Assumed Liabilities
constituting accrued taxes payable and accrued Payphone Compensation shall
remain primarily obligations of the Seller subject to reimbursement, or payment
on the Seller's
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behalf, by the Purchaser upon its receipt from the Seller of evidence reasonably
satisfactory to the Purchaser that such amounts are required to be paid (i.e.,
the Purchaser shall not, without limitation, be required to file any tax returns
or be named a party to any litigation or other proceedings).
Section 3.02 BILL OF SALE. On the Closing Date, the Purchaser shall
execute and deliver to the Seller the Bill of Sale.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE PARENT
The Parent represents and warrants to the Purchaser as of the date hereof
and as of the Closing Date as follows:
Section 4.01 OWNERSHIP AND TITLE TO THE SHARES. The Parent is the record
and beneficial owner of 100% of the shares of the Common Stock (as defined
below) and has good and valid title in and to such securities.
Section 4.02 CORPORATE ORGANIZATION; SUBSIDIARIES. The Parent is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware with all requisite corporate power and authority to
own, operate and lease its properties and to carry on its business as it is now
being conducted, and, except as set forth on Schedule 4.02 (which exceptions
shall remain indemnifiable obligations of the Parent), is qualified or licensed
to do business and is in good standing in each jurisdiction in which the failure
to be so qualified or licensed, in the aggregate, would have a Company Material
Adverse Effect (as defined below). True and correct copies of the Certificate of
Incorporation and the Bylaws of the Parent have been delivered or made available
to the Purchaser.
Section 4.03 AUTHORITY RELATIVE TO AGREEMENT. The Parent has the full
power and authority to execute this Agreement and the other transactions
contemplated on its part hereby. The Parent has taken, or prior to the Closing
will have taken, all steps (including obtaining any necessary shareholder
action) that may be necessary to duly authorize the execution and delivery by
the Parent of this Agreement and the consummation of the transactions
contemplated on its part hereby, and no other action on the part of the Parent
(other than the obtaining of shareholder approval, which shall be sought prior
to Closing) is necessary to authorize the execution and delivery of this
Agreement by the Parent or the consummation of the transactions contemplated on
its part hereby. This Agreement has been duly executed and delivered by the
Parent, and constitutes a legal, valid and binding obligation of the Parent,
enforceable against the Parent in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, moratorium, reorganization or
other laws affecting the enforcement of creditors' rights generally or by
general equitable principles. Each other agreement to be executed in connection
with this Agreement by the Parent on or prior to the Closing Date will be duly
executed and delivered by the Parent and will constitute a legal, valid and
binding obligation of the Parent, enforceable against the Parent in accordance
with its terms, except as may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or other laws affecting the enforcement of creditors'
rights generally or by general equitable principles.
Section 4.04 NO VIOLATIONS OR CONSENTS. The execution, delivery and
performance of this Agreement by the Parent and the consummation of the
transactions contemplated hereby will not (i) materially violate, conflict with
or result in a breach of or the acceleration of any obligation under, or
constitute a default (or an event which with notice or the lapse of time or both
would become a default) under, or give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation of an
Encumbrance on any property or asset of the Parent pursuant to any provision of
any contract to which the Parent is bound, or (ii) materially violate or
conflict with any law, rule, regulation, permit, ordinance or regulation
applicable to the Parent or by which any property or asset of the Parent is
bound or affected.
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Section 4.05 PROXY STATEMENT; OTHER INFORMATION. The information supplied
or to be supplied in writing by the Parent specifically for inclusion in the
proxy materials relating to the Asset Sale which shall constitute part of the
joint proxy statement and prospectus in connection with the stockholders meeting
for the Parent and Waxs (such proxy statement and prospectus, as amended or
supplemented, the "PARENT PROXY STATEMENT") and any other documents to be filed
with the Securities and Exchange Commission (the "SECURITIES AND EXCHANGE
COMMISSION") or any other regulatory agency in connection with the transactions
contemplated hereby will, at the respective times such documents are filed, or,
as applicable, declared effective, and on the effective time, and, with respect
to the Parent Proxy Statement, when first published, sent or given to
stockholders of the Parent, not be false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements therein relating to the Asset Sale not misleading or, in the case of
the Parent Proxy Statement or any amendment thereof or supplement thereto, be
false or misleading with respect to any material fact, or omit to state any
material fact necessary to correct any statement in any earlier communication
with respect to the solicitation of any proxy for such meeting relating to the
Asset Sale.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE PARENT
The Company and the Parent jointly and severally represent and warrant to
the Purchaser as of the date hereof and as of the Closing Date as follows:
Section 5.01 CORPORATE ORGANIZATION; SUBSIDIARIES.
(a) ORGANIZATION. The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of New York with
all requisite corporate power and authority to own, operate and lease its
properties and to carry on its business as it is now being conducted, and is
qualified or licensed to do business and is in good standing in each
jurisdiction in which the failure to be so qualified or licensed, in the
aggregate, would have a material adverse effect on the financial condition,
results of operations, business or properties of the Company and its
Subsidiaries (as defined below), taken as a whole (a "Company Material
Adverse Effect"). True and correct copies of the Certificate of
Incorporation and the Bylaws of the Company and each Subsidiary have been
delivered or made available to the Purchaser.
(b) SUBSIDIARIES. Schedule 5.01(b) contains a true and complete list
of all of the Subsidiaries, listing the name and jurisdiction of
incorporation or organization of each such Subsidiary. Except as set forth
on Schedule 5.01(b), each Subsidiary is a corporation duly organized and
validly existing and in good standing under the laws of its respective
jurisdiction of incorporation, has the corporate power and authority to own,
operate or lease the properties and assets now owned, operated or leased by
such Subsidiary and to carry on its business as now being conducted by such
Subsidiary, is duly qualified as a foreign corporation to do business, and
is in good standing, in each jurisdiction set forth on Schedule 5.01(b),
which are all of the jurisdictions in which the failure so to qualify would
have a Company Material Adverse Effect. The Company owns the requisite
amount of the issued and outstanding capital stock of each Subsidiary, free
and clear of any and all Encumbrances except as set forth on
Schedule 5.01(b), necessary to cause the transfer by the Subsidiaries to the
Purchaser of any Assets held by them without the consent of any third party,
except as set forth on Schedule 5.05. The Company does not own, directly or
indirectly, any stock, partnership interest, joint venture interest or other
security, investment or interest in any other corporation, organization or
entity, other than the Subsidiaries.
Section 5.02 CAPITAL STOCK. As of the date hereof, the authorized capital
stock of the Company consists in its entirety of 1,000 shares of common stock,
par value $.001 per share (the "COMMON STOCK") of which 1,000 shares are issued
and outstanding. Except as set forth in this Section 5.02, there are no voting
trusts or other outstanding securities of the Company entitled to vote on the
Asset Sale.
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Section 5.03 RESERVED.
Section 5.04 AUTHORITY RELATIVE TO AGREEMENT. The Company has full
corporate power and authority to execute and deliver this Agreement and to
consummate the Asset Sale and the other transactions contemplated on its part
hereby. The execution and delivery by the Company of this Agreement and the
consummation of the transactions contemplated on its part hereby have been duly
authorized by its Board of Directors and the Parent, as the sole stockholder of
the Company, such authorization being in compliance with the provisions of
Section 909 of the Business Corporation Law, and no other corporate proceeding
on the part of the Company or, except for the stockholder vote of the Parent,
the Parent is necessary to authorize the execution and delivery of this
Agreement by the Company or the consummation of the transactions contemplated on
its part hereby. This Agreement has been duly executed and delivered by the
Company, and constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, moratorium, reorganization or
other laws affecting the enforcement of creditors' rights generally or by
general equitable principles. Each other agreement to be executed in connection
with this Agreement by the Company on or prior to the Closing Date will be duly
executed and delivered by the Company, and will constitute a legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except as may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or other laws affecting the enforcement of creditors'
rights generally or by general equitable principles.
Section 5.05 NO VIOLATIONS OR CONSENTS. Except as set forth on
Schedule 5.05, the execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby will not
(i) violate or conflict with any provision of any charter or bylaws of the
Company or any Subsidiary, (ii) require the consent, waiver, approval, license
or authorization of or any filing by the Company or any Subsidiary with any
third party or public authority (other than (a) the filing of a pre-merger
notification report under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder (the "HSR
ACT"), (b) in connection with or in compliance with the provisions of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), the Securities
Act of 1933, as amended (the "SECURITIES ACT"), the Communications Act of 1934,
as amended (the "COMMUNICATIONS ACT") and the rules and regulations arising
thereunder, the Business Corporation Law or the "PUBLIC UTILITIES" laws of
various states, (iii) violate, conflict with or result in a breach of or the
acceleration of any obligation under, or constitute a default (or an event which
with notice or the lapse of time or both would become a default) under, or give
to others any right of termination, amendment, acceleration or cancellation of,
or result in the creation of an Encumbrance on any property or asset of the
Company or any Subsidiary pursuant to any provision of any Material Contract (as
defined below), lien, order, judgment or decree to which any such party is
subject or by which the Company or any Subsidiary or any of their property or
assets is bound, or (iv) violate or conflict with any law, rule, regulation,
permit, ordinance or regulation applicable to the Company or any Subsidiary or
by which any property or asset of the Company or any Subsidiary is bound or
affected except, in each of the instances set forth in items (i) through
(iv) above, where failure to give such notice, make such filings, or obtain such
authorizations, consents or approvals, or where such violations, conflicts,
breaches or defaults, in the aggregate, would not have a Company Material
Adverse Effect.
Section 5.06 GOVERNMENTAL AUTHORIZATIONS AND REGULATIONS. Set forth on
Schedule 5.06 is a true and complete list of all material governmental licenses,
franchises, permits and other authorizations, including without limitation any
and all licenses issued to the Company or any Subsidiary by the United States
Federal Communications Commission (the "FCC"), by state public utilities
commissions and by all applicable foreign telecommunications regulatory entities
(the "FOREIGN AGENCIES") ("COMPANY PERMITS") held by the Company and the
Subsidiaries. Such Company Permits are all governmental licenses, franchises,
permits and other authorizations necessary to the conduct of the business of the
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Company and the Subsidiaries as presently conducted. Such Company Permits are
valid and in full force and effect and the Company knows of no threatened
suspension, cancellation or invalidation of any such Company Permit. Except as
set forth on Schedule 5.06, the Company has not received notice from any of the
FCC, any state public utilities commissions or any Foreign Agencies of any
complaint filed therewith concerning the Company, its operations or services
and, to the best knowledge of the Company and the Parent, there is no reasonable
basis for the filing of any such complaint. Neither the Company nor any
Subsidiary is in conflict with, or is in default or violation of, any tariffs,
law, rule, regulation, order, judgment, Company Permit, ordinance, regulation or
decree applicable to the Company or any Subsidiary or by which any property or
asset of either of them is bound or affected, except where such conflicts,
defaults or violations, in the aggregate, would not have a Company Material
Adverse Effect.
Section 5.07 LITIGATION. Except as set forth on Schedule 5.07 hereto,
there are no actions, proceedings, claims, complaints, grievances, unfair labor
practice complaints or investigations (collectively, "ACTIONS") pending or, to
the best knowledge of the Company and the Parent, threatened against the Company
or the Parent or any of the assets or properties of the Company before any court
or governmental or regulatory authority or body or arbitrator, which, if such
Action were determined adversely to the Company, would have, individually or in
the aggregate, a Company Material Adverse Effect. There are no Actions pending
or, to the best knowledge of the Company and the Parent, threatened against the
Company or the Parent challenging the validity or propriety of the transactions
contemplated by this Agreement. Except as set forth on Schedule 5.07 (which
exceptions will not result in a Company Material Adverse Effect), none of the
assets, property or other rights of the Company or any Subsidiaries thereof is
subject to any order, judgment, injunction, writ or decree, which would have,
individually or in the aggregate, a Company Material Adverse Effect.
Section 5.08 FINANCIAL STATEMENTS AND REPORTS; MATERIAL LIABILITIES;
PROJECTIONS.
(a) FINANCIAL STATEMENTS AND REPORTS. The Company's audited balance
sheets and its audited statements of operations, stockholder's equity and
cash flows as of and for the fiscal years ended March 31, 1998 and
December 31, 1999 (the "AUDITED FINANCIALS"), as well as the Company's
unaudited balance sheet and unaudited statements of operations (the "MARCH
STATEMENT OF OPERATIONS"), as of and for the quarter ended March 31, 2000
(collectively with the Audited Financials, the "COMPANY FINANCIAL
STATEMENTS") were prepared from and are in accordance with the books and
records of the Company and were prepared in accordance with GAAP applied on
a consistent basis and (except as may be indicated therein or in the notes
thereto) present fairly in all material respects the consolidated financial
position, results of operations and cash flows of the Company and its
consolidated subsidiaries as of the dates and for the periods indicated;
provided that the March Statement of Operations is subject to normal
year-end adjustments and lacks footnotes and other presentations.
(b) MATERIAL LIABILITIES. Except as set forth on the Balance Sheet or
disclosed in the notes thereto, the Company has no material liabilities or
obligations (whether fixed, accrued, contingent or otherwise, but not
including the Excluded Liabilities) that are not fully reflected or provided
for on, or disclosed in the notes to, the Company Financial Statements,
except for (i) liabilities in the ordinary course of business that could not
be reasonably expected to have a Company Material Adverse Effect or
(ii) liabilities incurred in the ordinary course of business that are not
required by GAAP to be reflected thereon and which, individually and in the
aggregate, are not material.
Section 5.09 ABSENCE OF CERTAIN CHANGES. Except as set forth on
Schedule 5.09 or as otherwise expressly permitted under this Agreement, since
December 31, 1999, the Company has conducted its business in the ordinary course
and there has not been any:
(a) material adverse change in the financial condition, assets,
liabilities, business or results of operations of the Company or any
Subsidiary;
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(b) addition to or modification of employee benefits plans, arrangements
or practices, other than in the ordinary course of business;
(c) sale, assignment or transfer of any of the material assets of the
Company or any Subsidiary, other than in the ordinary course of business,
consistent with past practice;
(d) cancellation of any indebtedness owed to the Company in an aggregate
amount greater than Seventy-five Thousand Dollars ($75,000), or waiver of
any rights of similar value to the Company relating to any of its business
activities or properties, other than in the ordinary course of business;
(e) material amendment, cancellation or termination of any Material
Contract, other than in the ordinary course of business, consistent with
past practice;
(f) any material breach of, or default under, any Material Contract by
the Company or any Subsidiary;
(g) change in accounting methods, principles or practices by the Company
materially affecting its assets, liabilities or results of operations;
(h) material revaluation by the Company or any Subsidiary of its assets,
including without limitation, any material write-offs, material increases in
any reserves or any material write-up of the value of inventory, property,
equipment or any other asset;
(i) material damage, destruction or loss (if not covered by insurance)
affecting any office or other facility maintained by the Company or any
other material asset of the Company and resulting in a loss in an aggregate
amount in excess of One Hundred Thousand Dollars ($100,000);
(j) Encumbrance with respect to any assets of the Company or any
Subsidiary, except Permitted Encumbrances;
(k) declaration, setting aside or payment of any dividend or other
distribution or payment (whether in cash, stock or property) with respect to
any shares of Common Stock, or any redemption, purchase or other acquisition
of any of such shares, or any other payment to the stockholders of the
Company with respect to the shares of Common Stock held thereby other than
intercompany payments in the ordinary course of business consistent with
past practices;
(l) issuance by the Company of, or commitment by it to issue, any shares
of Common Stock or other equity securities or any securities convertible
into or exchangeable or exercisable for shares of the Common Stock or other
equity securities;
(m) indebtedness for borrowed money incurred by the Company or any
Subsidiary or any commitment to incur indebtedness for borrowed money
entered into by the Company or any Subsidiary, or any loans made or agreed
to be made by the Company, including without limitation, any loans made to
any of the Company's executive officers;
(n) incurrence of other liabilities by the Company or any Subsidiary
involving an aggregate amount in excess of One Hundred Fifty Thousand
Dollars ($150,000) or more, except in the ordinary course of business, or
any material increase or change in any assumptions underlying, or methods of
calculating, any bad debt, contingency or other reserves;
(o) payment, discharge or satisfaction of any liabilities other than the
payment, discharge or satisfaction in the ordinary course of business,
consistent with past practice, of liabilities reserved against in the
Financial Statements or of liabilities incurred in the ordinary course of
business, consistent with past practice, since such date or of other
liabilities involving Fifty Thousand Dollars ($50,000) or less individually
and One Hundred Fifty Thousand Dollars ($150,000) or less in the aggregate;
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(p) increase in the compensation of officers or employees (including any
such increase pursuant to any bonus, pension, profit sharing or other plan
or commitment) or any increase in the compensation payable or to become
payable to any officer or employee or any severance or termination pay,
except for increases in the ordinary course of business, consistent with
past practice or as required by law or any existing agreement;
(q) granting of any bonus, incentive compensation, service, award or
other like benefit to any officer or employee except in accordance with
plans or arrangements disclosed on Schedule 5.11; or
(r) other event or condition of any character which in any one case or
in the aggregate could be reasonably expected to have a Company Material
Adverse Effect.
Section 5.10 BENEFIT PLANS. Except as disclosed on Schedule 5.10, the
Company does not have outstanding any employment agreement with any officer or
employee of the Company or any Subsidiary or any bonus, incentive compensation,
deferred compensation, profit sharing, stock option, stock bonus, stock
purchase, savings, severance, salary continuation, consulting, retirement
(including health and life insurance benefits provided after retirement) or
pension plan (including Company Employee Benefit Plans, as defined in
Section 5.11 hereof) or arrangement with or for the benefit of any officer,
employee or other person, or for the benefit of any group of officers, employees
or other persons that provides for payment of more than $100,000 in annual
benefits. Neither the Company nor any Subsidiary has made, or entered into any
agreement to make, any payment that becomes payable as a result of the
consummation of the transactions contemplated by this Agreement which would be
treated as an "EXCESS PARACHUTE PAYMENT" as defined in Section 280G of the Code.
There are no such agreements, plans or other arrangements entered into with or
provided for any independent contractors with whom the Company or any Subsidiary
has a business relationship.
Section 5.11 ERISA. Set forth on Schedule 5.11 are all of the employee
benefit plans, as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), but without regard to whether any
such plan is in fact subject to ERISA, that is sponsored, or is being maintained
or contributed to, by the Company or any Subsidiary that provides for payment of
more than $25,000 in annual benefits (the "COMPANY EMPLOYEE BENEFIT PLANS").
None of the Company Employee Benefit Plans are "MULTIEMPLOYER PLANS" as defined
in Section 3(37) of ERISA. The Company has furnished or made available or will
promptly after the date hereof make available to the Purchaser (a) a true and
complete copy of the plan document and summary plan description for each Company
Employee Benefit Plan, (b) a true and complete copy of the most recently filed
Form 5500 (including the related schedules) with respect to each Company
Employee Benefit Plan for which such form is required to be filed, (c) a true
and complete copy of any trust agreement, insurance contract or other agreement
or arrangement serving as a source of funding any benefits payable under any
Company Employee Benefit Plan, and (d) the most recently issued financial
statement and actuarial report, if any, for each Company Employee Benefit Plan.
No "PROHIBITED TRANSACTIONS" (as such term is defined in Section 4975 of the
Code, or in Part 4 of Subtitle B of Title I of ERISA) have occurred with respect
to any Company Employee Benefit Plan that could result in the imposition of
taxes or penalties that, in the aggregate, would have a Company Material Adverse
Effect. With respect to each of the Company Employee Benefit Plans that is
intended to qualify for favorable income tax treatment under Section 401(a) of
the Code, (i) the Internal Revenue Service ("IRS") has issued a favorable
determination letter with respect to such plan; (ii) except as set forth on
Schedule 5.11, the Company has furnished the Purchaser with a copy of the
determination letter most recently issued by the IRS with respect to such plan
and the application filed with the IRS for such determination letter; and
(iii) to the best knowledge of the Company, no event has occurred from the date
of each such favorable determination letter that would adversely affect the
tax-qualified status of the plan in question. Each Company Employee Benefit Plan
has been administered in compliance with the applicable requirements of ERISA
and the Code, and in compliance with all other applicable provisions
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of law, except for such noncompliance, if any, that, in the aggregate, would not
have a Company Material Adverse Effect. With respect to each Company Employee
Benefit Plan, neither the Company nor any Subsidiary has incurred liabilities
which, in the aggregate, could have a Company Material Adverse Effect as a
result of the violation of or the failure to comply with any applicable
provision of ERISA, the Code, any other applicable provision of law, or any
provision of such plan. None of the Company Employee Benefit Plans which is an
"EMPLOYEE PENSION BENEFIT PLAN", as that term is defined in Section 3(2) of
ERISA (a "COMPANY EMPLOYEE PENSION BENEFIT PLAN"), has incurred an "ACCUMULATED
FUNDING DEFICIENCY," within the meaning of Section 3(2) of ERISA or Section 412
of the Code. Neither the Company nor any Subsidiary has failed to make any
contribution to, or to make any payment under, any Company Employee Benefit Plan
that it was required to make pursuant to the terms of the plan or pursuant to
applicable law in any amount which, in the aggregate, could have a Company
Material Adverse Effect. To the best knowledge of the Company, no "REPORTABLE
EVENTS," with respect to which a notice must be filed with the Pension Benefit
Guaranty Corporation ("PBGC"), has occurred with respect to any Company Employee
Pension Benefit Plan subject to Title IV of the ERISA. No proceedings by the
PBGC to terminate any Company Employee Pension Benefit Plan pursuant to Subtitle
C of Title IV of ERISA have to the best of the Company's knowledge, been
instituted or threatened. Except for any liabilities in an amount which, in the
aggregate, would not have a Company Material Adverse Effect, neither the Company
nor any Subsidiary (1) has incurred any liability to the PBGC in connection with
any Company Employee Pension Benefit Plan, including any liability under
Section 4069 of ERISA and any penalty imposed under Section 4071 of ERISA,
(2) has terminated any Company Employee Pension Benefit Plan, or ceased
operations at any facility or withdrawn from any Company Employee Pension
Benefit Plan, in a manner that could subject it to liability or any liens under
Section 4062, 4063, 4064 or 4068 of ERISA or (3) has any knowledge as to the
existence of any state of facts, or as to the occurrence of any transactions,
that might reasonably be anticipated to result in any liability of the Company
or any Subsidiary to the PBGC under any other provision of Title IV of ERISA.
There is no pending or, to the best knowledge of the Company, threatened
legal action, proceeding or investigation against or involving any Company
Employee Benefit Plan which could result in liabilities to the Plan, the Company
or any Subsidiary. Except as disclosed on Schedule 5.11, the present value of
accrued benefits of each Company Employee Benefit Plan that is a defined benefit
plan as defined in Section 3(35) of ERISA does not exceed the value of the
assets of such plan available to pay such benefits by an amount that, in the
aggregate for all such plans, could have a Company Material Adverse Effect. All
representations made by the Company in this Section 5.11 are likewise true with
respect to each Subsidiary.
Section 5.12 ENVIRONMENTAL MATTERS. "COMPANY REAL PROPERTIES" shall mean
all real property now or previously owned, operated or leased by the Company,
any Subsidiary or any predecessor-in-interest. Except as set forth on
Schedule 5.12: (i) the Company, each of the Subsidiaries, and to the best of the
Company's knowledge, each of the Company Real Properties is in compliance with,
and has no liability under any federal, state, or local law, statute, rule or
regulation, or the common law governing or relating to the environment or to
occupational health and safety ("ENVIRONMENTAL LAW"), (ii) none of the Company,
any Subsidiary or any of the Company Real Properties has been alleged in writing
by any governmental agency or third party to be in violation of, to be liable
under, or to be subject to any administrative or judicial proceeding pursuant
to, any Environmental Law, and (iii) there are no facts or circumstances which
could reasonably form the basis for the assertion of any claims against the
Company or any Subsidiary relating to environmental matters, except, in any such
case, where the failure to comply or such liability could not be reasonably
expected to have a Company Material Adverse Effect.
Section 5.13 REAL ESTATE LEASES. Schedule 5.13 sets forth a complete and
accurate list, copies of which have been delivered to the Purchaser, of (i) all
leases and subleases under which the Company
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or any Subsidiary is lessor or lessee of any real property, together with all
amendments, supplements, nondisturbance agreements and other agreements
pertaining thereto; (ii) all material options held by the Company or any
Subsidiary or contractual obligations on the part of the Company or any
Subsidiary to purchase or acquire any interest in real property; and (iii) all
options granted by the Company or any Subsidiary or contractual obligations on
the part of the Company or any Subsidiary to sell or dispose of any material
interest in real property in each such instance in items (i) through
(iii) above, which provides for a payment of more than $25,000. Such leases,
subleases and other agreements are in full force and constitute binding
obligations of the Company and, to the best of its knowledge, the other parties
thereto, and (i) there are no defaults thereunder by the Company or any
Subsidiary or, to the best of Company's knowledge, by any other party thereto
and (ii) no event has occurred which (with notice, lapse of time or both or
occurrence of any other event) would constitute a default by the Company or any
Subsidiary or, to the best of the Company's knowledge, by any other party
thereto, except, in either such instance, for defaults or events that could not
be reasonably expected to have a Company Material Adverse Effect. The Company or
a Subsidiary has good, valid and insurable leasehold title to all such leased
property, free and clear of all Encumbrances, except for Permitted Encumbrances.
Section 5.14 TITLE TO PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES. None
of the Company or any of its Subsidiaries owns any real property. Except for
leased assets, the Company and the Subsidiaries have good and insurable title to
all of their material tangible personal property used in their businesses,
including, without limitation, those reflected in the Balance Sheet (other than
assets disposed of in the ordinary course of business since December 31, 1999)
or other imperfections of title, if any, as would not, in the aggregate, have a
Company Material Adverse Effect on the operation of the business of the Company
or any Subsidiary, and except as reflected or disclosed in the Balance Sheet, or
on Schedule 5.14. On the Closing Date the Seller shall transfer to the Purchaser
the Assets free and clear of all Encumbrances, except Permitted Encumbrances.
Section 5.15 TAX MATTERS. Except as set forth on Schedule 5.15, the
Company has paid, or the Balance Sheet contains adequate provision for, all
Company Taxes for the Company taxable period ended on the date of the Balance
Sheet and all fiscal periods of the Company prior thereto. Company Taxes paid
and/or incurred from the date of the Balance Sheet until the Closing Date will
include only Company Taxes incurred in the ordinary course of business
determined in the same manner as in the taxable period ending on the date of the
Balance Sheet. Except as disclosed on Schedule 5.15, the Company and each of its
Subsidiaries have timely filed all income tax, excise tax, sales tax, use tax,
gross receipts tax, franchise tax, employment and payroll related tax, property
tax, and all other tax returns which the Company and/or each Subsidiary (as the
case may be) are required to file ("TAX RETURNS"), and have paid or provided for
all the amounts shown to be due thereon. Except as set forth on Schedule 5.15,
(i) neither the Company nor any Subsidiary has filed or entered into, or is
otherwise bound by, any election, consent or extension agreement that extends
any applicable statute of limitations with respect to taxable periods of the
Company, (ii) the Company is not a party to any contractual obligation requiring
the indemnification or reimbursement of any person with respect to the payment
of any Tax, (iii) no claim has ever been made or threatened by an authority in a
jurisdiction where the Company or any Subsidiary do not file Tax Returns that
they are or may be subject to taxes by that jurisdiction, (iv) no issues have
been raised by the relevant taxing authorities on audit that are of a recurring
nature and that would have an effect upon the Taxes of the Company or any
Subsidiary. Except as set forth on Schedule 5.15, to the best of the Company's
and each Subsidiary's knowledge, no action or proceeding is pending or
threatened by any governmental authority for any audit, examination, deficiency,
assessment or collection from the Company or any Subsidiary of any Company
Taxes, no unresolved claim for any deficiency, assessment or collection of any
Company Taxes has been asserted against the Company or any Subsidiary, and all
resolved assessments of Company Taxes have been paid or are reflected in the
Balance Sheet.
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Section 5.16 PROPRIETARY PROPERTY. Schedule 5.16 contains a complete and
accurate list of all material Proprietary Property. To the Company's knowledge,
none of the Company or the Subsidiaries has infringed or is now infringing on
any Proprietary Property belonging to any other person, firm or corporation. The
Company and the Subsidiaries own or hold adequate licenses or other rights to
use all Proprietary Property necessary for them to conduct their respective
businesses as they are being conducted, including without limitation, all such
rights relating to all software and related Proprietary Property used in and
necessary for the operation of the Company's debit card platform and the
Company's billing system relating to its 1010XXX program, except where the
failure to hold such rights could not be reasonably expected to result in a
Company Material Adverse Effect. Except as disclosed on Schedule 5.16, none of
the Company or the Subsidiaries has granted any licenses with respect to any of
their respective Proprietary Property. None of the Company or the Subsidiaries
has received any notice of, nor does the Company have any knowledge with respect
to, any claim of infringement or other conflict or claimed conflict with respect
to the rights of others to the use of the corporate name of the Company or any
Subsidiary or any of their Proprietary Property, except such conflicts or
claimed conflicts which, in the aggregate, would not result in a Company
Material Adverse Effect. No Proprietary Property is subject to any outstanding
order, judgment, decree, stipulation or agreement restricting the use thereof by
the Company or any Subsidiary or restricting the licensing thereof by the
Company or any Subsidiary to any Person. Except as set forth on Schedule 5.16,
neither the Company nor any Subsidiary has entered into any agreement to
indemnify any other party against any charge of infringement of any patent,
trademark, service mark or copyright. Except as set forth on Schedule 5.16, no
Proprietary Property contains any restriction regarding its use over the
internet or with respect to VOIP activities.
Section 5.17 LABOR MATTERS. Neither the Company nor any Subsidiary is a
party to any collective bargaining agreement with respect to any of their
employees. None of the employees of the Company or any Subsidiary are
represented by any labor union and, as of the date hereof, neither the Company
nor any Subsidiary has any knowledge of any union organizational efforts
involving the Company's employees during the past five years. Except as set
forth on Schedule 5.17, neither the Company nor any Subsidiary has received
written notice of any claim, or has knowledge of any facts which are likely to
give rise to any claim, that they have not complied in any material respect with
any laws relating to the employment of labor, including, without limitation, any
provisions thereof relating to wages, hours, collective bargaining, the payment
of social security and similar taxes, equal employment opportunity, employment
discrimination or employment safety.
Section 5.18 INSURANCE. Schedule 5.18 lists, as of the date of this
Agreement, all material policies of fire, products liability, general liability,
vehicle, worker's compensation, directors' and officers' liability, title and
other insurance owned or held by or covering the Company or any Subsidiary or
any of their property or assets which are material to the business of the
Company and any Subsidiary, taken as a whole. As of the date hereof, all of such
policies are in full force and effect, except as to matters or defaults which,
in the aggregate, would not have a Company Material Adverse Effect, and no
written notice of cancellation or termination has been received with respect to
any such policy which has not been replaced or cannot be replaced on
substantially similar terms prior to the date of such cancellation or
termination.
Section 5.19 MATERIAL CONTRACTS. Schedule 5.19 lists, as of the date of
this Agreement, the following contracts or agreements to which the Company or a
Subsidiary is a party or is bound (collectively, the "MATERIAL CONTRACTS"):
(i) all contracts or other agreements, whether or not made in the ordinary
course of business, which are material to the business of the Company and the
Subsidiaries taken as a whole; (ii) all contracts in the nature of mortgages,
indentures, promissory notes, loan or credit agreements or similar instruments
under which the Company and the Subsidiaries have borrowed or may borrow at
least $1,000,000; (iii) any personal property lease providing for annual rentals
of $500,000 or more; (iv) any agreement with a term of at least one year for the
purchase of
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materials, supplies, goods, services, equipment or other assets providing for
either annual payments by the Company and the Subsidiaries of $500,000 or more
or aggregate payments by the Company and the Subsidiaries of $1,000,000 or more;
(v) any sales, distribution or other similar agreement with a term of at least
six months, providing for the sale by the Company or any Subsidiary of
materials, supplies, goods, services, equipment or other assets that provides
for (A) annual payments to the Company and the Subsidiaries of $200,000 or more
and (B) does not by its terms permit the Company or any Subsidiary to pass any
increase in the costs of such materials, supplies, goods, services, equipment or
other assets on to the counterpart thereto; (vi) any material partnership, joint
venture or other similar agreement or arrangement; (vii) any material agreement
relating to the acquisition or disposition of any business (whether by cash
sale, sale of stock, sale of assets or otherwise); (viii) any and all carrier
services agreements, operating agreements and agreements with vendors; (ix) any
material option, license, franchise or similar agreement; (x) any material
agency, dealer, sales representative, marketing or other similar agreement;
(xi) any agreement that limits the freedom of the Company or any Subsidiary to
compete in any line of business or with any Person or in any area or which would
so limit the freedom of the Company or any Subsidiary after the Closing Date;
(xii) all agreements with qualified independent distributors; (xiii) any
agreement with any person directly or indirectly owning, controlling or holding
with power to vote, 5% or more of the outstanding voting securities of the
Company. Except as set forth on Schedule 5.19, each of the Material Contracts is
valid and binding and in full force and effect, enforceable by the Company in
accordance with its terms, except to the extent that such enforceability may be
subject to applicable bankruptcy, insolvency, moratorium, reorganization or
other laws affecting the enforcement of creditors' rights generally or by
general equitable principles. Except as set forth on Schedule 5.19, none of the
Company or any of the Subsidiaries or, to the best knowledge of the Parent and
the Company, any other party thereto, is in default in any respect, and no event
has occurred which (whether with or without notice, lapse of time or the
happening or occurrence of any other event) would constitute a default of the
Company or any Subsidiary or, to the knowledge of the Company, any third party,
under any of the Material Contracts, except such defaults which, in the
aggregate, would not result in a Company Material Adverse Effect, and all
accounts payable with respect to the Material Contracts and any material
suppliers and vendors of the Company and its Subsidiaries that do not also
materially apply to or service the Parent are current and have been and are
being paid per the terms of such contracts or agreements, excluding all amounts
being disputed in good faith (which disputed amounts, for the avoidance of
doubt, shall remain obligations of the Seller and the Parent). True and complete
copies of each of the Material Contracts have been delivered or made available
to the Purchaser.
Section 5.20 BROKERS. Except as set forth in Schedule 5.20, neither the
Company nor any Subsidiary has paid or become obligated to pay any fee or
commission to any broker, finder, investment banker or other intermediary in
connection with this Agreement.
Section 5.21 TRANSACTIONS WITH AFFILIATED PARTIES. Schedule 5.21 sets
forth a true and complete list and description of all transactions engaged in
since the date of the Balance Sheet between the Company and any affiliate
(including, without limitation, the Parent), director, officer, employee,
stockholder, partner or agent of the Company, or any of their respective spouses
or children, any trust of which any such person is the grantor, trustee or
beneficiary, any corporation of which any such person or party is a stockholder,
employee, officer or director, or any partnership or other person in which any
such person or party owns an interest (all such persons, trusts, corporations
and partnerships being herein referred to collectively as "AFFILIATED PARTIES"
and individually as an "AFFILIATED PARTY"). No Affiliated Party is a party to
any agreement, contract or commitment with the Company except as set forth in
Schedule 5.21.
Section 5.22 DISTRIBUTORS. Schedule 5.22 hereto sets forth the Company's
five (5) largest distributors for the fiscal year ended December 31, 1999 and
for the fiscal quarter ended March 31, 2000.
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Section 5.23 ACCOUNTS RECEIVABLE. The accounts receivable of the Company
set forth on the Balance Sheet, and all accounts receivable of the Company at
the Closing Date which are included in the Assets will have arisen only from
bona fide transactions in the ordinary course of business, are and will be
valid, genuine and fully collectible (net of reserves), and the reserves
provided therefor on the Balance Sheet and on the Closing Date are and will be
adequate pursuant to GAAP. The services sold and delivered that gave rise to
such accounts were sold and delivered in conformity in all material respects
with applicable Material Contracts and, except as set forth on Schedule 5.23, as
of March 31, 2000 there were no refunds, rebates, discounts or other adjustments
payable with respect to any such accounts receivable other than in the normal
course of business consistent with past practices.
Section 5.24 INVENTORY. As of the date of the Balance Sheet, inventories
set forth on the Balance Sheet consisted in all material respects of items of a
quantity and quality saleable in the ordinary course of business net of
applicable reserves. All such inventories are valued on the Balance Sheet in
accordance with GAAP applied on a basis consistent with past practices.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Seller as of the date hereof
and as of the Closing Date as follows:
Section 6.01 ORGANIZATION AND GOOD STANDING. The Purchaser is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of Delaware. As of the date hereof Counsel Corporation, an
Ontario corporation, is the record and beneficial owner of 100% of the
outstanding equity interests of the Purchaser and has good and valid title in
such equity interest (provided that at Closing Counsel Corporation may directly
or indirectly through a wholly-owned subsidiary own less than such percentage of
the outstanding equity interests of the Purchaser, but in no event shall Counsel
Corporation own less than a controlling direct or indirect, through a
wholly-owned subsidiary, interest in the Purchaser).
Section 6.02 AUTHORITY; NO CONFLICTS. The Purchaser has the full power and
authority to execute and deliver this Agreement and the other agreements and
instruments to be executed and delivered by the Purchaser, pursuant hereto and
to consummate the transactions contemplated hereby and thereby. All acts and
other proceedings required to be taken by or on the part of the Purchaser to
authorize such execution, delivery and consummation have, or by the Closing Date
will have, been duly and properly taken. This Agreement has been duly executed
and delivered by the Purchaser and constitutes, and such other agreements and
instruments when duly executed and delivered by the Purchaser will constitute,
legal, valid and binding obligations of the Purchaser enforceable against them
in accordance with their respective terms. The execution and delivery by the
Purchaser of this Agreement and the execution and delivery by the Purchaser of
such other agreements and instruments and the consummation by the Purchaser of
the transactions contemplated hereby and thereby will not (i) violate or
conflict with any provision of the certificate of formation or limited liability
company agreement of the Purchaser, (ii) require the consent, waiver, approval,
license or authorization of or any filing by the Purchaser with any public
authority, other than (a) the filing of a notification report under the HSR Act,
(b) in connection with or in compliance with the provisions of the Exchange Act,
the Securities Act, the Communications Act and the rules and regulations arising
thereunder, the rules and regulations of The Nasdaq Stock Market, or the "PUBLIC
UTILITIES" laws of various states, all of which will be completed prior to
Closing, and (c) any other filing sand approvals expressly contemplated by this
Agreement, (iii) violate, conflict with or result in a breach of or the
acceleration of any obligation under, or constitute a default (or an event which
with notice or the lapse of time or both would become a default) under, or give
to others any right of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or other encumbrance on any property or
asset of the
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Purchaser pursuant to any provision of any indenture, mortgage, lien, lease,
agreement, instrument, order, judgment or decree to which the Purchaser is
subject or by which the Purchaser or any of its property or assets is bound, or
(iv) violate or conflict with any law, rule, regulation, permit, ordinance or
decree applicable to the Purchaser or by which any of its property or assets is
bound or affected except, in each of the instances set forth in items
(i) through (iv) above, where failure to give such notice, make such filings, or
obtain such authorizations, consents or approvals, or where such violations,
conflicts, breaches or defaults, in the aggregate, would not have a material
adverse effect on the financial condition, results of operations, business or
properties of the Purchaser, taken as a whole, or the ability of the Purchaser
to consummate the transactions hereunder (a "PURCHASER MATERIAL ADVERSE
EFFECT").
Section 6.03 NO LEGAL PROCEEDINGS. There is no action, suit, order,
judgment or proceeding pending or, to the knowledge of the Purchaser, threatened
against or affecting the Purchaser that, individually or when aggregated with
one or more other actions, suits, orders, judgments or proceedings, has or might
reasonably be expected to have a material adverse effect on the Purchaser's
ability to perform any of its obligations hereunder or under any of the other
agreements and instruments to be executed and delivered by the Purchaser in
connection herewith.
Section 6.04 FINANCING. The Purchaser will have available to it sufficient
cash, available lines of credit or other sources of immediately available funds
to enable it to pay the Purchase Price on the Closing Date.
Section 6.05 BROKERS. Neither the Purchaser nor any affiliate of the
Purchaser has paid or become obligated to pay any fee or commission to any
broker, finder, investment banker or other intermediary in connection with this
Agreement, except to CIBC World Markets Corp. or its affiliates.
ARTICLE VII
FURTHER COVENANTS AND AGREEMENTS
Section 7.01 CONDUCT OF BUSINESS OF THE SELLER. From the date hereof and
prior to the Closing Date, and except as otherwise contemplated by this
Agreement or with the specific prior written consent of the Purchaser, each of
the Seller and the Parent jointly and severally covenants and agrees (and the
Seller agrees to cause the Company and its Subsidiaries to comply) with respect
to the Business of the Seller as follows:
(a) The Seller and its Subsidiaries shall conduct the business of the
Seller and such Subsidiaries in the ordinary course, consistent with past
practices, and shall make no dividend payments, intercompany payments,
loans, advances or other distributions, except pursuant to existing
agreements set forth on the Schedules hereto or in the ordinary course
consistent with past practices, without the consent of the Purchaser;
(b) Neither the Seller nor any Subsidiary shall enter into any contract
or commitment, or make any expenditures, for property, plant or equipment in
excess of $1,000,000 in the aggregate with respect to the Business; provided
that the Parent and the Company agree to make advertising expenditures in
respect of the dial-around portion of the Business in an amount not less
than (i) $2,000,000 for the fiscal quarter ending June 30, 2000 and
(ii) $1,500,000 for the month of July 2000;
(c) The Seller and each Subsidiary will continue to use its reasonable
efforts, consistent with past practices, to substantially preserve the
Business intact and the goodwill of customers and others having business
relations with the Seller and such Subsidiaries and to keep available the
employees of the Seller and the Subsidiaries for employment by the
Purchaser;
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(d) The Seller and each Subsidiary will continue to maintain its real
and personal properties in substantial accordance with past practices;
(e) Neither of the Seller nor any Subsidiary will terminate or
materially modify any leases, contracts, governmental licenses, permits, or
other authorizations or agreements affecting the real and/or personal
properties of the Business or the operation thereof or any additional lease
or contract of any nature affecting such properties or the operation
thereof, except in the ordinary course of business consistent with past
practice;
(f) No material debts of or claims against others held by the Seller or
any Subsidiary and owing in respect of the Business shall be canceled or
released and no such rights shall be waived or abandoned, except in the
ordinary course of business consistent with past practice;
(g) Neither of the Seller nor any Subsidiary will make any change in any
method of accounting principles or practices with respect to the Business;
(h) The Seller will promptly notify the Purchaser of any Company
Material Adverse Change, after the date hereof and prior to the Closing
Date; and
(i) The Seller will not take, or agree to take, any action or engage, or
agree to engage, in any transaction or activity which would render any
representation and warranty of the Seller inaccurate in any material respect
as of the Closing Date.
Section 7.02 ACCESS; INFORMATION; CONFIDENTIALITY. From the date hereof to
and including the Closing Date, the Seller shall afford to the officers,
employees, attorneys, accountants and other authorized representatives of the
Purchaser reasonable access, during normal business hours, to the offices,
plants, properties, books and records of the Business of the Seller in order
that the Purchaser may have the full opportunity to make such legal, financial,
accounting and other reviews or investigations of the Business of the Seller and
the Assets as the Purchaser shall desire to make. The Purchaser also covenants
and agrees to comply with all confidentiality undertakings heretofore agreed to
between the Purchaser and the Seller, its affiliates or their representatives
relating to the business of the Seller or the transactions contemplated by this
Agreement.
Section 7.03 CONSENTS AND CONDITIONS TO CLOSING. From the date hereof to
and including the Closing Date, each of the parties hereto agrees (i) to take
all reasonable actions necessary to obtain (and to cooperate with each other in
obtaining) all material consents, authorizations, orders, exemptions and
approvals of any third parties, including, without limitation, from governmental
bodies and other third parties and in respect of laws and regulations, Material
Contracts, Company Permits and Proprietary Property, required to be obtained by
it in connection with any of the transactions contemplated hereby, (ii) to take
all reasonable actions necessary to comply promptly with all material legal
requirements which may be imposed on or applicable to it with respect to the
Closing and (iii) to promptly cooperate with and furnish information to each
other in connection with any such legal and contractual requirements.
Notwithstanding the foregoing, the Purchaser shall, with the cooperation of the
Seller and the Parent as set forth in Section 7.06 below, use its best efforts
to file (i) within 8 Business Days of the complete execution and delivery of
this Agreement, the appropriate and complete documents (or, if any documents are
required to be filed consecutively after receipt of certain approvals such as
authority to do business within a state, promptly following receipt of such
approval) necessary to obtain such authorizations, consents, certifications or
other approvals necessary from the FCC and the state public utility commissions
in the states of New York, California, Florida, New Jersey and Texas to operate
the Business on and after the Closing Date and (ii) within 10 days (or if such
10th day is not a Business Day, by the next succeeding Business Day after such
10th day) of the complete execution and delivery of this Agreement, a
notification report under the HSR Act (collectively, the "REQUIRED REGULATORY
APPROVALS"). Notwithstanding anything to the contrary contained herein,
following Closing, to the extent any consents to Material Contracts not set
forth on
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Schedule 8.05 have not yet been obtained, the Seller and the Parent shall use
best efforts consistent with Section 2.02(b), and cooperate with the Purchaser,
to obtain any such outstanding consents.
Section 7.04 NOTIFICATION OF CERTAIN MATTERS. The Seller and the Parent
shall give prompt written notice to the Purchaser, and the Purchaser shall give
prompt written notice to the Seller and the Parent, as the case may be, of
(i) the occurrence, or failure to occur, of any event that would be likely to
cause any representation or warranty by such notifying party contained in this
Agreement to be untrue or inaccurate in any material respect at any time between
or including the date of this Agreement and the Closing Date, (ii) any knowledge
of or discovery by the notifying party of the inaccuracy of any representation
or warranty by the non-notifying party contained in this Agreement and
(iii) any failure of the non-notifying party to comply with or satisfy, in any
material respect, any covenant condition or agreement to be complied with or
satisfied by it under this Agreement.
Section 7.05 SHAREHOLDER SUPPORT. Mr. Christopher Edgecomb, solely in his
capacity as a stockholder of the Parent, shall vote his shares in the Parent in
favor of the Asset Sale and all of the transactions contemplated hereby.
Section 7.06 USE OF NAME; CHANGE OF NAME. On the Closing Date, the Seller
shall, and hereby agrees to, unconditionally, irrevocably and in perpetuity,
relinquish to the Purchaser all rights to, and cease the use of, the names
"PT-1", "PT-1 COMMUNICATIONS INC.", "PT-1 LONG DISTANCE" and any and all
derivative forms thereof. Promptly after the execution and delivery of this
Agreement the Seller and the Parent shall execute and deliver to the Purchaser
such consents necessary for the Purchaser to form operating subsidiaries having
names with the term "PT-1" included therein and to enable the Purchaser to make
its filings in respect of the Required Regulatory Approvals in such names
(provided that, for the avoidance of doubt, the Seller shall not be obligated to
cease its use of such names as provided in the immediately preceding sentence
until Closing).
Section 7.07 PROXY STATEMENT AND SPECIAL MEETING OF THE PARENT. The Parent
and Waxs are preparing the Parent Proxy Statement in connection with the Parent
Merger and the Asset Sale. In connection with the execution of this Agreement,
the Parent shall, if required, as expeditiously as possible, prepare and file
with the Securities and Exchange Commission an amendment to the Parent Proxy
Statement and all other filings relating to the special meeting as required by
the Exchange Act and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder and, in that regard, the Purchaser will
provide all necessary assistance as may be requested by the Parent with respect
to such filing. The Parent will notify the Purchaser promptly of the receipt of
any comments from the Securities and Exchange Commission or its staff relating
to the Asset Sale and of any request by the Securities and Exchange Commission
or its staff for amendments or supplements to the Parent Proxy Statement
relating to the Asset Sale or for additional information in respect thereof, and
will supply the Purchaser and its legal counsel with copies of all
correspondence between the Parent or any of its representatives, on the one
hand, and the Securities and Exchange Commission or its staff, on the other
hand, with respect to the Parent Proxy Statement which relate to the Asset Sale.
Section 7.08 TRANSACTION PROPOSALS. None of the Parent, the Seller or
their respective affiliates, officers, directors, employees or other agents
shall (i) directly or indirectly, solicit, discuss or encourage the making of
any inquiry, offer or proposal which constitutes or is reasonably likely to lead
to any Transaction Proposal (as defined below); or (ii) accept or entertain an
offer by any person, other than the Purchaser, or enter into discussions with,
or provide information to any person, other than the Purchaser, concerning any
Transaction Proposal. Each of the Parent and the Seller agrees that it will
promptly notify the Purchaser after receipt of any Transaction Proposal of the
material terms thereof and any ongoing developments with respect thereto. For
purposes of this Agreement, "TRANSACTION PROPOSAL" shall mean any proposal or
offer to acquire an equity interest in, or a substantial portion of, the
Company, the Business or the Assets, whether by merger, sale of equity
interests, asset purchase or other transaction, other than pursuant to the
transactions contemplated by this Agreement. The Seller
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and the Parent shall, and shall cause the Parent's and the Company's and each
Subsidiary's directors, officers, employees, financial advisors and other agents
or representatives to, cease immediately and cause to be terminated all
activities, discussions or negotiations, if any, with any persons heretofore
conducted with respect to any Transaction Proposal.
Section 7.09 RIGHT OF FIRST REFUSAL. The Parent shall make reasonable
efforts to facilitate conversations and meetings between the Purchaser and Waxs
with a view to securing for the Purchaser a right of first refusal for the
purchase of any business competitive with the Business that is owned and offered
for sale by Waxs at any time after the Closing Date.
Section 7.10 SATELLITE OFFICES. The Seller and the Parent shall take all
steps necessary to close the Satellite Offices prior to Closing (or as soon as
reasonably practicable thereafter) without any liability to the Purchaser or any
adverse effect on the Assets.
Section 7.11 NEW YORK POOL AGREEMENT. The Seller and the Parent shall
before and after Closing continue to perform any obligations under that certain
agreement with the New York debit card distributors (the "NEW YORK POOL
AGREEMENT").
Section 7.12 KEY EXECUTIVES; NON-SOLICITATION. The Parent and the Seller
agree (i) to use reasonable commercial efforts to cause certain of the Seller's
key executives identified by the Purchaser to enter into exclusive employment
agreements with the Purchaser, or to agree to not, directly or indirectly,
engage in any business competitive with the Business and the Purchaser for a
period of 18 months following Closing, and (ii) to refrain from, and shall use
reasonable commercial efforts to cause the Seller's key executives to refrain
from, directly or indirectly soliciting or hiring away any of the Purchaser's or
its affiliates employees for a period of three years following the Closing.
Section 7.13 RETENTION BONUSES. The Parent agrees to pay a retention bonus
to Sidney Huang in the amount of $154,000 and Srdjan Strbanovic in the amount of
$216,000 prior to Closing; provided, however, that the Parent shall not be
obligated to make any such payment unless and until the individual entitled to
such payment has entered into an employment agreement with the Purchaser.
Section 7.14 EQUIPMENT LEASE. The Purchaser agrees that it shall be solely
responsible for obtaining any consent required under that certain
telecommunications equipment capital lease among Chase Equipment Leasing, the
Seller and the other parties thereto, dated February 20, 1998, with respect to
Nortel DMS 250 switch equipment in Flushing, New York and Jersey City, New
Jersey.
Section 7.15 MANAGEMENT SERVICES. Subject to obtaining any necessary
regulatory or third party consents and to the extent permitted under applicable
law, the Purchaser, on the one hand, and the Seller and the Parent, on the other
hand, intend to enter into a management agreement pursuant to which the
Purchaser will provide, under the supervision and direction of the Parent's
board of directors, certain management services to the Parent and the Seller.
Neither party shall have any obligation under this Section 7.15 until the
execution and delivery of, and the provision of the foregoing services shall be
subject to the negotiation, execution and delivery of, a definitive agreement
satisfactory to each of the Purchaser and the Parent in its sole discretion.
ARTICLE VIII
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PURCHASER
All obligations of the Purchaser to effect the Closing hereunder are, at the
option of the Purchaser, subject to the conditions precedent that, at the
Closing:
Section 8.01 PERFORMANCE BY THE SELLER AND PARENT. All the terms,
covenants, agreements and conditions of this Agreement to be complied with and
performed by the Seller and the Parent on or before the Closing shall have been
complied with and performed in all material respects.
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Section 8.02 REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the Seller and the Parent in this Agreement shall have been
true and correct in all material respects at the date hereof and as of the
Closing with the same force and effect as though all such representations and
warranties had been made as of the Closing.
Section 8.03 NO INJUNCTIONS. There shall not be any pending or seriously
threatened injunction or restraining order issued by a court of competent
jurisdiction against the consummation of the sale and purchase of the Assets
pursuant to this Agreement.
Section 8.04 OFFICER'S CERTIFICATE. The Purchaser shall have received from
the Seller and Parent, in form and substance reasonably satisfactory to the
Purchaser and its counsel, certificates, dated the Closing Date, of the CEO or
the President of the Seller and the Parent, as to the satisfaction of the
conditions set forth in Sections 8.01 and 8.02.
Section 8.05 INSTRUMENTS OF TRANSFER; THIRD PARTY CONSENTS. The Purchaser
shall have received from the Seller and the Parent (i) an executed copy of the
Escrow Agreement, (ii) the appropriate instruments of transfer required pursuant
to Section 2.02, including but not limited to the Bill of Sale and (iii) any
third party consents required to transfer to the Purchaser all rights and
benefits under the Material Contracts and Proprietary Property set forth on
Schedule 8.05; provided, however, that this clause (iii) shall not apply to any
such third party consents that are unable to be obtained solely and demonstrably
due to the condition, financial or otherwise, of the Purchaser (provided that
the Seller and the Parent shall remain obligated under Section 2.02(b) with
respect to any such consents that are not obtained by Closing).
Section 8.06 SERVICES AGREEMENTS.
(a) NETWORK SERVICES AGREEMENT. The Parent and the Purchaser shall
enter into a Shared Network Services Agreement in a form mutually agreed
among the parties.
(b) SWITCH PARTITION SERVICES AGREEMENT. The Parent and the Purchaser
shall enter into a Switch Partition Services Agreement mutually agreed
between the parties pursuant to which the Parent shall provide the Purchaser
a $5,000,000 credit over five (5) years (or, if necessary to allow the
Purchaser to utilize the entire amount of such credit, for successive
one-year terms thereafter) for the Parent's standard switch partition
services at the Parent's best available rate as of the date of this
Agreement. The Purchaser shall not be entitled to a rebate for any unused
portion of such credit.
Section 8.07 CONSENTS. All applicable waiting periods, and any extensions
thereof under the HSR Act shall have expired or otherwise been terminated, and
the Purchaser and the Seller shall have received the Required Regulatory
Approvals; provided, however, that this provision shall not be available to any
party whose failure to fulfill its obligations under Section 7.03 or this
Section 8.07 or whose condition, financial or otherwise, or whose act or
omission, or other failure for any reason to satisfy any requirements necessary
to obtain such approvals shall have been the primary cause of, or shall have
primarily resulted in, such failure.
Section 8.08 APPROVAL. The Asset Sale contemplated hereby shall have been
approved and adopted by the requisite vote of the holders of the common stock of
the Parent.
Section 8.09 ACCOUNTS RECEIVABLE. The Purchaser shall have received
written evidence from the distributors under the New York Pool Agreement and
TSI, satisfactory to the Purchaser in its sole discretion, that the accounts
receivable set forth on the Balance Sheet and the March Statement of Operations
are accurate, valid, genuine and fully-collectible (net of reserves set forth on
such financial statements).
Section 8.10 ESTIMATED CLOSING STATEMENT. The Purchaser shall have
received from the Parent and the Seller a copy of the Estimated Closing
Statement and the parties or the Independent Third
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Party shall have determined the amount and applicability of any Closing
Reduction Amount pursuant to Section2.03(b)(i).
Section 8.11 OTHER DOCUMENTS. The Purchaser shall have received all
documents it may reasonably request relating to the existence of the Parent, the
Company and each Subsidiary and the authority of each of them for this Agreement
and the Asset Sale, all in form and substance reasonably satisfactory to the
Purchaser.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLER
All obligations of the Seller to effect the Closing hereunder are, at the
option of the Seller, subject to the conditions precedent that, at the Closing:
Section 9.01 PERFORMANCE BY THE PURCHASER. All the terms, covenants,
agreements and conditions of this Agreement to be complied with and performed by
the Purchaser on or before the Closing shall have been complied with and
performed in all material respects.
Section 9.02 REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the Purchaser in this Agreement shall have been true and
correct in all material respects at the date hereof and as of the Closing with
the same force and effect as though all such representations and warranties had
been made as of the Closing.
Section 9.03 NO INJUNCTIONS. There shall not be any pending or seriously
threatened injunction or restraining order issued by a court of competent
jurisdiction against the consummation of the sale and purchase of the Assets
pursuant to this Agreement.
Section 9.04 OFFICER'S CERTIFICATE. The Seller shall have received from
the Purchaser, in form and substance reasonably satisfactory to the Seller and
its counsel, a certificate, dated the Closing Date, of the President or any Vice
President of the Purchaser, certifying as to the satisfaction of the conditions
set forth in Sections 9.01 and 9.02.
Section 9.05 ESCROW AGREEMENT; BILL OF SALE. The Seller shall have
received a duly executed copy of (i) the Escrow Agreement and (ii) the Bill of
Sale referred to in Section 3.02 from the Purchaser.
Section 9.06 CONSENTS. All applicable waiting periods, and any extensions
thereof under the HSR Act shall have expired or otherwise been terminated, and
the Purchaser and the Seller shall have received the Required Regulatory
Approvals; provided, however, that this provision shall not be available to any
party whose failure to fulfill its obligations under Section 7.03 or this
Section 9.06 or whose condition, financial or otherwise, or whose act or
omission, or other failure for any reason to satisfy any requirements necessary
to obtain such approvals shall have been the primary cause of, or shall have
primarily resulted in, such failure.
Section 9.07 APPROVAL. The Asset Sale contemplated hereby shall have been
approved and adopted by the requisite vote of the holders of the common stock of
the Parent.
Section 9.08 SERVICES AGREEMENTS. The Parent and the Purchaser shall enter
into each of the Shared Network Services Agreement and Switch Partition Services
Agreement referred to in Section 8.06 above.
Section 9.09 OTHER DOCUMENTS. The Parent shall have received all documents
it may reasonably request relating to the existence of the Purchaser and the
authority of the Purchaser for this Agreement and the Asset Sale, all in form
and substance reasonably satisfactory to the Parent.
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ARTICLE X
SURVIVAL, INDEMNIFICATION AND LIQUIDATED DAMAGES
Section 10.01 SURVIVAL OF REPRESENTATIONS, ETC.; EXCLUSIVE REMEDIES. The
representations, warranties, covenants and agreements contained in this
Agreement, and in any agreements, certificates or other instruments delivered
pursuant to this Agreement, shall survive the Closing and shall remain in full
force and effect, but subject to all limitations and other provisions contained
in this Agreement (including Section 10.06).
Section 10.02 INDEMNIFICATION BY THE SELLER AND THE PARENT. Subject to the
other provisions of this Article X, Seller and the Parent hereby jointly and
severally agree to indemnify and hold the Purchaser and its affiliates,
officers, directors, employees, agents and representatives harmless from and
against any and all claims, damages, liabilities, liens, losses or other
obligations whatsoever, together with costs and expenses, including fees and
disbursements of counsel and expenses of investigation (collectively, "LOSSES"),
arising out of, based upon or caused by (i) the inaccuracy of any representation
or the breach of any warranty of the Seller or the Parent contained in this
Agreement, (ii) any breach or nonperformance by the Seller or the Parent of any
of its covenants or agreements contained in this Agreement or in any agreement,
certificate or other instrument delivered by the Seller or Parent pursuant to
this Agreement (other than Christopher Edgecomb's covenant under Section 7.05
which shall remain solely his responsibility hereunder), or (iii) any Excluded
Liability; provided, however, that no indemnification shall be made hereunder
unless and until the amount of all claims for all Losses in the aggregate shall
be equal to at least $250,000, in which case the Seller and the Parent shall
indemnify the Purchaser for the full amount of such Losses, including the
initial $250,000 in Losses; provided further that the aggregate amount of all
Losses payable under this Section 10.02 by the Seller and the Parent shall not
exceed the amount of the Purchase Price; and provided further, that no claim may
be made against the Seller or the Parent for indemnification relating to the
financial accounting used by the Company with respect to the two DS-3's on AC-1.
The Purchaser acknowledges and agrees that the foregoing indemnification and the
provisions of Section 10.06 shall be the exclusive remedy of the Purchaser and
its affiliates, officers, directors, employees, agents and representatives for
any Losses under this Agreement, except in the event of fraud or willful
misconduct.
Section 10.03 INDEMNIFICATION BY THE PURCHASER. Subject to the other
provisions of this Article X, the Purchaser hereby agrees to indemnify and hold
the Seller and the Parent and their respective affiliates, officers, directors,
employees, agents and representatives harmless, from and against any and all
Losses arising out of, based upon or caused by (i) the inaccuracy of any
representation or the breach of any warranty of the Purchaser contained in this
Agreement or in any agreement, certificate or other instrument delivered by the
Purchaser pursuant to this Agreement, (ii) any breach or nonperformance by the
Purchaser of any of its covenants or agreements contained in this Agreement or
in any agreement, certificate or other instrument delivered by the Purchaser
pursuant to this Agreement, (iii) the operation of the Business or the use or
ownership of the Assets after the Closing Date (other than with respect to items
for which the Seller or the Parent are responsible to indemnify the Purchaser),
or (iv) any of the Assumed Liabilities pursuant to Article III; provided,
however, that no indemnification shall be made hereunder unless and until the
amount of all claims for all Losses in the aggregate shall be at least equal to
$250,000, in which case the Purchaser shall indemnify the foregoing Persons for
the full amount of such Losses, including the initial $250,000 in Losses; and
provided further that the aggregate amount of all Losses payable under this
Section 10.03 shall not exceed the amount of the Purchase Price. Each of the
Parent and the Seller acknowledges and agrees that the foregoing indemnification
shall be the exclusive remedy of the Parent and the Seller and their respective
affiliates, officers, directors, employees, agents and representatives for any
Losses under this Agreement, except in the event of fraud or willful misconduct.
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Section 10.04 NOTICE; COOPERATION; DEFENSE; ETC. The indemnified party
agrees to give the indemnifying party prompt written notice of any action,
claim, demand, discovery of fact, proceeding or suit (collectively, "CLAIMS")
for which such indemnified party intends to assert a right to indemnification
under this Agreement; provided, however, that failure to give such notification
after such notice is required shall not adversely affect the indemnified party's
entitlement to indemnification hereunder except to the extent that the
indemnifying party shall have been actually prejudiced as a result of such
failure. The indemnified party shall take all reasonable or necessary steps to
cooperate in the defense of such Claims, including retaining and providing to
the indemnifying party all documents, records and other information that may be
relevant to such Claims and making employees available to the extent reasonably
requested to fully cooperate in the resolution or defense of such Claims and
provide any additional information (including explanations and interpretations
of any other materials or information provided) that they are able to provide
with respect thereto. The indemnifying party shall have the right to participate
jointly with the indemnified party in the indemnified party's defense,
settlement or other disposition of any Claim at the indemnifying party's expense
and, with respect to any Claim that is not likely to result in the indemnified
party's becoming subject to injunctive or other similar relief, the indemnifying
party shall have the sole right (but not the obligation) to defend, settle or
otherwise dispose of such Claim on such terms as the indemnifying party, in its
sole discretion, shall deem appropriate; provided, however, that in each case
the indemnifying party shall acknowledge in writing its obligation to indemnify
the indemnified party hereunder with respect to such Claim prior to exercising
any right to participate in or control the defense, settlement or disposition of
such Claim hereunder. The indemnifying party shall obtain the written consent of
the indemnified party, which shall not be unreasonably withheld or delayed,
prior to ceasing to defend any Claim if it has theretofore elected to exercise
its sole right to defend, settle or otherwise dispose of such Claim.
Section 10.05 TIME LIMITATIONS; RECOVERABLE DAMAGES. Notwithstanding
anything to the contrary contained herein, the obligation of each of the parties
hereto to indemnify or otherwise hold harmless the other party(ies) or its
(their) affiliates, officers, directors, employees, agents or representatives
(i) for any Losses arising out of, based upon or caused by the inaccuracy of any
representation or the breach of any warranty (except the representations and
warranties set forth in Section 5.15), and shall, except as otherwise provided
in the next sentence, terminate at 11:59 p.m., New York City time, on the second
anniversary of the Closing, and (ii) for any Losses arising out of, based upon
or caused by the inaccuracy of any representation or the breach of any warranty
set forth in Section 5.15, and shall, except as otherwise provided in the next
sentence terminate on the expiration of the statute of limitations (and any
extensions thereof) applicable to the Company Tax in respect of which
indemnification is being sought without the assertion of a deficiency in respect
thereof by the applicable governmental entity. Claims (with all relevant and
necessary information and particulars to support such Claims) properly made in
accordance with the provisions of this Article X on or prior to the expiration
of the two year time period specified above may continue to be asserted
following such two year period.
Section 10.06 INJUNCTIVE RELIEF; LIQUIDATED DAMAGES. Each party
acknowledges and agrees that the other parties would be irreparably damaged in
the event that any of the terms of this Agreement are not performed in
accordance with their specific terms or are otherwise breached. Accordingly,
each party agrees that the indemnified party shall be entitled to an injunction,
specific performance or other equitable relief to prevent breaches of the terms
of this Agreement and to enforce specifically such terms in addition to any
other remedies to which the indemnified party may be entitled, at law or in
equity. Notwithstanding the foregoing, each of the Parent and the Seller hereby
agrees that in the event that the Seller fails or refuses to consummate the
transactions contemplated by this Agreement with the Purchaser for any reason
(other than (i) the failure, after good faith efforts, to obtain necessary
regulatory approval for the transactions contemplated hereby, (ii) the failure,
after good faith efforts by the Board of the Parent, of a majority of the
Parent's shareholders entitled to vote to approve the transactions contemplated
hereby (provided that if within 12 months of such failure to approve the
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Asset Sale, the Assets are directly or indirectly sold to a third party other
than the Purchaser, the exclusion contained in this clause (ii) shall not
apply), (iii) the Purchaser's breach of the material terms and conditions of
this Agreement, or (iv) the mutual written consent of the Purchaser, Seller and
Parent), the Seller shall promptly upon demand pay to the Purchaser $5,850,000
in cash as liquidated damages (the "LIQUIDATED DAMAGES AMOUNT") by wire transfer
to a bank account designated by the Purchaser to the Parent. Each of the Parent
and the Seller hereby acknowledges that the Liquidated Damages Amount is
reasonable and not punitive in nature. The Purchaser acknowledges and agrees
that the payment of the Liquidated Damages Amount shall be the exclusive remedy
of the Purchaser for such failure or refusal by the Seller referred to in this
Section 10.05; provided that the payment of the Liquidated Damages Amount shall
not be the Purchaser's exclusive remedy in respect of the foregoing in the event
(i) the Parent or the Seller willfully breaches the terms of this Agreement or
(ii) the Parent or the Seller fails to pay the Liquidated Damages Amount within
10 Business Days of the Purchaser's demand therefor absent a good faith,
reasonable basis dispute between the parties as to the legitimacy of the
Purchaser's demand.
Section 10.07 ESCROW AMOUNT. The Purchaser shall be entitled to satisfy
any indemnifiable claims or Liquidated Damages Amount under this Article X out
of the Escrow Amount without limiting any of its other rights or remedies
against the Seller and the Parent hereunder in excess of the Escrow Amount.
ARTICLE XI
MISCELLANEOUS
Section 11.01 EXPENSES. Except as otherwise specifically provided in this
Agreement, each party will pay its own expenses incident to this Agreement and
the transactions contemplated hereby, including legal and accounting fees and
disbursements. Any payments for sales, transfer or other taxes or fees
applicable to the conveyance and transfer to the Purchaser of the Assets arising
as a result of the transactions contemplated by this Agreement shall be borne by
the Purchaser. The provisions of this Section shall survive any termination of
this Agreement.
Section 11.02 FINANCIAL RECORDS AND PRODUCT HISTORY FILES. (a) If at any
time it is necessary that a party be furnished with additional information,
documents or records relating to the Assets or the Business in order properly to
prepare or support any Action (other than an Action in which the parties hereto
are opposed in interest) or its Company Tax returns or other documents or
reports required to be filed with governmental authorities or any securities
exchanges or otherwise for any reasonably legitimate purpose, and such
information, documents or records are in the possession or control of another
party, such other party agrees to use all reasonable efforts (at the expense of
the requesting party) to furnish or make available such information, documents
or records (or copies thereof) and personnel; and
(b) Each party to this Agreement hereby agrees that it shall cooperate with
the other by executing and/or filing or causing to be executed and/or filed any
required documents and by making available to the other, without limitation, all
work papers, records and notes of any kind, at all reasonable times, for the
purpose of allowing the appropriate party to complete Tax returns, respond to
audits, obtain refunds, make any determination required under this Agreement,
verify issues and negotiate settlements with Tax authorities or defend or
prosecute Tax claims. In the case of Income Taxes relating to the Business, the
Seller and the Parent shall be exclusively responsible for handling the
compliance and audits for Income Taxes for periods prior to and including the
Closing Date, except to the extent included in the Assumed Liabilities, and the
Purchaser shall be exclusively responsible for handling the compliance and
audits for Income Taxes for periods after the Closing Date and in connection
with the Assumed Liabilities, subject to the cooperation required from the other
party under this Section 11.02.
A-28
<PAGE>
Section 11.03 AMENDMENTS AND WAIVERS. The parties hereto may, by written
agreement signed by the parties, modify any of the covenants or agreements or
extend the time for the performance of any of the obligations contained in this
Agreement or in any document delivered pursuant to this Agreement. Any party
hereto may waive, by written instrument signed by such party, any inaccuracies
in the representations and warranties of another party or compliance by another
party with any of its obligations contained in this Agreement or in any document
delivered pursuant to this Agreement. This Agreement may be amended only by
written instrument signed by the parties hereto.
Section 11.04 TRANSFERABILITY. The respective rights and obligations of
each party hereto shall not be assignable by either such party without the
written consent of the other party hereto (and any purported assignment without
such written consent shall be void and of no effect); provided, however, that
the Purchaser may assign its rights and obligations to any of its affiliates,
provided, however, that the Purchaser shall remain jointly and severally liable
with such affiliate for all of the Purchaser's obligations under this Agreement.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assignees.
Section 11.05 TERMINATION. The Purchaser or the Seller may terminate this
Agreement if the Closing has not occurred by August 31, 2000 (provided that no
party may terminate this Agreement if by such date the only conditions to
Closing remaining to be satisfied pertains to the receipt of the Required
Regulatory Approvals) or if at any time prior to Closing there shall be any law
or regulation that makes consummation of the transactions contemplated hereby
illegal or otherwise prohibited; provided, however, that any party that has
failed to perform any covenant hereunder, which failure has resulted in the
failure of a condition in Articles VIII or IX, shall not be entitled to
terminate this Agreement except with the prior written consent of the other
party hereto. In the event of the termination of this Agreement, except as may
otherwise be specifically provided in this Agreement none of the parties shall
have any obligation or liability of any nature whatsoever to the other party
hereto, and all expenses incurred by any party hereto shall be for its own
account; provided, however, that notwithstanding any termination of this
Agreement, no party hereto shall be deemed to have waived any rights it may have
arising from the breach of this Agreement or any provision contained herein by
the other party hereto and such rights shall specifically survive any such
termination of this Agreement.
Section 11.06 NOTICES. Any notice, request or other document to be given
hereunder to a party hereto shall be effective when received and shall be given
in writing and delivered in person or sent by overnight courier, registered or
certified mail, postage prepaid, or by telecopy (receipt confirmed) as follows:
If to the Purchaser, addressed to it at:
Counsel Communications LLC
280 Park Avenue, 28th Floor -- West Building
New York, New York 10017
Tel: (212) 286-5001
Fax: (212) 867-3226
Attention of the President
with a copy to:
Wollmuth Maher & Deutsch LLP
500 Fifth Avenue
New York, New York 10110
Tel: (212) 382-3300
Fax: (212) 382-0050
Attention of David H. Wollmuth and Mason H. Drake
A-29
<PAGE>
and
If to the Seller or the Parent, addressed to them at:
STAR Telecommunications, Inc.
223 E. De La Guerra Street
Santa Barbara, California 93101
Tel: (805) 963-1619
Fax: (805) 884-1137
Attention of Christopher E. Edgecomb
with a copy to:
Riordan & McKinzie
600 Anton Blvd., 18th Floor
Costa Mesa, California 92626
Tel: (714) 433-2900
Fax: (714) 549-3244
Attention of Elaine R. Levin
Any party hereto may change its address for receiving notices, requests and
other documents by giving written notice of such change to the other parties
hereto.
Section 11.07 GOVERNING LAW; CHOICE OF FORUM. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York
(without regard to conflict of laws doctrines). The parties agree that the
exclusive place of jurisdiction for any action, suit or proceeding relating to
this Agreement shall be in the Federal courts sitting in the Borough of
Manhattan in the City of New York or, if such courts shall not have jurisdiction
over the subject matter thereof, in the courts of the State of New York sitting
therein, and each such party hereby irrevocably and unconditionally agrees to
submit to the jurisdiction of such courts for purposes of any such action, suit
or proceeding. Each party irrevocably waives any objection it may have to the
venue of any action, suit or proceeding brought in such courts or to the
convenience of the forum. Final judgment in any such action, suit or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment, a certified or true copy of which shall be conclusive evidence of the
fact and the amount of any indebtedness or liability of any party therein
described.
Section 11.08 PARTIAL INVALIDITY. In the event that any provision of this
Agreement shall be held invalid or unenforceable by any court of competent
jurisdiction, such holding shall not invalidate or render unenforceable any
other provision hereof.
Section 11.09 SECTION HEADINGS. The section headings and table of contents
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
Section 11.10 DISCLOSURE. The information set forth in the Schedules to
this Agreement is qualified in its entirety by reference to the specific
provisions of this Agreement and is not intended to (i) in any way create
Assumed Liabilities or affect the Purchase Price Adjustment provisions of this
Agreement or (ii) constitute, and shall not be construed as constituting,
representations or warranties of the party to which such Schedules relate,
except as and to the extent provided in this Agreement. Inclusion of information
in the Schedules shall not be construed as an admission that such information is
material for purposes of the specific provisions of this Agreement to which such
information relates. Information included in the Schedules that is not required
to be so included under the specific provisions of this Agreement shall be
deemed to be included for information purposes only and information of a similar
nature need not be included elsewhere, at the discretion of the party providing
such information. All information included in the Schedules as exceptions to the
representations and
A-30
<PAGE>
warranties of the Parent and the Seller set forth in this Agreement shall,
unless expressly assumed by the Purchaser hereunder, remain liabilities and
indemnifiable obligations of the Seller and the Parent.
Section 11.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but both of which
together shall constitute one and the same instrument.
Section 11.12 ENTIRE AGREEMENT. This Agreement, together with the
schedules and exhibits and the agreements, certificates and instruments
delivered pursuant hereto, contain the entire agreement among the parties
hereto, and supersede all prior agreements and undertakings (written and oral)
between the parties hereto, relating to the subject matter hereof.
Section 11.13 PUBLICITY. No party shall issue any press release or make
any other public announcement with respect to this Agreement or the transactions
contemplated hereby without obtaining the prior review and approval of the other
parties (which will not be unreasonably withheld or delayed), except as may be
required by law or the regulations of any securities exchange.
Section 11.14 PARTIES IN INTEREST. Nothing in this Agreement, express or
implied, is intended to confer on any person other than the parties and their
respective successors and assigns any rights or remedies under or by virtue of
this Agreement, and no person shall assert any rights as a third party
beneficiary hereunder.
Section 11.15 BULK TRANSFER LAWS. The Purchaser hereby waives compliance
by the Seller with the provisions of any so-called "BULK TRANSFER LAW" of any
jurisdiction in connection with the sale of the Assets. Subject to the
requirements of Article III of this Agreement and the Bill of Sale contemplated
thereby, each of the Parent and the Seller agrees to indemnify and hold harmless
the Purchaser against any and all liabilities, including costs and expenses,
that may be asserted by third parties against the Purchaser as a result of any
non-compliance by the Seller with any such bulk transfer law.
A-31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
<TABLE>
<S> <C> <C>
PURCHASER:
COUNSEL COMMUNICATIONS LLC
By: /s/ GARY J. WASSERSON
-----------------------------------------
Name: Gary J. Wasserson
TITLE: PRESIDENT AND CEO
SELLER:
PT-1 COMMUNICATIONS, INC.
By: /s/ MARY CASEY
-----------------------------------------
Name: Mary Casey
TITLE: CEO
PARENT:
STAR TELECOMMUNICATIONS INC.
By: /s/ CHRISTOPHER EDGECOMB
-----------------------------------------
Name: Christopher Edgecomb
TITLE: CEO
CHRISTOPHER EDGECOMB,
in his individual capacity
as to Section 7.05 only
By: /s/ CHRISTOPHER EDGECOMB
-----------------------------------------
</TABLE>
A-32
<PAGE>
FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
THIS AMENDMENT TO ASSET PURCHASE AGREEMENT (this "Amendment"), dated as of
August , 2000, among Counsel Communications LLC, a Delaware limited liability
company (the "Purchaser"), PT-1 Communications, Inc., a New York corporation
(the "Seller" or the "Company"), and STAR Telecommunications, Inc., a Delaware
corporation and the sole shareholder of the Seller ("Parent").
WITNESSETH:
WHEREAS, the Purchaser, the Seller and the Parent are parties to that
certain Asset Purchase Agreement, dated as of June 6, 2000 (the "Agreement"),
pursuant to which Parent will purchase the Assets from the Seller;
WHEREAS, the parties have agreed to make certain amendments to the
Agreement; and
WHEREAS, capitalized terms used, but not otherwise defined herein, shall
have the meanings given to such terms in the Agreement.
NOW THEREFORE, in consideration of the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties do hereby mutually agree as follows:
1. Section 2.03(b)(ii) of the Agreement shall be amended so as to replace
the second sentence of Section 2.03(b)(ii) of the Agreement in its entirety as
follows:
"The Closing Balance Sheet (the "Closing Balance Sheet") shall
(x) fairly present the Assets and Assumed Liabilities as at the close of
business on the Closing Date in accordance with GAAP applied on a basis
consistent with those used in the preparation of the Balance Sheet,
(y) include line items substantially consistent with those in the Balance
Sheet and (z) be audited by representatives of Arthur Andersen selected
by the Purchaser with all expenses of such audit to be paid by the
Purchaser."
2. Section 7.01(b) of the Agreement is hereby amended by replacing the word
"and" prior to "(ii)" with a comma; and by appending the following to the end of
clause (ii) of such section:
", (iii) $1,500,000 for the month of September 2000 and (iv) $1,000,000
for the month of October 2000."
3. The following is hereby appended following Section 7.15 of the
Agreement:
"Section 7.16. MANAGING DIRECTOR. The Parent and the Seller agree to
promptly name, and to take all steps necessary or desirable to promptly
cause Gordon Hutchins, Jr. to be named, Managing Director of the Seller,
with such powers and authorities over the operations of the Seller as
would be accorded a chief executive officer of a corporation."
4. Section 11.05 of the Agreement is hereby amended by deleting
"August 31, 2000" and replacing it with:
"October 31, 2000."
5. Except as expressly set forth in this Amendment, the Agreement shall
remain in full force and effect and shall not be deemed to have been modified or
amended by this Amendment. Each of the parties understands and agrees that by
executing and delivering this Amendment the other parties do not hereby waive
any of their respective rights or remedies under the Agreement.
A-33
<PAGE>
6. This Amendment, together with the Agreement, constitutes the entire
understanding of the parties with respect to the subject matter hereof, and any
other prior or contemporaneous agreements, whether written or oral, with respect
thereto are expressly superseded hereby. This Amendment shall be governed by the
laws of the State of New York applicable to agreements entered into and fully
performed in such state.
7. This Amendment may be executed in two or more counterparts, each of
which shall for all purposes be deemed to be an original and all of which shall
constitute the same instrument.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
A-34
<PAGE>
IN WITNESS WHEREOF, the Purchaser, the Seller and the Parent have caused
this Amendment to be signed by their respective officers thereunto duly
authorized, all as of the date first above written.
<TABLE>
<S> <C> <C>
PURCHASER:
COUNSEL COMMUNICATIONS LLC
By: /s/ ALAN SILBER
-----------------------------------------
Name: Alan Silber
TITLE: CHAIRMAN
SELLER:
PT-1 COMMUNICATIONS, INC.
By: /s/ MARY A. CASEY
-----------------------------------------
Name: Mary A. Casey
TITLE: CHIEF EXECUTIVE OFFICER
PARENT:
STAR TELECOMMUNICATIONS INC.
By: /s/ CHRISTOPHER E. EDGECOMB
-----------------------------------------
Name: Christopher E. Edgecomb
TITLE: CHIEF EXECUTIVE OFFICER
</TABLE>
A-35
<PAGE>
ANNEX B
May 25, 2000
To the Board of Directors of
STAR Telecommunications, Inc.
223 E. De La Guerra Street
Santa Barbara, California 93101
Gentlemen:
We understand that STAR Telecommunications, Inc. ("STAR") and PT-1
Communications, Inc., a wholly-owned subsidiary of STAR ("PT-1"), propose to
enter into an Asset Purchase Agreement (the "Asset Purchase Agreement") with
Counsel Communications LLC ("Counsel"), pursuant to which PT-1 will sell certain
of its assets to Counsel for an aggregate purchase price of $150 million (the
"Transaction"). In addition, Counsel will assume certain of the liabilities of
PT-1. Consummation of the Transaction is subject to, among other things, the
approval of the shareholders of STAR. The terms of the Transaction are more
fully described in the Asset Purchase Agreement.
In connection with your review and analysis of the Transaction, you have
requested our opinion, as investment bankers, as to the fairness, from a
financial point of view, of the consideration to be paid by Counsel to STAR in
the Transaction (including the assumption of liabilities) to the shareholders of
STAR.
Kaufman Bros., L.P., as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements of public and private companies
and valuations for corporate and other purposes.
In conducting our analysis and arriving at our opinion as expressed herein,
we have reviewed, among other things, the following:
- a draft of the Asset Purchase Agreement, dated May 23, 2000, by and among
STAR, PT-1 and Counsel;
- a preliminary draft of the Joint Proxy Statement/Prospectus relating to
the Transaction;
- certain documents and reports filed by STAR and Counsel with the
Securities and Exchange Commission;
- certain internal information and documents relating to PT-1 provided to us
by STAR's and PT-1's respective managements, including historical
financial information and financial forecasts;
- certain publicly available information concerning certain other companies
engaged in businesses which we believe to be reasonably comparable to
PT-1; and
- information concerning certain other business transactions which we
believe to be reasonably comparable to the Transaction.
We have also discussed with certain officers and employees of STAR and PT-1
the business and operations, assets, present condition and future prospects of
PT-1, and performed such analyses as we deemed appropriate.
We visited the PT-1 facility in Flushing, New York, but have not made,
obtained or been provided with any independent evaluation or appraisal of the
properties and facilities or of any of the assets or liabilities of PT-1
(contingent or otherwise). We have assumed and relied upon the accuracy and
completeness of the financial and other information used by us in arriving at
our opinion, and upon the
B-1
<PAGE>
assurances of the managements of STAR and PT-1 that they are not aware of any
information that would make the information provided to us incomplete or
misleading, and have not attempted to independently verify such information.
With respect to financial forecasts, we were advised by the management of STAR,
and we assumed without independent investigation, that they were reasonably
prepared and reflected, as of the times they were delivered to us, the best
currently available estimates and judgment as to the expected future financial
performance of PT-1. We have also assumed, with your permission and with out
independent investigation, that:
- The Transaction will be consummated in accordance with the terms set forth
in the draft of the Asset Purchase Agreement, dated May 23, 2000, without
any amendment thereto and without any waiver by any of the parties of any
of the conditions to their respective obligations; and
- All regulatory and other approvals and third party consents required for
consummation of the Transaction will be obtained without material cost to
STAR or PT-1.
Our opinion is necessarily based upon financial, economic, market and other
conditions as they exist, and the information available to us, as of the date
hereof. We disclaim any undertakings or obligation to advise any person of any
change in any fact or matter affecting this opinion which may come or be brought
to our attention after the date hereof. Although we evaluated the consideration
to be paid by Counsel to PT-1 in the Transaction from a financial point of view,
Kaufman was not asked to and did not recommend the specific consideration
payable in the Transaction, which was determined through negotiations between
STAR and Counsel.
In the ordinary course of our business, we may hold and actively trade
securities of STAR for our own account and for the accounts of our customers
and, accordingly, may at any time hold a long or short position in such
securities.
Our opinion does not constitute a recommendation as to any action the Board
of Directors or any shareholder of STAR should take in connection with the
Transaction or any aspect thereof and is not a recommendation to any person on
how such person should vote in his or her consideration of the Transaction. Our
opinion relates solely to the fairness, as of the date hereof, from a financial
point of view, of the consideration to be paid by Counsel to PT-1 in the
Transaction to the shareholders of STAR. We express no opinion herein as to the
structure, terms or effect of any other aspect of the Transaction, the merits of
the underlying decision of STAR or PT-1 to enter into the Transaction or any
other transactions or business strategies discussed by the Boards of Directors
of STAR or PT-1 as alternatives to the Transaction. Without limiting the
generality of the foregoing, we express no opinion as to any aspect of the
proposed merger among STAR, World Access, Inc. and STI Merger Co.
This opinion has been prepared at the request of, and is addressed to, the
Board of Directors of STAR and it may not be used for any other purpose,
published, reproduced, summarized, described or referred to or given to any
other person or otherwise made public without our prior written consent.
Based upon and subject to the foregoing, it is our opinion, as investment
bankers, that, as of the date hereof, the consideration to be paid by Counsel to
PT-1 in the Transaction (including the assumption of liabilities) is fair, from
a financial point of view, to the shareholders of STAR.
Very truly yours,
/S/ KAUFMAN BROS., L.P.____
B-2
<PAGE>
STAR TELECOMMUNICATIONS, INC.
PROXY FOR THE STAR TELECOMMUNICATIONS, INC. SPECIAL MEETING
OF STOCKHOLDERS TO BE HELD ON , 2000
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF STAR
TELECOMMUNICATIONS, INC.
The board of directors of STAR recommends that you vote FOR the following
proposal:
/X/ Please mark votes as in this example.
1. Adoption of the following resolution approving the terms of the Asset
Purchase Agreement ("Asset Purchase Agreement"), dated as of June 6, 2000,
as amended August 30, 2000, among STAR, PT-1 Communications, Inc. and
Counsel Communications LLC, and authorizing the transactions considered
thereby:
RESOLVED, that the form, terms and provisions of the Asset Purchase
Agreement attached to the proxy statement as Annex A, and the transactions
contemplated by the Asset Purchase Agreement be, and the same hereby are,
authorized, adopted and approved in all respects.
/ / FOR / / AGAINST / / ABSTAIN
The undersigned appoints Christopher E. Edgecomb and Mary A. Casey, and each
of them, with full power of substitution, the proxies and attorneys of the
undersigned, to vote as specified herein at the special meeting of stockholders
to be held on , 2000 at 11:00 a.m. local time, and at any
adjournments or postponements thereof, with all powers (other than the power to
revoke the proxy or vote the proxy in a manner not authorized by the executed
form of proxy) that the undersigned would have if personally present at the
special meeting, to act in their discretion upon any other matter or matters
that may properly be brought before the special meeting and to appear and vote
all the shares of stock that the undersigned may be entitled to vote. The
undersigned hereby acknowledges receipt of the accompanying proxy statement and
hereby revokes any proxy or proxies heretofore given by the undersigned relating
to the STAR special meeting.
UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED AS IF MARKED "FOR" PROPOSAL 1.
<PAGE>
__________________________________
Signature
__________________________________
Signature if jointly held
Dated: ___________________________
PLEASE DATE AND SIGN AS NAME
APPEARS HEREIN. WHEN SIGNING AS
EXECUTOR, ADMINISTRATOR, TRUSTEE,
GUARDIAN OR ATTORNEY, PLEASE GIVE
FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN FULL
CORPORATE NAME BY PRESIDENT OR
OTHER AUTHORIZED CORPORATE
OFFICER. IF A PARTNERSHIP, PLEASE
SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON. JOINT OWNERS
SHOULD EACH SIGN.
